Financial Markets Today: Quick Take – March 25, 2022 Financial Markets Today: Quick Take – March 25, 2022 Financial Markets Today: Quick Take – March 25, 2022

Financial Markets Today: Quick Take – March 25, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Sentiment remains strong in the US market overnight after a positive session yesterday, but in Asia, sentiment was downbeat in Chinese markets as Shanghai reported record Covid case numbers. In FX, the JPY finally managed to fight back slightly after posting new cycle lows in its recent plunge late yesterday. Global yields are pinned near cycle highs after a historic rout in performance for bonds over the last year and a particularly bad quarter-to-date. But could the end of quarter next week see portfolio rebalancing?

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures closed yesterday around the previous two sessions’ highs and are attempting to push above this resistance level in early European trading hours. S&P 500 futures are trading around the 4,514 level with the 100-day moving average being around the 4,540 level. The strongest initial jobless claims since 1961 yesterday helped sentiment and underscore the strength of the US economy.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index fell more than 2% and Hang Seng TECH Index (HSTECH.I) was more than 4% lower. Investors were disappointed by the deceleration of growth in Chinese Internet companies.  Alibaba, Baidu, Meituan, Bilibili, JD.COM delinked 5% to 9%.  JD Logistics (02618) fell more than 13% after announcing its plan to offer shares at a 8% to 11.7% discount to yesterday’s closing price. EV maker NIO (09886) reported losses in 4Q21 increasing 46% YoY to RMB 2.2 billion amid rising material costs. The company guided delivery of 25,000 to 26,000 vehicles in 1Q22 which was below analyst expectations. NIO fell 5%.  Base metal producer, MMG (01208) reported better than expected results on higher copper and zinc prices.  MMG was up 9%. On A-shares, CSI300 fell more than 1%.

Stoxx 50 (EU50.I) – European equity futures are slightly negative in early trading with Stoxx 50 futures trading around the 3,783 level with the 3,720 level being the key support level to watch if risk-off kicks in ahead of the weekend. Yesterday’s preliminary PMI figures for March are a positive for sentiment and a pleasant surprise given the weaker than expected ZEW survey from last week.

USDJPY and JPY crosses the JPY spiked lower still yesterday before recovering sharply, if somewhat briefly, overnight. Bank of Japan Governor Kuroda was out saying a mix of things, with the general line that the current policy mix is desirable and that a weaker JPY is positive for Japan’s economy, although he said the BoJ is watching FX moves very closely. The Japanese Ministry of Finance also chimed in that rapid moves in the currency are not desirable – likely the driver of overnight volatility.  Kuroda said that cost-push inflation is not the path to stable 2% inflation. As a backgrounder on the driver of the recent enormous JPY weakening: the focus for the JPY is on rising yields elsewhere, which transmit directly to the yen if the Bank of Japan insists on maintaining its yield-curve-control policy, under which it has declared a cap on 10-year Japanese Government Bond yields at 0.25%. The 10-year JGB’s traded as highs as 0.24% overnight, the highest for the cycle, and would theoretically require the BoJ to come out and declare explicit renewed defense of the yield cap as it did back in February.

AUDUSD – reached new cycle highs recently above 0.7450 and has even edged above the 0.7500 level over the last couple of sessions, though the price action seems a bit hesitant. The next key level is the major pivot high from last October at 0.7556, and risk sentiment may also be an important coincident indicator, as the recent recovery from mid-month looks closely correlated with the recovery in risk sentiment since the FOMC meeting last week failed to spook markets. Australia has generally been bid up in recent weeks as well on its impressive portfolio of commodity exports, particularly its status as the world’s leading LNG exporter, which has weighed heavily in the wake of the Russian invasion of Ukraine.

Crude oil (OILUKMAY22 & OILUSMAY22) after receiving a boost yesterday from Russian leader Putin’s demands for sanctioning countries to pay for Russian gas with rubles, the price action eased lower, perhaps in part as technical focus is on the 61.8% retracement of the retreat from the enormous spike that developed in the wake of Russia’s invasion of Ukraine. That level is 123.01 in May Brent (just below yesterday’s high), while May WTI traded well north of its respective 61.8% level at 113.35 yesterday, reaching a high above 116.50 before retreating. If yesterday’s resistance can’t hold the price action back, the spike highs to nearly 139 in Brent may be the next focus.

