Summary: US equities plunged to new cycle lows on Friday, but quickly found support at a major technical level and rallied back toward unchanged on the day, with some brightening in sentiment to start this week as well, though a rise in Covid cases in Beijing is driving fears of new lockdowns there. The focus this week is on whether sentiment can stabilize and whether the USD rally is done for now as the sell-off last week has extended into the start of this week. Gold has enjoyed the combination of a weaker USD and lower yields.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - another choppy US equity session on Friday with Nasdaq 100 futures pushing to new lows for the cycle hitting 11,491 before bouncing back to close at 11,840 the weakest close since the current drawdown cycle started. This morning Nasdaq 100 futures are trading just above the 12,000 level, but the backdrop is still negative with US economic data weakening and inflationary pressures continuing to impact households. The resistance level to watch today in Nasdaq 100 futures is 12,096 and the key support level is 11,840. April Chicago Fed National Activity Index out today expected to remain significantly above trend growth, but a negative surprise could be in store given latest negative economic surprises.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - retraced 1.7% and 0.8% respectively, as newly reported COVID cases surged, the Beijing municipal government tells residents in five districts, including the central business district Chaoyang and the IT hub Haidian to work from home through May 28. More Chinese cities relaxed mortgage lending with banks in Beijing lowering the mortgage rate for first-time buyer by 15 bps to 5% and Changzhou cuts down payment ratio for second-home purchases.
Stoxx 50 (EU50.I) - Stoxx 50 futures were less impacted by the late session selloff on Friday in US equities and are responding positively this morning surging to 3,700 with the 50-day moving average at 3,728 being the key level to watch on the upside. IFO survey figures for May is out this morning in Europe expected to decline again m/m and could reverse the current positive momentum should the survey show a bigger negative surprise.
AUDUSD – the AUDUSD has jumped through the local resistance above 0.7030, which was a prior major pivot low as sentiment picked up on Friday from new lows for the cycle and followed through higher in Asia to start the week, with rallying metals prices in recent days supporting the AUDUSD rally off the 0.6829 cycle low from the week before last. The recovery back above the huge 0.7000 level is significant as this level was an important pivot as far back as early 2019, but the rally has not yet more profoundly threatened the sell-off from the 0.7600+ top in early April, which would require a full reversal of the current sell-off wave from the 0.7250 area, also near the 200-day moving average (currently 0.7260). More on the Australian election below.
USDJPY and JPY pairs – the potential for JPY volatility is still in play as long safe-haven bond yields settled toward multi-week lows on Friday and USDJPY settled back toward the low 127.00’s overnight, as 127.00 is an important range support. US treasury yields will remain an important coincident indicator, together with energy prices, for JPY crosses, with the risk of aggravated volatility if the 127.00 area falls in USDJPY as speculative short-JPY positioning has built heavily on the huge move after breaking above 116.35 to the top above 130.00. Looking lower, the 125.00 area is a natural focus, but may not corral the action if the US 10-year benchmark, for example punches back toward 2.50% (currently 2.82%).
Gold (XAUUSD) trades higher for a fourth day supported by a weaker dollar but with headwinds from higher bond yields and the improved risk sentiment seen through higher stocks. Speculators cut bullish bets on COMEX gold futures to an eight-month low in the week to May 17 while the silver net returned to neutral for the only the second time in three years. Both highlight metals that have their work cut out to attract fresh buying interest. For the technical situation to turn more price friendly gold will soon need to break the next significant hurdle at $1868, the 38.2% retracement of the recent 210-dollar correction.
Crude oil (OILUKJUL22 & OILUSJUL22) pushed higher in Asian trading, supported by a weaker dollar and tight product market, offsetting ongoing worries that tight monetary policies will drive an economic slowdown and lower demand. In addition, Beijing reported a record number of new Covid-19 cases, thereby highlighting the prolonged economic fallout from China’s increasingly controversial Covid Zero approach. Hedge funds rushed into crude oil futures in the week to May 17, boosting their net long by the most in six months as prices attempted a fresh break to the upside. Continued focus on the tight product market and refinery demand ahead of the driving season as well as China. A break above $115 in Brent may signal a move towards $124, the recent peak.
