Financial Financial Financial

Financial Markets Today: Quick Take – June 15, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Markets are nervously eyeing the FOMC meeting tonight for new guidance from Fed Chair Powell and company in addition to whether the Fed is not set for two large rate hikes of 75 basis points at the meeting today and in July, the first hikes of this magnitude since 1994. Today’s meeting also sees the latest Fed projections on the economy and policy. Elsewhere, the market is challenging the Bank of Japan ahead of its meetings, as JGB futures are under massive pressure.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) futures continued slightly lower yesterday on a rather large intraday trading session indicating the market is trying to find a new equilibrium. This morning S&P 500 futures are trading slightly higher around the 3,755 level, but we expect muted price action ahead of the FOMC which is priced to deliver 75 bps rate hike, but the mechanical step has historically been 50 bps. While the market is pricing 75 bps our guess is that it will still spook the market, especially technology stocks, because retail investors have still not accepted or understood the big change that is coming. Given our big retail flow is today compared to 2007 we are guessing that it could add to selling pressures post a 75 bps decision tonight with the 3,700 level being the big level to watch on the downside in S&P 500 futures.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) continued to outperform the U.S market despite the COVID-19 outbreak in Beijing is yet to be contained. The gradual relaxation of pandemic control measures since mid-May has enabled a series of economic data showing better-than-expected improvements in May, in particular exports and credit numbers released last week as well as industrial production and retail sales released today. Hang Seng Index (HSI.I) and Hang Seng TECH (HSTECH.I) surged 1.3% and 2.7% respectively.  CSI300 (000300.I) climbed 2.6%. Renewed speculation about Ant Group IPO also contributed to the sentiment towards Chinese internet stocks. Alibaba (09988) surged more than 4%.  According to the WSJ, President Biden “is closing in on a decision to lift some tariffs on Chinese imports”.

EURGBP, GBPUSD – GBPUSD slipped below 1.2000, a key chart level, for the first time since the brief move below that level during the pandemic outbreak panic in early 2020, and EURGBP has rusehd to new highs after breaking above the important 0.8600 level. With currency devaluation a prominent new risk, the Bank of England may be forced to go with the larger rate hike at tomorrow’s BoE meeting (market leaning more toward only a 25 basis point move) or sterling could face a further broad drubbing.

USDJPY and JPY pairs – the pressure on the Bank of Japan is intensifying ahead of the Friday BoJ meeting, as speculators are mounting a direct challenge to the BoJ policy by selling JGB futures and taking the implied yields some several basis points above the BoJ’s 0.25% yield cap. The BoJ is busy with fresh interventions overnight to keep a lid on things, but with the Fed set to raise the pace of its rate tightening and the ECB getting priced to move to a faster pace of hiking than previously anticipated, the pressure may become intolerable on the Japanese yen and force the BoJ to capitulate soon. USDJPY is locked in a nervous range after poking to new highs above 135.00 yesterday. Beware the risks of two-way volatility through the end of this week.

Crude oil (OILUKAUG22 & OILUSJUL22) trades steady around $120 per barrel after WTI briefly dropped below $117 on Tuesday, driven by news President Biden will meet the Saudi Crown Prince next month and after Democrats said they are considering more energy legislation including a windfall tax on energy companies. Both developments, however, are unlikely to mend the core problem that is lack of spare capacity. Ahead of IEA’s monthly Oil Market Report today, OPEC on Tuesday said global oil demand growth could almost halve next year to 1.8 million b/d from expectations of a 3.4 million b/d rise this year. Before tonight's FOMC rate decision the market will also receive the latest EIA inventory report with the API last night reporting a small 0.7-million-barrel increase in crude stocks and a 2.2 million barrel drop in gasoline.

Gold (XAUUSD) trades near a four-week low after suffering another drop overnight as US treasury yields continued their historic surge with ten-year real yields touching 0.87%, a 0.55% jump since Friday’s bigger than expected US inflation print. The market will be trading nervously ahead of today’s FOMC meeting where a 75-basis point hike is now fully pricedin. In our latest update, we highlight the current battle between surging yields adding pressure and support from investors looking for a hedge against rising risks of stagflation. Key support in the $1780 area with resistance at $1844.

US natural gas prices (NATGASUSJUL22) slumped by 16.5% on Tuesday while European prices (TTFMN2) jumped after the operator of a key Texas LNG export terminal said it would take much longer than previously stated to partially restart production following last week's fire. A prolonged shut down will keep supplies in the US thereby supporting stock building ahead of next winter while gas starved Europe will have to look elsewhere for supplies. Dutch TTF benchmark gas, already up on lower supply through the Nord Stream 1 pipeline to Germany, ended Tuesday’s session higher by 16.4% with Freeport LNG accounting for close to 20% of US overseas shipments, of which Europe had been getting the bulk in recent months.

US Treasuries (TLT, IEF) US treasury yields rose further yesterday to new highs for the cycle as the market nervously awaits the Fed’s message at today’s FOMC meeting and whether a more hawkish Fed lies in wait, possibly driving a deepening inversion of the yield curve after the 2-10 yield curve slope briefly turned negative in recent days. The 30-year T-bond yield is not quite to new highs above the late 2018 cycle high just ahead of 3.50%.

What is going on?

Coinbase, the crypto-trading platform company, set to fire nearly a fifth of its staff, citing economic conditions, although clearly the move has been motivated by the cratering of prices in the cryptocurrency market. The CEO also uses words like crypto winter to describe what is coming for industry indicating that cryptocurrencies have potentially much further downside from current levels.