Gold (XAUUSD) pulled to new local highs yesterday above 1,950 resistance, but still needing to pull back to 2,000 to begin to emerge from the shadow of m the steep retreat from the spike highs to above 2,050 that were posted in the wake of the Russian invasion of Ukraine. The chief headwind for gold here is the rise in global yields. Tactically, watching the status of the 1,950 break.

US Treasuries (TLT, IEF). Treasuries resumed their fall yesterday as investors prepare for a more aggressive Federal Reserve. The 10-year US Treasury auction drew soft demand and tailed the When Issued by roughly 2bps. Ten-year yields closed at 2.35% after rising to 2.39%. As yields rise investors perceive more risks in holding lower rated corporate bonds, and junk bond funds (JNK, HYG) see withdrawals for the 11th straight week.

EU sovereigns (VGEA). As PMI numbers came stronger than expected, European sovereign yields soared with the French 10-year yields breaking above 1% for the first time since 2018. Money markets are now expecting a more aggressive ECB hiking 55bps by December.

What is going on?

Euro area PMI indicators for March were better than expected but this might be misleading. The manufacturing PMI fell to 57 from 58.2 in February (56 expected). The services PMI dropped to a two-month low of 54.8 from 55.5 in February and expected 54.3. Price inflation for goods and services remains a big issue. This indicates a further rise in the euro area consumer price index for March. PMI indicators are broadly positive despite the uncertainty surrounding the consequences of the Ukraine war. However, keep in mind the PMIs have not been the most reliable leading indicators since the start of the pandemic. At the same time, several national surveys are sending a warning signal. The INSEE business and manufacturing confidence for France slumped to the lowest levels in almost a year in March. This survey is usually highly correlated to GDP growth. Leaders in the industry are now less optimistic on every element determining the survey’s assessment of their business environment. Their expectations for price increases hit record highs, for instance. This is a very reliable indicator, in our view. Expect a disappointing GDP growth in France in Q1 and in most other euro area countries.

U.S. durable goods orders lost altitude in February, with a 2.2 % drop. This is mostly explained by the collapse in aircraft orders. Core orders, which track well business investment plans, fell a more moderate 0.3 % after a very strong jump in January. Finally, core shipments, which are directly integrated into GDP calculations, rose 0.5 %. All of this suggests that Q1 growth will likely be weaker than initially expected.

Surge in Tokyo CPI won’t nudge BoJ, Yen decline continues. Tokyo core CPI rose at the fastest pace in over two years. March CPI ex-fresh food was up by 0.8% y/y, the highest since December 2019, but still below the Bank of Japan’s 2% target which means the central bank is unlikely to join its global peers in tightening policy for now (see more above on USDJPY). Japan PM Kishida is poised to announce support measures to alleviate the impact from rising fuel and commodity prices on households and firms. This could help to cool price pressures.

Asian chip stocks in focus. Apple is reportedly planning a hardware subscription service for iPhones that could launch as soon as the end of this year. Chip and semiconductor suppliers in Asia could benefit, especially Apple’s suppliers, despite a risk off sentiment currently weighing on tech equities. While supply chain constraints are yet to abate, the broader trend of digital transformation will likely keep the demand robust. In Japan, Murata Manufacturing (6981), Taiyo Yuden (6976) and Alps Alpine (6770) shares jumped over 1%.

NIO disappoints on Q1 outlook. NIO reported Q4 earnings yesterday with revenue exceeding estimates by a few percentage points although gross margin was a bit weaker than expected due to rising input costs. However, the Q1 outlook with revenue expected at €1.51-1.57bn missed estimates of $1.66bn as supply constraints continue to trouble the car industry.

Chinese ADRs update. The U.S. Public Company Accounting Oversight Board downplayed the prospect of a resolution to allow Chinese companies to continue to be listed in the U.S. and called the speculation of a deal “pre-mature.” 

Sanctions against Russia. The news that the U.S. and its allies are going to set up an organization to enforce sanctions against Russia and the escalated concerns about the perceived association between China and Russia dampened market sentiment in the Hong Kong and mainland Chinese equity markets.  

Container Shipping Freight Rates. Container shipping freight rates from China to Europe has been declining since late January and the decline accelerated in March.  It probably reflects a weaker demand for consumer goods from Europe lately.

