Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Equities suffered a terrible session in the US yesterday, as the strong start at the opening bell yielded to an all-day bout of selling that took the S&P 500 back to range support, while the Nasdaq 100 index suffered a downside break. Fresh hawkish comments from Fed Chair Powell were no help. In FX, commodity currencies and EM currencies took a beating on the turn lower in risk appetite, while gold managed to avoid a meltdown as the weak risk sentiment countered offered support even as new highs in bond yields continue to provide a headwind.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - massive rejection in US equities of the recent rally with S&P 500 futures pushing below the 4,400 level again. Philly Fed figures for April were weaker than estimated and the bond market continues to sell off. Small caps and growth pockets were leading the declines with commodities being the strong exception underscoring the need for investors to have commodities in their portfolios. Today’s session in S&P 500 futures is critical as we are headed into the weekend with 4,321 level being the first support level if the index futures break below the 4,355 low seen on Monday.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - opened lower with the CSI300 Index and Shanghai Stock Exchange Composite Index near to their March 16 lows. The markets soon recovered as investors found comforts from several Chinese government initiatives and rhetoric, including calling on large institutional investors to buy stocks and issuing a proposal to set up retirement funds, to boost confidence to the Chinese economy and stock markets. Investors are mindful that the March 16 lows might be the line in the sand for the Chinese authorities to become more proactive in supporting the equity markets.
AUDUSD – currencies traditionally positively correlated with risk sentiment took a beating on the dive in sentiment yesterday, with the technical situation looking suddenly far more bearish for AUDUSD, as the pair sharply reversed the prior day’s rally on Fed Chair Powell’s hawkish comments. This has key AUDUSD support zooming into view just below the 0.7300 level in the form of the 200-day moving average, which might suggest a capitulation back into the lower zone toward the massive 0.7000 range support if broken.
JPY crosses – a huge test for JPY crosses here as conflicting pressures on the currency battle it out, the chief headwind coming from the continuous ramp in global yields, which weigh on the JPY due to the BoJ enforcing its cap on 10-year JGB yields at just +0.25%. But at the same time, the currencies that have performed best of late and likely paired against the JPY in many trades – especially commodity- and EM currencies – are suddenly weak and new highs in some JPY crosses like AUDJPY are reversing badly from their peaks earlier this week. A further acceleration in portfolio deleveraging/deteriorating risk appetite might finally bring support for longer dated safe-haven bonds and suddenly bring JPY support as well after its recent historic slide.
Gold (XAUUSD) trades steady amid renewed declines in stocks and sovereign bonds on the prospect of three consecutive half-point Fed interest-rate hikes, the quickest pace of tightening since the early 1980’s. Gold’s ability to withstand this pressure being seen as the markets attempt to find a hedge against a policy mistake tipping the world’s largest economy into a downturn. So far, the current US earnings season has shown companies are able to pass on higher costs and preserve margins. With input prices staying elevated due to war and sanctions and a general scarcity of supply, only the killing of demand can bring down inflation. A view that has seen the gold-silver ratio hit a two-month high given silver's semi-industrial status. Total holdings in bullion-backed ETFs hit a fresh 14-month high on Thursday as asset managers continue to accumulate. Support the 50-DMA at $1938 and resistance at $1960/67/75.
Crude oil (OILUKJUN22 & OILUSMAY22) continues to trade within a narrowing range around $107 in Brent and $102.5 in WTI. Beneath the surface, however, the market is anything but calm with supply disruptions from Libya and Russia currently being offset by lower demand in China where officials are struggling to eradicate a wave of Covid-19 in key cities. In addition, the market is on growth alert with the US Federal Reserve signaling an aggressive tightening mode in order to curb inflation, a process that most likely will reduce growth and eventually demand for crude oil. US refinery margins hit a record earlier this week before falling by more than 10% yesterday. Developments still reflecting the high prices US and other buyers are forced to pay while cutting reliance on Russian oil.
What is going on?
Fresh hawkish comments from Fed Chair Powell. The Fed Chair specifically indicated he is in favor of a 50-basis point hike at the May 4 FOMC meeting and didn’t rule out a few more 50bps rate hikes as well. Commenting on the US labor market, Powell said that it is “unsustainably hot”. US 2-year yields rose another fifteen basis points as the market is pricing in slightly more than 50 basis points for the May meeting, with at least one bank, Nomura, calling for two 75-basis point hikes at the June and July FOMC meetings. While the Fed enters a blackout period now which means that Fed officials not make any further comments until the other side of the FOMC meeting, the US PCE Inflation data will be closely watched next week.
The eurozone HICP is slightly lower than expected in March. The year-over-year rate was at 7.4 % versus expected 7.5 % and the month-over-month was at 2.4 % versus expected 2.5 %. This is a positive surprise. But frankly speaking there is no cause for optimism. Structural inflation is a long-term issue for the euro area and the whole EU. In several EU member countries, the year-over-year rate is already well-above 10 %, such as in Bulgaria, Latvia, the Netherlands, the Czech Republic or Estonia, for instance.
France’s business climate in manufacturing industry improved slightly in April. After deteriorating markedly in March, the composite indicator won one point, at 108 versus prior 106 and expected 104. This is mostly explained by the increase in the balances of opinion on order books, both overall and foreign. But the coming months will be very challenging for the manufacturing industry. Supply chain disruptions coupled with inflationary pressures remain the top two issues.
We are worried about emerging market debt. There are several factors which could put emerging markets into trouble: 1) the level of public and private debt shot up significantly since the outbreak began; 2) local interest rates have increased noticeably in order to fight inflationary pressures (with little success so far); 3) global rates are rising and 4) Sri Lanka’s default could trigger contagion. This is not an isolated phenomenon. A bunch of emerging market countries might have to deal with debt stress in the short- and medium-term: Pakistan, Tunisia or Ghana, for instance. In all these three countries, the debt stock is above 80 % of GDP and interest rates have risen sharply over the past year.
Japan’s CPI higher but no shift in BOJ policy. Japan's March CPI came in at 1.2% y/y from 0.9% (Feb), the highest since October 2018 and its 7th consecutive month of gains. The “ex Fresh food and Energy” core inflation fell by –0.7% y/Y in March vs. -0.8% expected and the more than ten-year low of –1.0% in Feb. With inflationary pressures in Japan significantly lower than what we are seeing globally, the BOJ's policy mix is less likely to shift toward tightening, although the dramatic recent pressure on the currency complicates the BoJ’s task at the meeting next week. But it is unlikely we will see any policy changes. Inflation is mostly energy-driven and there is still no wage growth.
What are we watching next?
Euro manufacturing PMIs on tap today. This morning sees the flash April PMIs for Euro area, France, Germany and U.K. While current surveys have been strong, the expectations indices have been sliding. PMIs may still show decent numbers, but it still cannot be ruled out that the EZ faces greater recession risks than the US due to weaker fundamentals, the physical proximity to the Russia-Ukraine war disrupting supply chains, and a higher sensitivity to rising food and energy prices.
Capitulation in store for US equities after pivotal support fails in Nasdaq 100 index? The technical situation looks suddenly far more bearish today for equities after yesterday’s powerful sell-off, which took the Nasdaq 100 below the prior pivot low, possibly opening up for a run into the ultimate pivot low just below 13,000 from early March. The broader S&P 500 index has yet to capitulate below recent lows but did see a dramatic rejection of the attempt to trade above the 200-day moving average yesterday.
Earnings Watch. Next week the Q1 earnings season shift gear with 558 major earnings releases that will impact sentiment in equity market. It is the big test of companies’ ability to pass on costs to their customers. The list below shows all the most important earnings releases, but our focus is on the biggest names such as Microsoft, Alphabet, UPS, Meta, Qualcomm, Boeing, PayPal, Apple, Amazon, Mastercard, Intel, Caterpillar, Exxon Mobil, and Chevron. Outside the big names we will focus on pure copper miners such as Southern Copper and First Quantum Minerals for guidance on copper which is seeing strong sentiment.
Economic calendar highlights for today (times GMT)
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