Financial Markets Today: Quick Take – November 29, 2022
Saxo Strategy Team
Summary: Markets have been on edge as we await further signs of the official stance in China on Covid restrictions after civil unrest on the issue at the weekend, with signs this morning from Chinese officialdom that a cautious easing will remain underway. This has inspired a comeback in some commodities and the Chinese renminbi after sharp weakening moves yesterday, but there is no profound sense of relief across markets as we also await incoming US data ahead of the December 14 FOMC meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures are stuck in a tight range between 3,926 on the downside and 4,054 on the upside as the market is struggling to find a clear signal and direction. The noise is filled by the back-and-forth news stream out of China related to it Covid policies and backstop plans for its struggling real estate sector. Meanwhile, the US 10-year yield is also stabilising and earnings releases are minimal except for tomorrow with reports expected from Salesforce and Snowflake.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg)
Hong Kong and mainland China equity markets rallied strongly with Hang Seng Index and the CSI300 Index each rising more than 3%. The market sentiment was buoyed by new measures from the Chinese securities regulator to relax its restriction on property developers from equity financing. Leading Chinese developers listed in Hong Kong jumped by 5%-12%. In the mainland’s A-share markets, real estate names led the charge higher. Tourism stocks rose on speculation that pandemic control restrictions might be relaxed further. China’s pandemic control regulators are holding a press conference later today.
USD firms, but then retreats overnight on hopes China’s reopening prospects
Concerns surrounding China’s reopening status after civil unrest at the weekend sparked considerable volatility across FX yesterday, with a US dollar rally yesterday eventually emerging as the dominant development after choppy action. The USD was a bit weaker again overnight, particularly against the USDCNH, which dropped back below the important 7.20 area ahead of a press briefing in China thought to make clear the official central government position on Covid policies. Expect the most volatility in commodity currencies and the Japanese yen depending on how clearly China either a) signals that the path is open to easing restrictions on an accelerated time frame or b) that restrictions will remain in place and could even tighten if virus numbers don’t fall.
Crude oil (CLF3 & LCOF3) made a sharp U-turn on Monday
...as one survey after another pointed to an elevated risk that OPEC+, partly depending on the price when they meet next week, will opt to agree on another production cut in order to stem the recent price drop. Having fallen by more than 15 dollars during the past two weeks, a downturn in Chinese demand has been more than priced in, with technical selling and momentum having taken over. Overnight Brent briefly traded $86 after Chinese health authorities announced they would hold a press conference at 7am GMT. At their last meeting OPEC+ cut output quotas by 2mb/d with Saudi Energy Minister Prince Abdulaziz bin Salman saying the group was ready to intervene with further supply reductions if it was required to balance supply and demand. Meanwhile, European talks on a price cap have stalled.
Wheat (ZWH3) in Chicago dropped to a three-month low
…on Monday on a combination of ample and cheap supply from Black Sea suppliers increasing competing with US origin wheat, and on concerns about the impact of protests in China on growth and demand. Following a bumper crop this summer, Russian wheat continues to be offered at about the cheapest prices in world export markets which is negative for the export prospects of U.S. wheat. In the week to November 22 speculators increased bearish bets on CBOT wheat to the highest since May 2019.
Gold (XAUUSD) has recovered from another stronger dollar driven attempt to challenge support...in the $1735 area after Fed speakers said more rate hikes are coming. pressed for higher rates. Investors will watch this week’s economic data, including ISM on Thursday and Friday’s nonfarm payrolls and US jobs report, for signs the US central bank may soon ease its monetary-tightening trajectory. Total holdings in bullion-backed gold ETFs rose 6 tons last week, the biggest weekly increase since April. During this time investors sold a total of 397 tons, still less than the 400+ tons bought by central banks during the third quarter. After finding support in the $1735 area last week, a break above $1765 may signal a return to key resistance at $1788.
US treasury yields recovered after dip to local lows. (TLT:xnas, IEF:xnas, SHY:xnas)
Weak risk sentiment after the weekend news of civil unrest in China due to restrictive Covid policies there saw a dip in the 10-year yield benchmark yesterday to new local lows below 3.65%. But there was little energy in the move as the market awaits important incoming US data starting with today’s November Consumer Confidence survey, but more importantly this Friday’s November jobs numbers on Friday.
What is going on?
The wave of takeover bids continues at the Paris Stock Market
This is mostly happening in Euronext Growth – the market segment for small and medium-caps. Yesterday, Abeille Insurance (member of Aema Group, the fifth largest insurance player in France) acquired the small bank Union Financière de France (a bank mostly specialized in wealth management advisory). Abeille Assurance bought the company at a price per action of 21 euros. This represents a premium of 51 %. With the sharp drop in values that has happened since January, we have seen a wave of takeover bids at the Paris Stock Market. This will likely continue in the short-term, especially in the segment of wealth management advisory where there is an ongoing process of consolidation happening.
