Global Market Quick Take: Europe – March 29, 2023 Global Market Quick Take: Europe – March 29, 2023 Global Market Quick Take: Europe – March 29, 2023

Global Market Quick Take: Europe – March 29, 2023

Macro 8 minutes to read
Saxo Strategy Team

Summary:  Risk sentiment is coming back across markets driven by Alibaba’s decision to split into six separate businesses lifting Chinese equities. Despite more pressures on banking AT1 bonds and European real estate companies yesterday the market is calm. Strong outlook from Lululemon and better than expected US March consumer confidence figures yesterday are for now at odds with the rising recession probability.


What is our trading focus?

US equities (US500.I and USNAS100.I): Positive Asia sentiment extends into US equities

S&P 500 futures are pushing higher in early trading hours extending the positive sentiment out of Asia which is driven by the divestment strategy of Alibaba splitting the business into six separate businesses. The index futures are trading around the 4,027 level this morning which is exactly at the 50-day moving average. Strong outlook from Lululemon and the positive consumer confidence figures yesterday have also helped on risk sentiment. Our view is that consumer confidence is likely a poor leading indicator with credit conditions and the banking crisis likely to put the economy into a recession this year.

Chinese equities (HK50.I) and (02846:xhkg): Gains on Alibaba divestment strategy

Hong Kong’s Hang Seng Index gained around 2%, driven by a 13.2% jump in the shares of Alibaba (09988:xhkg) which announced a plan to reorganize the conglomerate into six separately run business groups. The market reacted positively to the e-commerce and technology giant’s reorganization plan, hoping it will remove some regulatory barriers to business growth as well as benefit the valuation of individual business lines. Industry peers gained, with Meituan (03690:xhkg) rising 4.8%m and JD.Com (09618:xhkg) climbing 2.6%. In A-shares, CSI300 edged up 0.3%, with Alibaba-related names, and semiconductor stocks outperforming. Rongsheng Petrochemical (002493:xsec) hit the 10% daily up-limit for the second day in a row after Saudi’s Aramco made a USD 3.6 billion investment for a 10% stake in the independent refinery.

FX: Japanese yen leads decline, AUD down on CPI miss

Lack of market news saw the US dollar being slightly offered on Tuesday, even as banking concerns remained at bay and traders continued to increasingly price in a 25bps rate hike from the Fed for May. A recovery however took hold in Asia today with JPY leading the decline. USDJPY rallied from 130.80 to touch the 132 handle amid the retreat in banking sector woes and BOJ Governor Kuroda talking about strengthening wage pressures in the parliament today, potentially leaving the door open for his successor to tweak policy. AUDUSD also unable to sustain gains above 0.67 with a softer-than-expected February CPI providing enough ammunition for an RBA pause next week.

Brent Crude oil closing in on $80 as focus returns to fundamentals

With fears of a banking crisis easing, focus returned to fundamentals in the crude oil market forcing short covering from funds. The pace of China’s reopening continues to attract additional barrels while a legal dispute between Turkey, Iraq and its semi-autonomous region of Kurdistan has halted around 400,000 barrels a day of seaborne exports from the Turkish port of Ceyhan. OPEC+ show no signs of adjusting oil production as it meets next week amid financial market jitters. In addition, prices also found support after the API reported a 6 million barrels drop in US crude stocks, the biggest of the year if confirmed by the EIA later today.  Brent, up +12% from last week's low is likely to see additional momentum and short covering on a break above its 21-DMA, currently at $79.25.

Gold tied in a range awaiting next trigger

Markets are awaiting a further direction in Gold which managed to recover back above $1970 overnight but appears to be waiting for its next catalyst. Banking sector fears have eased this week, but markets are for now not pricing in the incoming risks of a credit crunch or a slowdown in growth as US data stays robust. Last night’s consumer confidence report remained strong despite covering a part of the period after the SVB collapse. Meanwhile, the disconnect between market and Fed expectations of the rate cycle continue to stay wide, and US PCE data this week may be worth watching. On the upside, $2000 remains to be the key level to watch, while support is seen at $1933, the 38.2% retracement of the recent runup to $2000.

Treasuries bear flattened as the 2-year yield rose to 4.08%

As fears of the risk of an escalation of the banking turmoil dissipated, traders adjusted their positions in Treasuries and added to the selloff in the front end. The 2-year yield rose 8bps to 4.08%, closing firmly above the 4% handle. The selling started during London hours as German bund yields climbed. For U.S. data, the Conference Board Consumer Confidence and the Richmond Fed Manufacturing Index came in stronger than estimates. The 5-year Treasury notes auction was awarded 1bp through and at a slightly above-average bid-to-cover ratio. The result helped stabilize the selloff somewhat in the New York afternoon. Yields on the 10-year climbed 4bps to 3.57%. The 2-10-year yield curve bear flattened 5bps to -52bps.