Australia pledged more $250 billion to develop hydrogen projects, as a zero emission energy source for Australia. 90 hydrogen projects are in the pipeline in Australia, with the bulk of the cash to go to the 20 largest developments. The Australian hydrogen industry could add $11 billion a year in GDP by 2050. If the market develops faster, it could mean another $26 billion a year in GDP. Fortescue Metals (FMG) plans to be the biggest hydrogen producer in Australia. Today FMG shares jumped about 2% to AU$19.27, taking FMG shares above its 30-day moving average. The technical indicators suggest FMG’s shares rally could continue. For investors wanting to get exposure to Hydrogen, they can look at Global X Hydrogen ETF (HYDR) or ETFS Hydrogen ETF (HGEN), that invest in the largest global hydrogen companies.

What are we watching next?

Pivotal levels for risk sentiment in the US equity market. The US equity market has rallied close to the last major Fibonacci retracement level – (for the cash index, the 61.8% retracement of the sell-off from the 4,818.7 top to the 4114.7 lows, which is 4,550, although on the June S&P 500 future, it is more like 4,530). The latter was nearly tested overnight with a high of 4,527. A strong break higher through this resistance level in coming sessions would suggest that the upside could extend back to the record highs posted at the very beginning of the year, and would also suggest that the Fed is failing to make much of an impression yet despite constantly raising the bar of rate expectations over the last few months. This might mean the Fed may have to get more unconventional if it wants to make an impression and more significantly tighten financial conditions. In short, the coming sessions look important for the Fed policy response function to the backdrop.

End of quarter and end of Japan’s financial year next Thursday, March 31. Global bond funds have suffered their worst performance drawdown from peak levels in the history of performance measurement dating back to 1990, with an 11% drop according to the FT. With quarter end approaching (and the end of the financial year in Japan) it will be interesting to watch whether portfolio rebalancing ahead of quarter end next Thursday brings some at least temporary, flow-based support after a particularly brutal quarterly performance in Q1 of this year.

The nuclear power push is on. As sanctions are likely to be put on the supply of uranium and enrichment services from Russia, the focus on nuclear power is heating up. Several European Nations are revisiting or accelerating plans to incorporate nuclear energy into power generation, because of energy security concerns, and higher fossil fuel costs. Plus, several US senators introduced legislation to end the US’ reliance on imported Russian uranium. Meanwhile, this week, the nuclear cooperation formed by Australia, the US and the UK, named AUKUS, to build nuclear (uranium) powered submarines made further progress. To get exposure to uranium, investors can look at; Global X Uranium ETF (URA) or VanEck Vectors Uranium Nuclear Energy ETF (NLR) which invest in the world’s biggest uranium/nuclear companies.

Situation in Ukraine and the geopolitical backdrop – with the war grinding on in Ukraine, US President Biden warned Russian leader Putin against using biological, chemical, or even nuclear weapons in Ukraine, as observers are concerned that Russia’s inability to achieve its objectives in Ukraine after getting badly bogged down there might see Putin reach for a “vertical escalation” to weapons of mass destruction. At the same time, the wider geopolitical implications of Russia’s invasion are still making waves, as Biden called for Russia’s removal from the G-20 ahead of a meeting in Indonesia, and the ongoing discomfort on the implications for relations between powers sanctioning Russia with China, especially if the latter steps up commitments to purchase more energy imports and offers supplies of materials to keep its economy running that are now unavailable elsewhere.

Earnings Watch. Today’s key focus is Meituan which is expected to report after the Hong Kong market close. Analysts are expected revenue growth of 30% y/y and the operating loss to widen to CNY 4.94bn.

  • Today: China Shenhua Energy, Bank of Communications, Anhui Conch Cement, Longfor Group, People’s Insurance, China Everbright Bank, Meituan

Economic calendar highlights for today (times GMT)

  • 0900 – Germany Mar. IFO Business Climate
  • 1310 – US Fed’s Waller (voter) on CB digital currencies
  • 1400 – US Fed’s Williams (voter) to speak
  • 1400 – US March Final University of Michigan Sentiment
  • 1530 – US Fed’s Barkin (non-voter) to speak
  • 1645 – Canada Bank of Canada’s Kozicki to speak

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