Fed speakers press for higher rates
James Bullard (2022 voter) said markets are underestimating the chances that the FOMC will need to be more aggressive next year, adding tightening may go into 2024. He also said that rates will need to be kept at a sufficiently high level all through 2023 and into 2024 even if the Fed reaches restrictive territory by Q1 2023. John Williams (voter) said "there's still more work to do" to get inflation down. He also hinted at “modestly higher” path of interest rates than what he voted for in September, sending another signal that December’s dot plot could see an upward revision, while also hinting at rate cuts in 2024. He provided some clear forecasts: unemployment rate rising from 3.7% to 4.5%-5.0% by late 2023; inflation declining to 5.0-5.5% by the end of 2022 and 3.0-3.5% by late 2023; modest economic growth this year and in 2023. The central bank isn't near a pause, Loretta Mester (2022 voter) told the FT. Richmond Fed President Barkin also spoke about higher-for-longer rates, despite moving slower
China relaxes its restrictions on developers from attaining equity financing
The China Securities Regulatory Commission (CSRC) fired the so-called “third arrow” to ease some of the restrictions previously imposed on property developers from attaining equity financing. While property developers are still barred from doing IPO in the domestic equity market, they are now domestically listed A-share developers and some Hong Kong-listed H-share developers to issue new shares to raise capital as long as the proceeds are used for restricting, M&A activities, refinancing, buying existing property projects, repaying debts, and project construction. However, proceeds are not allowed to be used in land acquisition.
Pinduoduo shares rally 12%
Strong Q3 results pushed the shares of the Chinese e-commerce platform to the highest level since November 2021. Q3 revenue was CNY 35.5bn vs est. CNY 30.9bn and adj. EPS at 8.62 vs est. 4.75 driven by tailwinds from the strict Covid policies in China.
BlockFi – another casualty in the FTX saga
The crypto lender BlockFi Inc. filed for Chapter 11 bankruptcy, the latest crypto-industry operator to seek court protection in the wake of FTX’s collapse. It sold $239 million of crypto ahead of its filing.
ECB’s Lagarde maintains tightening stance
ECB President Lagarde repeated her previous comments that the ECB will raise rates further but nothing on how much further, and on how fast they need to go. She said the bank will be data-dependent, adding the ECB may need to move into restrictive territory. She also said that she will be surprised if inflation in the Eurozone (due to be reported on Wednesday 30/11) peaked last month. Even if the November print cools slightly, most likely driven by lower energy costs, there is a possibility that inflation will likely remain high in the coming months as winter months progress and cost of living gets worse.
Dallas Fed manufacturing signals job stress is building
Dallas Fed manufacturing index came in less bad than expected at -14.4 for November, but the underlying metrics indicated a softening in labor markets. 16% of the factories surveyed indicated net layoffs in November, up from 9% previously, and comments suggested more layoffs may be coming as the backlog and holiday season get over. While it may still be early to see any significant signs of softening in Friday’s jobs report, the jobs data remains key to monitor to see if consumers may be vulnerable to a faster-than-expected pullback in spending.
What are we watching next?
US November Consumer Confidence, September home prices up today
The Conference Board’s monthly Consumer Confidence survey has historically correlated most closely with the strength of the US labour market, although after a strong recover from the pandemic lows by mid-2021, confidence fall sharply, hitting a 95.3 local low in July of this year, likely due to steeply rising inflationary pressures (the other major US confidence survey, the University of Michigan sentiment survey, hit the lowest level in its 44-year history in July, likely as the survey contains questions more closely linked to inflation). Confidence then bounced strongly from that July local low, hitting 107.80 in September before dropping sharply to 102.50 last month. The November reading is expected at 100.00. With inflationary pressures easing relative to their peak, a weaker than expected confidence reading today could suggest rising insecurity in the labour market. The September S&P CoreLogic Home Price data is expected to show an ongoing drop in US home prices of some –1.2% MoM after 30-year mortgage rates rose 400 basis points this year to 20-year highs.
Apple production risk is on the rise
The protests in China and the unrest around Apple’s largest manufacturing hub for its iPhone could lead to a production shortfall of close to 6mn iPhone Pro which was a Morgan Stanley estimate and was published before the intensified issues at the Apple manufacturing site.
Earnings to watch
Today’s earnings focus is Crowdstrike with analysts expected FY23 Q3 (ending 31 October) revenue growth expected at 51% y/y with operating margin expected to demand as pricing power and demand remain robust in the cyber security industry.
- Today: Li Auto, DiDi Global, Bank of Nova Scotia, Intuit, Workday, Crowdstrike, HP Enterprise, NetApp, Shaw Communication
- Wednesday: Royal Bank of Canada, National Bank of Canada, Salesforce, Synopsys, Snowflake, Splunk, Hormel Foods, KE Holdings
- Thursday: Canadian Imperial Bank of Commerce, Bank of Montreal, Toronto-Dominion Bank, Marvell Technology, Veeva Systems, Ulta Beauty, Zscaler, Dollar General, Kroger
Economic calendar highlights for today (times GMT)
- 0800 – Spain Nov. CPI
- 0930 – UK Oct. Mortgage Approvals/Consumer Credit
- 1000 – Eurozone Nov. Confidence Surveys
- 1300 – Germany Nov. Flash CPI
- 1330 – ECB's Schnabel to speak
- 1330 – Canada Sep. GDP
- 1400 – US Sep. S&P CoreLogic Home Prices
- 1500 – UK Bank of England Governor Bailey to testify
- 1500 – US Nov. Consumer Confidence
- 2130 – API's Weekly Crude and Fuel Stock Report
- 0030 – Australia Oct. CPI
- 0130 – China Nov. Manufacturing and Non-manufacturing PMI
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