What is going on?

US consumer confidence rose again in March, inflation expectations up as well

Despite the one-year ahead consumer inflation expectations ticking higher to 6.3% (prev. 6.2%), US consumer confidence for March rose to 104.2 (prev. 103.4) above the expected 101. Looking at the split in the index, the Present Situation index fell to 151.1 (prev. 153.0), while Expectations slightly lifted to 73.0 (prev. 70.4) still staying soft. The strength of the index may be a slight surprise as the cutoff date for survey was March 20, after the US bank failures hit, and risks of a credit crunch ahead keeps risks tilted to the downside.

Sector rotation between tech and financials, large cap and small cap

Large cap stocks, especially in tech, have seen big gains in the last few weeks primarily due to the slide in Treasury yields and flight to safety amid the banking sector woes where companies that are less dependent on financing needs become attractive. We wrote this piece, asking how long can that outperformance continue, given tech is not immune to a recession. Even if banking concerns were to ease now, risks of a credit crunch remain and have brought forward the next recession. What that could mean is small cap stocks could continue to be under pressure as bank lending tightens.

Alibaba is splitting into six independent business groups

In a statement from its CEO, Alibaba announced that the e-commerce giant is going to break up into six separate and independently operated business groups which could seek separate capital financing including IPOs in the future. The six business groups will be cloud intelligence, e-commerce, smart logistics, local services, global digital business, and digital media and entertainment. The reorganization could effectively dismantle the business empire founded by Jack Ma. The conglomerate has grown to be too large and dominant in the e-commerce and technology industries in the eyes of the authorities and a fundamental restructuring of Alibaba has long seemed to be inevitable.

US earnings recap: Micron Technology, Lululemon

Micron Technology misses on Q2 revenue and operating income as the memory chip maker reports Q1 adjusted operating loss of $2.1bn vs est. $676mn. Q3 revenue outlook is $3.5-3.9bn vs est. $3.75bn with management saying that the market has turned a corner in the data center business. The company expects smartphone shipments to decline slightly in 2023 and shipments of PC units to decline mid-single digit in 2023. Micron reiterates their headcount reduction of 15% of the workforce. The long-term outlook for 2024 and 2025 looks strong according to management. Lululemon beat on FY23 Q1 revenue and earnings per share with fiscal year revenue outlook of $.93-9.4bn beating estimates of $9.1bn. The healthy apparel maker is still taking market share as it pushes into new categories. Lululemon shares up 13% in extended trading.

RBA may pause rate hikes next week as Australian inflation and retail sales cool

Australian retail sales pointed to household spending beginning to slow, following higher interest rates. This suggests the RBA may pause rate hikes next week. Retail sales rose 0.2% from a month earlier, which was in line with forecast. However, today’s February CPI was more telling, showing inflation easing to 6.8% YoY from 7.4% and more than the 7.2% expected. This is the last important read before the RBA potentially considers a rate pause next week. Given CPI cooled more than Bloomberg consensus expected; it triggered a small drop in the Australian dollar while bond yields trade around a 3-month low.

Apple rolls out buy-now-pay-later service

With Apple looking to double its revenue over the next four years to $50bn, by moving into financial services, communications and EVs. Apple has taken another step and launched its buy-now-pay-later (BNPL) services after a lengthy delay. Not only will this diversity its revenue, but it will allow Apple to take market share from providers such as Affirm, Klarna and Square’s Afterpay. Apple launched its BNPL service, which allows customers to pay for their products over four payments across six weeks, with no interest or fees. This year Apple is expected to unveil plans to launch its EV business, with the “Apple Car’ reportedly due to release in 2024 or later.

What are we watching next?

Earnings to watch

It is a light earnings calendar today in the US with our next focus on H&M reporting tomorrow before the European market opens. Analysts expect FY23 Q1 (ending 28 Feb) revenue growth of 11% y/y but only EBITDA of SEK 4.25bn down from SEK 5.77bn a year ago as the Swedish fashion retailer is still struggling with excess inventory and cost pressures.

  • Wednesday: Constellation Software, Cintas, Paychex
  • Thursday: Kweichow Moutai, Great Wall Motor, H&M

Economic calendar highlights for today (times GMT)

1530 – EIA's Weekly Crude and Fuel Stock Report

2100 – South Korea April Business Survey

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.