US Treasuries (TLT, IEF) - US treasuries seem to have reverted to their old behavior of negative correlation with equities in times of stress, as Friday saw the 10-year benchmark Treasury yield closing at a more than three week low near 2.80% as equities tested new lows for the cycle, even as risk sentiment improved markedly late Friday and to start this week. As shorter yields have fallen less during this corrective episode, the Treasury yield curve is near the flattest it has been since early April at about +20 basis points for the 2-10 spread, suggesting a darkening outlook for the economy and perhaps the assumption that inflation will ease. If yields continue to correct lower, the natural next focus could be 2.50% if the 2.75-72% area is taken out.
What is going on
Australian election sees new Labor prime minister, but final vote tallies not yet in place. Former Prime Minister of the National/Liberal coalition has conceded defeat to Labor’s Anthony Albanese, but the final vote tallies are not yet in which will determine whether Labor has a slim majority or will need to form a coalition, perhaps with the Green party. The incoming Labor government, like all governments, will have to deal with accelerating inflation, while the Australian left faces the dilemma of dealing more aggressively with climate change when so much of its economy is dependent on extracting iron ore, coal and natural gas that are huge drivers of carbon emissions.
UK April retail sales stayed upbeat but consumer confidence registered a record low in May. UK retail sales rose 1.4% in April beating expectations of a 0.3% decline, a significant surprise given the general sentiment of inflation hitting consumers. Consumer confidence, however, fell to –40, its lowest level ever registered in the 48-year history of the survey. With further tightening to come after 9% inflation print reported last week, more economic pain will likely remain on the radar.
Orpea is going through a rough time again. In February, the French retirement home group was accused of allegations of systematic mistreatment, patient abuse and hygiene negligence in order to maximize profit margins. Investigations are still ongoing. Now, Orpea is embroiled in a financial scandal. Last week, the French media Mediapart and Investigate Europe revealed the existence of a financial company parallel to Orpea, based in Luxembourg, which has accumulated €92 million in assets and carried out questionable financial operations. There are suspicions of misuse of corporate assets. Orpea’s shares were down almost 30 % last week and collapsed by 72 % since the beginning of the year. A few weeks ago, the operator managed to secure €1.73 billion of financing from several banks to face increasing costs (related to the ongoing investigations) and debt maturities. For the moment, the risk of bankruptcy is limited. The company announced it won’t pay a dividend this year, of course.
What are we watching next?
Flash global and Eurozone PMIs in focus this week. With inflation concerns being increasingly priced in by the markets, focus is now shifting to the possibility and extent of economic slowdown, and Eurozone likely faces the biggest threat in that regard. Flash Eurozone PMIs will be on watch this week to gauge the extent of damage to the economy. First up, German IFO index release today will further signal the reverse effect of sanctions on Russia. The business expectations index edged up to 86.7 in April from 84.9 in March, but that’s still well below the 10-year average of about 97.4.
“Averting a global food crisis” is one of the first sessions at the annual gathering of the business and political elite in Davos. Last week the UN warned of a catastrophe that could last for years as the war in Ukraine and global weather changes reduce the availability of key food items. Ukrainian farmers have almost completed the sowing of spring wheat for the 2022 harvest, and it is down 25% from 2021 while agriculture analysis firm Gro Intelligence said the world has only 10 weeks’ worth of wheat consumption in reserves. Investors are on alert for more government moves to protect crop flows after India’s wheat curbs roiled markets last week. Speculators meanwhile in the week to May 17 increased bullish bets on Chicago wheat to the highest in more than 14 months
US Economic calendar focus this week on FOMC minutes Wednesday, Apr. PCE inflation data Friday. But another key focus across markets is the crude oil price, which is threatening the top of the range since late March near 115.00 for both Brent and WTI. The April Core PCE inflation readings are expected at +0.3% MoM and +4.9% YoY after March saw the YoY drop to 5.2% after the cycle high +5.3% in February.
Earnings Watch. Today’s Chinese earnings focus is Meituan expected to deliver another big loss in the first quarter. US earnings will focus on Zoom Video which is expected to see its revenue growth moderate to 12% y/y in Q1 (ending 30 April) and the EV-maker XPeng which is expected to deliver 150% y/y revenue growth in Q1 despite Chinese lockdowns disrupting supply chains. Later this week on Thursday Alibaba is reporting Q1 results. Consensus estimates are calling for a 7% increase in revenues and a 29% fall in EPS YoY. Analysts are concerned about the decline in Alibaba’s customer management revenues (ads & commissions) and growth prospect of cloud business.
Economic calendar highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy