The shockwave from the writing down of the Credit Suisse’s AT1 bonds lingers
In spite of statements issued by the European Central Bank and the Bank of England in attempts to calm investor jitters stemming from the complete writing down of Credit Suisse’s Additional Tier-1 (AT1) debts, prices of AT1 bonds and other subordinated debts issued by European banks plunged. As Saxo’s Head of Equity Strategy, Peter Garnry, highlighted in his article, the cost of capital for European banks has soared. After 2008 Great Financial Crisis, European banks have been relying on AT1 as an important source of capital. Across the largest European banks, it is estimated that AT1 debts account for over 10% of Tier-1 capital and around 2% of risk-weighted assets. Banks will be damned if not calling the AT1 debts on call dates by both higher reset coupons as well as reputation risks and will also be damned by the anticipated high costs of refinancing by issuing new AT1 debts or common shares. Investors will monitor closely how banks handle bonds on calls and coupon resets and how investors react to it.
Is inflation still a problem in the US?
While the focus has quickly turned to banking sector concerns, the 25bps Fed rate hike and 50bps ECB hike this month is proof that central bankers are still more worried about inflation. Fed’s preferred inflation gauge, the PCE, will be out for February this week on Friday. February core CPI came in higher than expected on a MoM basis while the PPI was cooler. So expectations on PCE are rather mixed. Core PCE is expected to rise 0.4% MoM in February, cooling vs. the +0.6% in January, while the annual rate of core PCE is seen firm at 4.7% YoY, as per the Bloomberg consensus. Market continues to price in about 100bps of rate cuts for this year, defying the Fed’s latest dot plot projections, and another miss in PCE could further give weight to the market expectations. On the other hand, the PCE print will likely have to be extremely hot to shift focus away from banking troubles.
Market implication: A weaker-than-expected print could bring bond yields lower, boosting rate-sensitive tech stocks. USD could fall, mostly against the yield-sensitive Japanese yen as well as precious metals like Gold and Silver.
ECB may not waver even with a big slide in Eurozone inflation
Euro-area headline inflation is expected to see a significant slide in March, with Bloomberg consensus expecting the flash headline CPI to soften to 7.1% YoY from 8.5% in February. This is mainly due to the large base effects in energy as we hit the one-year mark for the invasion of Ukraine which led to a sudden spurt in European prices. But the base effect factor may mean that this easing of Europe’s inflation falls short to ease market’s tightening expectations for the ECB. Core inflation is still expected to remain hot, and come in at 5.7% YoY vs. 5.6% previously.
Market implication: A stronger-than-expected core CPI for the Eurozone could fuel further gains in EURUSD, as long as further bank stress remains contained in Europe.
Nasdaq 100 seen as a shelter play, up 17% this quarter, amid the worst banking sector turmoil since the GFC. Watch for end of quarter rebalancing
It’s important to reflect on market moves to see where momentum is and what could be subject to end of quarter rebalancing. With bond yields continuing to fall to new lows, down for the 3rd week, and the US dollar index down for the second, the Nasdaq 100 has continued to hit new highs, moving up 17% this quarter while the KBW Bank Index has shed 22% this quarter. Quality Mega-cap tech stocks with strong cash flows are being favoured amid the uncertainty with companies with robust balance sheets in focus. Nvidia share are up the most this quarter, up 83% as its datacentre and networking business are being seen as a defensive play. Meanwhile Meta shares up are 71% with investors buying into the fact that Meta’s revenue is expected to rise in 2023 and recover from the prior drop. Tesla shares are also doing this quarter, up 54% as Tesla has cut costs, while the lithium price is down 47% in six months which is helping Tesla’s bottom line.
China’s PMIs set to moderate while stay in expansion
According to the survey by Bloomberg, the March PMI data scheduled to release this week in China are to moderate from the strong levels in February. In March, the official NBS Manufacturing PMI is expected to come at 51.7 (February: 52.6) and Non-manufacturing PMI to drop to 54.9 (February: 56.3). The Caixin China PMI Manufacturing is expected to edge down to 51.2 from 51.6.
