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Global Market Quick Take: Europe – April 25, 2023 Global Market Quick Take: Europe – April 25, 2023 Global Market Quick Take: Europe – April 25, 2023

Global Market Quick Take: Europe – April 25, 2023

Macro 9 minutes to read
Saxo Strategy Team

Summary:  US equities tilted lower after a sideways session on one of the weaker US regional banks, First Republic, reporting after the close that it saw significant depositor flight and plans to downsize its operations. The mood in Asia soured further as Chinese stocks tumbled once again, with mainland shares bearing down on the lows since early January. Looking ahead, earnings season hits a new high gear with megacaps Alphabet and Microsoft reporting after the close.

What is our trading focus?

US equities (US500.I and USNAS100.I): Treading water before big earnings

US equities have settled in a narrow range recently and the question is whether yesterday’s earnings from First Republic Bank, showing a whopping 41% decline in deposits, can move the market or the news will drown in big earnings news today from UPS, McDonald’s, GE, Alphabet, and Microsoft. In related markets the VIX Index has dropped below 17 and the US 10-year yield remains steady around the 3.5% level.

Chinese equities (HK50.I & 02846:xhkg): Losses are extending

Hang Seng Index and CSI300 extended losses, sliding over 2% and 1% respectively. Heightened geopolitical tension stemmed from China’s ambassador to France’s questioning of the sovereignty of former Soviet states which angered European countries as well as renewed worries about potentially another wave of Covid outbreaks weighed on the overall market sentiment. Investors’ confidence in the sustainability of the economic recovery has also somewhat receded and there have been notable outflows in the Northbound Stock Connect.

FX: EUR and CHF continue their lonely strength. AUD slumps

Measures of the US dollar suggest USD weakness, but largely only due to the heavy weight of a very strong euro, which pulled higher to test the 1.1076 cycle highs in EURUSD overnight without quite making it there. Hawkish ECB rhetoric weighs as short EZ rates hit new local highs. AUD traded softer overnight as metals prices were once again overnight and ahead of tonight’s Q1 CPI releases. USDJPY trades nervously in a tight range ahead of the Friday Bank of Japan meeting, the first with Ueda at the helm.

Crude oil bounce ahead of key level supported by a weaker dollar

Crude oil bounced on Monday after Brent and WTI for a second day in a row found support at $80.50, and $76.72 respectively, thereby raising hopes the worst of the recent weak demand driven correction has run its course. A fourth day of dollar weakness also helped sentiment while supply issues came into focus as shipments from Iraqi Kurdistan remain paused, strike action halted two North Sea production platforms, and supply risks in Sudan also underpinned. Focus for the rest of the week is likely to shift back to growth and inflation worries and how far the Fed will go, especially after mega cap earnings announcements come due. The potential for new strong upside push remains limited while fuel markets continue to slump as refinery margins shrink in Asia, raising concerns about the strength of the rebound in China.

Gold continues to bounce back from support

Gold’s current correction phase remains unimpressive as the yellow metal continues to bounce of trendline support, currently at $1974, thereby keeping it clear from challenging key support in the $1955-60 area. Overnight, the price touched resistance at $2k, supported by a fourth day of dollar weakness and lower yields as the market once again dial back bets on FOMC rate hikes. Apart from incoming data on growth, inflation and wages, the market will also be watching talks on the US debt ceiling (see below). Resistance at $2000, $2012 and $2018. Silver meanwhile holds above key support in the $24.50 area, having so far retraced less than one-quarter of the recent strong gains.

CBOT wheat drops to fresh 2021 lows

The Chicago Soft red winter contract, for a while now the most shorted futures contract by hedge funds, trades lower for a fifth day and overnight the price reached a fresh low $6.52 a bushel, the lowest since July 2021. Around this time last year, the price was almost double the current as the war in Ukraine triggered extreme market angst about the availability of supply. Driven by the prospect for ample global supply despite warnings from Russia that the Black Sea grain deal remains at risk until the West removes restrictions on Russia’s grain and fertilizer exports.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) stage a late rally

Yields fell first on a weaker than expected Dallas Fed manufacturing index in low volume trading and they took a decisive dive in late trading after First Republic Bank reported worse-than-expected deposit losses in Q1. The yield on the 2-year dropped by 9bps to 4.09% and the 10-year yield declined 8bps to 3.49%.

What is going on?

