Financial Markets Today: Quick Take – May 25, 2022

Financial Markets Today: Quick Take – May 25, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equity markets bobbed back higher after a sharp intraday sell-off never quite poked at the cycle lows from Friday. US yields dropped sharply at the short end of the curve in the wake of a very weak US New Home Sales number for April and the flash Services PMI for May, helping to keep the US dollar on its back foot. Overnight, New Zealand’s central bank hiked rates 50 basis points, boosting the kiwi sharply.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures were under pressure yesterday with Tesla shares down 7%. Nasdaq 100 futures broke lower through key support levels but found support and bounced back, but still ended the session lower locking in the lowest close price since the current drawdown began. This morning the futures are attempting to move higher but have already lost momentum with yesterday’s close at 11,771 being the big level to watch on the downside. If sentiment improves today the 12,000 in Nasdaq 100 futures will likely be the gravitational level to watch on the upside.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - both indices gained modestly.  China’s banking regulators called on banks to make more lending. The People’s Bank of China (“PBoC”) held an internal meeting to call on ranks and files at the central bank to step up efforts to encourage banks to lend to SMEs.  In addition, the PBoC jointly with the China Banking and Insurance Regulatory Commission to meet with 24 financial institutions and to call on the latter to lend to SMEs, home buyers, truck drivers and households. Kuaishou Technology (01024) rose 4% after reporting results beating market expectations. 

EURUSD – the pair marked out new territory on this rally with a move above 1.0700 yesterday in the wake of solid flash EU Services PMI, easing a tad lower after posting a high just shy of 1.0750 overnight. The US dollar was weighed down by lower US yields in the wake of soft US economic data points (more below). If US yields continue lower, the pair could continue to rise and threaten the 1.0800+ zone that would open up for a possible consolidation all the way to 1.1000 and possibly even 1.1200 on a more profound reassessment of the Fed’s potential to tighten. But those latter levels may require new specific positive catalysts in Europe.

USDJPY and JPY pairs – USDJPY broke down through the 127.00 area support yesterday, just as the entire US yield curve dropped on weak US economic data points, with the 10-year yield dropping below 2.75% at one point to trade its lowest since late April. The price action was orderly, suggesting that heavy short-JPY speculative positioning is not driving any immediate panic (relatively stable risk sentiment and a fresh rise in oil prices working against the yen’s favour), with a low of 126.36 before bouncing back toward 127.00 overnight. The 125.00 area is the next focus if the sell-off continues amidst lower treasury yields. In the crosses, the JPY moves tell us that USDJPY punching lower yesterday was only briefly about the JPY strengthening and more about the USD weakening.

Crude oil (OILUKJUL22 & OILUSJUL22) trades higher with Brent once again challenging resistance in the $115-area after the American Petroleum Institute reported a 4.2 million barrels decline in gasoline stocks. If confirmed by the EIA later today, it will mean US stockpiles are at the lowest level for this time of year since 2013, just ahead of an expected busy driving season. An offer from the US DOE to sell up to 40 million barrels of crude had no impact with Saudi Arabia saying they have done what they can and there is no shortfall of crude. The current oil market strength happening without the support from a struggling China where demand remains challenge by covid-19 related lockdowns. A break above $115 in Brent may signal a fresh attempt being made towards $124.

Gold (XAUUSD) as expected has found resistance at $1868, the 38.2% retracement of the recent 210-dollar correction, with silver (XAGUSD) in need of a break above $22.20 before focusing on $22.65. Renewed strength driven by weak US economic data (see below), a weaker dollar, Wall Street getting beaten up and concerns over a central bank policy mistake with aggressive monetary-policy tightening driving concerns over a potential US recession. Despite these latest tailwinds, the recovery has not been strong enough to seriously challenge those looking for lower gold prices, hence a continued focus on economic data, the dollar and yield developments.

US Treasuries (TLT, IEF) - weak US data yesterday (more below) punched US yields lower all across the curve, with the 10-year Treasury benchmark nearly touching the pivot lows from late April around 2.71% and the two-year yield dropping as much as 15 basis points intraday before settling near the 2.50% level. The next key US data point for the treasury market is the April PCE inflation data point up this Friday, with 5-year and 7-year Treasury auctions set for today and tomorrow, respectively, after a 2-year auction yesterday went off smoothly despite yields having dropped to their lowest level in nearly a month.

What is going on

Very weak US data yesterday. The flash US May S&P Global Services PMI was out at 53.5 versus 55.2 expected and versus the 55.6 reading for April. This survey has often undershot the traditionally more influential ISM Services survey many times in recent months, but the market reaction was clear as Fed expectations seem extremely tuned to any hint of slowing activity that might drive a drop off in inflation. As well, the US April New Home Sales release (annualized pace of sales dropping to 591k versus 748k expected and 709k (revised from 763k) in March) pointed to a massive deceleration in activity in the new housing sales after the steep rise in US mortgage rates this year.  Finally, despite a strong flash May survey for the S&P Global US Manufacturing PMI, the regional Richmond Fed manufacturing survey dropped into negative territory at –9 versus +10 expected and +14 in April. This is the third US regional manufacturing survey in the US this month after the Empire  and Philly Fed surveys to show a steep drop from April levels.

RBNZ stays hawkish, supporting NZD. Another 50bps rate hike by the RBNZ along with no signs of parting with its ahead-of-curve tightening path put in a further bid for the kiwi. NZDUSD shot up to 0.6500 from intraday lows of 0.6423 while AUDNZD gave up the key 1.1000 level to plunge to 1.0928. Even though RBA is catching up now, RBNZ remains ahead of other central banks, having tightened by 175 basis points since last October, and will likely be the fastest to reach neutral rates. Guidance was key in driving further kiwi strength as the RBNZ raised its projection for peak cash rates to 3.95% from 3.35% earlier.

What are we watching next?

Food protectionism increases the odds of inflation being sticky. India will limit sugar exports as a precautionary measure to safeguard its own supplies, after banning wheat sales just over a week ago. While the overall impact of this move is smaller than the wheat ban, it is more a concern in terms of the rising food protectionism trend at a time when the weather conditions are weighing on output and Russia is hoarding its food exports. Fitch said in a report that around 30 countries have now taken steps to limit their food exports since the start of Ukraine/Russia war.

Fed meeting minutes from the May meeting are due today. While the hunt for any mention of a possible 75bps rate hike may be futile, the base case stays at a series of 50bps rate hikes to follow. But investors are also increasingly parsing Fed talk to look for signs of stagflation or economic slowdown and that really is driving the market sentiment for now. Fed minutes will be especially key for the FX markets, and the focus will be on EUR and JPY, but also the commodity currencies. USD bulls may be back in action, but lower long-term yields may mean more gains for the yen too. AUDJPY remains a key risk sentiment play.

Earnings Watch. Today’s key focus is Nvidia and Snowflake with the former being the one with the biggest sentiment impact given its $404bn market value and still elevated equity valuation (2% free cash flow yield). The worry around Nvidia is to what extent the decline in cryptocurrencies is beginning to weigh on sales due to a slowdown in crypto mining. This was a negative driver for Nvidia’s stock back in the years 2018 and 2019 following the big drawdown in Bitcoin. Snowflake was one of the hottest IPOs in recent memory attracting even Berkshire Hathaway as one of its investors and top line growth has been strong, but the market is getting increasingly nervous that growth is decelerating faster than initially expected.

  • Today: Bank of Nova Scotia, Bank of Montreal, SSE, Acciona Energias Renovables, Nvidia, Snowflake, Splunk
  • Thursday: Royal Bank of Canada, Canadian Imperial Bank of Commerce, Lenovo, Alibaba, Costco, Medtronic, Marvell Technology, Baidu, Autodesk, Workday, VMware, Dell Technologies, Dollar Tree, Zscaler, Farfetch
  • Friday: Singapore Telecommunications

Economic calendar highlights for today (times GMT)

  • 0800 – ECB President Lagarde to speak
  • 0945 – ECB Chief Economist Lane to speak
  • 1100 – US Weekly Mortgage Applications
  • 1105 – Japan Bank of Japan Governor Kuroda to speak
  • 1230 – US Apr. Durable Goods Orders
  • 1430 – EIA's Weekly Crude and Product Stock Report
  • 1515 – UK Bank of England’s Tenreyro to speak
  • 1615 – US Fed Vice Chair Brainard to speak
  • 1800 – US FOMC Minutes
  • 1800 – US 5-year Treasury Auction
  • 2110 – New Zealand RBNZ Governo Orr to speak

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

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)

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.