The March Emerging Industries PMI released earlier decelerated to 56.1 from the elevated 62.5 in February. Steel demand data coming out recently also suggested potentially some deceleration in manufacturing and construction activities in March. Seasonality may have made an impact as well as expert orders tended to be front-loaded and only to pick up gradually again after the Chinese New Year.
Market implication: Investors are impatiently waiting for growth acceleration in the Chinese economy to validate the notion of reopening trade. Turning into the wrong direction in data about the real economy may stir disappointment into investors’ deliberations.
Monthly Australia CPI; the next catalyst for the Australian dollar, local gold price and real estate linked stocks
The February CPI report is expected to show inflation fell in the month, from 7.4% YoY to 7.2%, which would support the case for the Reserve Bank of Australia to pause rate hikes at its April board meeting. This could spell further downward pressure on the Australian dollar which has been range bound for weeks. That said, if we do see a drop in inflation, Australian bond yields will likely continue to fall and that would underpin higher prices in Australian dollar gold. This scenario supports further upside in Australian gold miners shares, with Newcrest Mining shares already up 27% this year. The drop in Australian bond yields from a smaller CPI print, also support property facing companies shares continuing to rebound; with Domain, and REA already over 20% this quarter.
The competition landscape in the China EV industry in focus
After the expiration of EV purchase subsidies at the end of last year, an intensifying price war among EV manufacturers has been front and center in the mind of investors when looking at EV stocks. The Q4 results and outlook guidance from the EV industry leader BYD (01211:xhkg) this Tuesday will be closely analysed by investors to gauge the trend in the industry. BYD is reportedly going to cut prices in new models by RMB 60-80K and older models by more than RMB150K.
Chip maker Micron and drug story giant, Walgreens results outlooks are on watch, as a proxy for what to expect from both industries this year
Chip maker, Micron Technology shares have been outperforming the Nasdaq 100, and are up 21% this year, ahead of the company reporting quarterly results after market Tuesday. Its outlook will be watched closely following the memory chipmaker’s cost-cutting efforts, from headcount reductions to executive compensation cuts, which take hold this quarter. That said, consensus expects further YoY declines in both EPS and revenue. Meanwhile, drug store giant, Walgreens Boots reports before the bell Tuesday and could see restructure and capital plans scrutinized, while investors could also react to the drugstore halting the sale of abortion-pills in several US states. Walgreens shares are down 14% this year.
Macro data on watch this week:
Monday 27 March
- Germany IFO Business Survey (Mar)
- Germany Retail Sales (Feb)
- UK BOE Bailey speaks
- US Dallas Fed Manufacturing Activity Index (Mar)
- China Industrial Profits (Feb)
Tuesday, 28 March
- Australia Retail Sales (Feb)
- UK Bailey Testifies on SVB
- US Senate Banking Committee to hold first hearing on SVB collapse
- US Advance Goods Trade Balance (Feb)
- US Consumer Confidence (Mar)
Wednesday, 29 March
- Australia CPI (Feb)
- Bank of Thailand rate decision
- German GfK Consumer Confidence (Apr)
- UK BOE Mann speaks
- US House FSA hearing on SVB
Thursday, 30 March
- Germany CPI (Mar P)
- US Initial Jobless Claims (25-Mar)
- US GDP (Q4 T)
- US Treasury Secretary Yellen and Fed’s Barkin speak
Friday, 31 March
- Japan Jobless Rate (Feb)
- Japan Tokyo CPI (Mar)
- China PMIs (Mar)
- UK GDP (Q4 F)
- France CPI (Mar P)
- Italy CPI (Mar P)
- Eurozone CPI (Mar P)
- US PCE (Feb)
- US Univ. of Michigan Sentiment (Mar F)
Earnings on watch this week:
- Monday: BioNTech, Carnival
- Tuesday: BYD, Nongfu Spring, Micron Technology, Lululemon Athletica, Walgreens Boots Alliance
- Wednesday: Constellation Software, Cintas, Paychex
- Thursday: Kweichow Moutai, Great Wall Motor, H&M