Japan 10-year JGB futures are selling off as market challenges BoJ ahead of Friday meeting. The yield in the cash bond market remains close to the 0.25% cap that the Bank of Japan maintains on 10-year Japanese Government Bonds, but the JGB futures market has sold off sharply over the last couple of sessions and the implied yields on JGB’s have risen a few basis points above the 25 basis-point ceiling as speculators are challenging the Bank of Japan’s intent to m

U.S. May Producer Price Index (PPI) is still uncomfortably high. The first estimate is out at 10.8 % year-over-year from 10.9% in April. This is a tad below expectations (10.9 %). Core PPI (excluding food and energy) is also below expectations, at 8.3 % year-over-year against 8.6 %. U.S. PPI matters for financial markets and policymakers because it is leading the U.S. Consumer Price Index. This is too early to assess whether inflation has peaked in the United States. One data point does not make a trend, especially when the month-over-month change is so small. We tend to believe that inflationary pressures will keep increasing in the short term, at least.

Germany ZEW economic sentiment is still subdued. It was out at minus 28.0 in June, from minus 34.3 in April and expected at minus 27.5. The current situation rose from minus 36.5 to minus 27.6. Financial market experts are still worried about the economy (mostly the effects of the sanctions against Russia, the unclear pandemic situation in China and the policy pivot in monetary policy. On the bright side, Volkswagen announced it has resumed 24/7 production in its German electric vehicles factory on improved parts supply. This is likely true more broadly for the overall automotive sector. If sustained, this could serve as a major support for the German growth outlook in H2.

China’s economic activities showed better-than-expected recovery in May. Industrial production grew 0.7% YoY (vs consensus: -0.9%, April: -2.9%) and 5.6% MoM, led by mining.  The services sector was down 5.1% YoY.  Retail sales fell 6.7% YoY in May (vs consensus: -7.1%, April: -11.1%). On a MoM basis, retail sales marginally improved by 0.05%.  Fixed asset investment for the first five months of the year grew 6.2% YoY but property investment fell 4%. Surveyed jobless rate fell to 5.9% in May from 6.1% in April.  However, the jobless rate for young people aged 16-24 year old rose to 18.4% from April’s 18.2%. 

What are we watching next?

ECB to call unscheduled meeting today to “discuss current financial conditions”. This is a breaking story this morning and could suggest that the ECB is not happy with the widening of peripheral EU yield spreads that has unfolded in aggressive fashion in the wake of the ECB meeting last week, with the Germany-Italy 10-year yield spread widening from around 200 basis points then to over 240 basis points as of late yesterday. The meeting comes a day after ECB governing council member Isabel Schnabel gave a speech touting the ECB’s willingness limitless will to defend against the risk of any “disorderly” jump in peripheral EU countries’ borrowing costs.

FOMC meeting tonight: does the Fed super-size the rate tightening as expected? While the Fed made it clear that it was turning explicitly hawkish last November upon Fed Chair Powell’s and Vice Chair Brainard’s acceptance speeches, this Fed has nearly always met the market at its expectations for actual rate moves on FOMC meeting day. Ahead of today’s meeting, market expectations for a more rapid pace of Fed tightening have jolted higher since last Friday after recent survey-based data has shown a sudden rise in longer term inflation expectations, providing a sudden new twist that was not a prominent concern before any of the meetings for this cycle. So, will the Fed flash a greater concern level and hike 75 basis points as expected, try to get ahead of the market with a 100 basis point move, or decided that moving to g. The most likely option is the expected 75-basis-point move as it is fully priced, but the guidance for coming meetings and projections in the dot-plot (particularly on PCE inflation, which in the March projections was only raised to 2.6% for 2023 and 2.3% for 2024 (vs. 2.3/2.1 in December).

Bank of Japan meeting Friday and JPY volatility risking global contagion. The market is challenging the Bank of Japan on its intent to maintain the yield-curve-control policy ahead of the Friday BoJ meeting as JGB futures sell-off and take implied yields above the BoJ’s yield cap. JPY volatility could prove tremendous, with risks in both directions if the BoJ promises unlimited support for now on its commitment to the yield cap, but especially to the upside is the Bank capitulates and allows price discovery for Japanese rates out the curve. The contagion could also go global as bond markets everywhere could come under pressure to rise, feeding into negative pressure on general risk sentiment.

Earnings Watch. Today’s earnings focus is UK-based JD Sports which operates a chain of retail stores selling sports and leisure wear. Like all other retailers its share price is down a lot from the peak and margins are under pressure which will be the key focus for analysts.

  • Wednesday: JD Sports
  • Thursday: Adobe, Kroger, Jalma

Economic calendar highlights for today (times GMT)

0800 – ECB’s Holzmann to speak on Financial Stability Report

0900 – Eurozone Apr. Industrial Production

1000 – ECB's Muller to speak

1215 – Canada May Housing Starts

1230 – US May Retail Sales

1230 – US Jun. Empire Manufacturing Survey

1400 – US Jun. NAHB Housing Market Index

1430 – EIA's Weekly Crude and Fuel Inventory Report

1620 – ECB's Lagarde to speak

1800 – FOMC Meeting

1830 – Fed Chair Powell press conference

2130 – Brazil Selic Rate announcement

2245 – New Zealand Q1 GDP

0130 – Australia May Employment Change / Unemployment Rate

During the day: IEA’s Oil Market Report

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
Beethovenstrasse 33
CH-8002
Zurich
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.