Another weak US regional manufacturing survey

The headline Dallas Fed manufacturing index fell to -23.4 in April from -15.7 in March, while the outlook index moved further into negative at -15.6, further confirming the weakness seen in the Philly Fed survey, defying the strength of the NY Empire State survey. The new orders index rose slightly to -9.6 from -14.3, although that marks the eleventh month in a row in negative territory. Employment nudged lower to 8 from 10.4, suggesting moderate employment growth but a decline in work hours. Respondents were concerned about credit, funding and recession. The Richmond Fed survey is out today, with two regional services surveys from the Dallas and Philadelphia Fed also on tap (see calendar).

ECB talks up May 4 rate hikes, boosting the Euro

Yesterday, ECB chief economist Philip Lane said that recent economic data argues for a rate increase next Thursday, although he refrained from commenting on the size of the hike and was reluctant to pre-commit to further tightening beyond that meeting. The more hawkish Isabel Schnabel insisted on keeping a 50 basis point hike on the table, while the more dovish Villeroy argued for limiting the size and number of further hikes. The market is pricing 30 basis points of tightening next week (high odds of a 25 basis point move with some leaning for 50 basis points) and a total of 87 basis points of tightening through the September meeting.

Liquidity concerns are piling up

Reports suggest that a boost in liquidity has supported the markets so far this year, with central banks injecting about $1 trillion (BoJ purchase of JGB’s and Fed’s response to Silicon Valley Bank crisis with new liquidity facility) and the US treasury drawing down its account at the Fed to the tune of $500 billion since late January – a source of liquidity that has now run dry as that account has dropped to sub-$100 billion levels. From here, risks of a liquidity pullback are rising as debt ceiling concerns rise, the ECB ramps up quantitative tightening and China easing measures cool.

First Republic Bank reports massive deposit flight, drops 20%

Widely considered one of the more troubled banks as the Silicon Valley Bank collapse unfolded back in March, First Republic Bank reported after the close yesterday that it suffered a massive 41% drop in deposits during Q1 (some $102bn, or $72bn adjusted for the $30bn of liquidity that was advanced by major banks to shore it up last month) versus the prior quarter. The bank suspended guidance and announced it would cut its workforce and consider “strategic options”

What are we watching next?

Vote in US House on Republican spending bill this week?

A key Republican in the US House of Representatives claims that a vote will go forward this week on the existing proposed Republican spending bill that would lift the US debt ceiling but cut trillions from spending in coming years, a bill that is a complete non-starter with Democrats and will never pass the Democrat-controlled Senate or President Biden’s desk as it guts many of Biden’s key initiatives. A minority of around a dozen Republican house members are said to be against the bill according to Politico and could prevent the bill from passing if they vote against it. Should the bill go to a vote this week and not pass (with a 222-213 majority in the house, the Republicans can only afford to lose four votes), this may open up room for a bipartisan compromise to avoid a crisis as early as June. Should the bill pass, it would suggest extreme Republican discipline and raise the risk of more drama around the issue.

Earnings to watch

Today key earnings are from the US technology majors Alphabet and Microsoft reporting after the market close. Our preview of this week’s earnings can be found here. The key focus for investors is whether recent cost cutting at Alphabet and Microsoft will help improve the operating margin. Other earnings releases today from UPS, McDonald’s and GE are worth watching for gauging demand in the global logistics industry, consumers’ willingness to pay for restaurant trips, and finally global capital goods demand in the industrial sector.

  • Tuesday: UPS, Danaher, PepsiCo, General Motors, Halliburton, Biogen, McDonald’s ADM, 3M, PulteGroup, GE, NextEra Energy, Chipotle Mexican Grill, Alphabet, Microsoft, Texas Instruments, Illumina

  • Wednesday: Boeing, Meta, eBay, ServiceNow, Teradyne,

  • Thursday: Linde, Caterpillar, Valero Energy, Honeywell, AbbVie, Merck, Newmont, Rockwell Automation, Mastercard, Eli Lilly, Mondelez, VeriSign, L3Harris Technologies, Intel, First Solar, Gilead Sciences, Amazon, Amgen

  • Friday: Exxon Mobil, Colgate-Palmolive, Chevron

Economic calendar highlights for today (times GMT)

0900 – UK Bank of England’s Broadbent

1230 – US Apr. Philadelphia Fed Non-manufacturing survey

1300 – US Feb. S&P CoreLogic Home Price Index

1400 – US Mar. New Home Sales

1400 – US Apr. Consumer Confidence

1400 – US Apr. Richmond Fed Manufacturing

1430 – US Apr. Dallas Fed Services Activity

1700 – US Treasury to auction 2-year notes

2030 – API's Weekly Crude and Fuel Stocks Report

2245 – New Zealand Mar. Trade Balance

0130 – Australia Q1 CPI


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