Global markets have repriced and got ready for the Fed’s verdict

Global markets have repriced and got ready for the Fed’s verdict

Equities 7 minutes to read
Saxo Be Invested
APAC Research

Summary:  After the inflation scare from the US CPI last Friday and massive selloffs in equities, bonds and currencies against the dollar since then, global asset markets have repriced and got ready for the verdict from the FOMC on Wednesday at 2p.m. NYT and signals from Chain Powel on the press conference afterward. The market is pricing in a 75bp hike this meeting and another 75bps on the July FOMC and 50bps in September, with a terminal rate of 4% by mid-2023.


What’s happening in markets that you need to know 

On edge ahead of Fed hike - The big picture in equites remains bearish (as we reiterated yesterday). The market is not only awaiting to see how much the Fed spikes rates by, but the market will be looking for clues as to what the Fed guides for 2022. The Fed Fund futures suggests rates will be at 3.8% by February 2023, but we think the Fed will go higher, given food and oil price inflation will get worse, once China reopens and as Euro and US travel picks up for their holiday period.

Overnight FedEx (FDX)  Oracle (ORCL)  CF Industries (FC) outperformed the market, with FedEX shares giving off short term bullish signals after FedEx guided for a reduction in capital spending and a 53% jump in its quarterly dividend (far above estimates). Oracle (ORCL) also showed further signs it shares could continue to rally up after it successfully gained more customers in the highly lucrative cloud market. 

Boeing (BA) may resume 787 deliveries in the coming weeks. We think this could give a clear a runway for a substantial amount of cashflow growth. Goldman for instance estimates 15 787s would be worth $6 billion.  BA is in our defence equity basket that we track. And its shares are down 66% since the covid crash. We do see other opportunity in Défense, with companies like Lockheed (LMT) and Raytheon (RTX) looking more attractive based on locking in forward, reoccurring contracts with the US government.

Asia Pacific markets remain mixed ahead of Fed, China data supports. The likelihood of a 75bps rate hike from the Fed is gaining traction and keeping the markets nervous, especially after a WSJ report which is said to be the Fed's way of communicating with the markets during the quiet period. Still, slightly better than expected China activity data for May supported sentiment and helped Singapore’s STI (ES3) to chalk out some gains along with Chinese equities. Japan’s Nikkei 225 (JP225.I) was down 0.6% led by department stores like Isetan (3099) and Takashimaya (8233) suggesting that inflation concerns are biting.

Australia’s ASX200 is searching for lower ground falling for the 4th day with consumer confidence levels falling like a knife, following yesterday’s ugly business confidence for May. The market is increasingly on uneven ground, with the fundamentals looking stretched and businesses costs to surge more than expected. All while the technical indicators suggesting the market is in oversold territory.  Firstly, today in Australia, the Fair Work Commission unveiled a 5.2% rise in minimum wages, which will dent companies forward earnings and profits, at a time when from July 1, companies costs for employees will already be rising with superannuation guarantee payments rising to 10.5%. All this comes on the eve of Australian stronger jobs data being released tomorrow. Australia bond yields today cracked an 8-year high of 4.1%, meaning a safe haven assets offers a more lucrative return than most stocks on the global market, and bonds are almost more attractive than the ASX200’s average yield of 4.9%.

Hong Kong and mainland China’s equity markets continue to outperform the U.S market despite the COVID-19 outbreak in Beijing is yet to be contained.   The gradual relaxation of pandemic control measures since mid-May has enabled a series of economic data showing better-than-expected improvements in May, in particular exports and credit numbers released last week as well as industrial production and retail sales released today.   Hang Seng Index (HSI.I) and Hang Seng TECH (HSTECH.I) surged 1.4% and 2.6% respectively.  CSI300 (000300.I) climbed 1.8%.  Renewed speculation about Ant Group IPO also contributed to the sentiment towards Chinese internet stocks. Alibaba (09988) surged more than 4%.  According to the WSJ, President Biden “is closing in on a decision to lift some tariffs on Chinese imports”.

GBPUSD takes a dip below 1.2000. Sterling is making big moves with GBPUSD dipping to fresh lows since the pandemic at 1.1934 while EURGBP rose to 0.87+ levels ahead of the Bank of England meeting on Thursday. While this is mainly driven by a massive repricing of the Fed, it is still unlikely to nudge the BOE at this point.

US natural gas slump, Europe gas higher. A key natural gas export terminal in Texas, Freeport LNG, said a partial resumption of activities was targeted for 90 days, but “a return to full plant operations is not expected until late 2022” following a fire this month that shuttered the facility. US natural gas (NGN2) dropped by over 15% to lows of $7.20/MMBtu with more gas staying at home despite soaring international demand, hence negating the upside pressure on domestic US gas prices. EU gas (TTFMN2) traded up 20% to above €100/Mwh ($31/MMBtu)

OPEC+ expects world oil demand will slow in 2023. OPEC+ expects world demand growth of 2 million barrels per day or less vs. growth of 3.36 million bpd expected in 2022. OPEC is expected to publish its oil demand forecast for 2023 on 12 July 2022. Meanwhile the IEA will give its 2023 oil demand forecast in a monthly report today. With the Democrats also considering some sort of excess profit tax legislation on oil companies to curb inflation ahead of the mid-term elections, crude oil (OILUKAUG22 & OILUSJUL22) slumped overnight with WTI dipping to 117 and Brent down to 119, but some recovery to 120-levels is seen in the Asian session.

What to consider?

U.S. May Producer Price Index (PPI) still uncomfortably high. The first estimate is out at 10.8% year-over-year from 10.9% in April. This is a tad below expectations (10.9%). Core PPI (excluding food and energy) is also out below expectations, at 8.3% year-over-year against 8.6%. U.S. PPI matters for financial markets and policymakers because it is leading the U.S. Consumer Price Index. This is too early to assess whether or not inflation has peaked in the United States. One data point does not make a trend, especially when the month-over-month change is so small. We tend to believe that inflationary pressures will stay higher-for-longer.

The US Government has noticed the star performers of 2022 are oil companies, with record high profits and overnight put them on notice; with a potential new profit tax. US Senate Chair Ron Wyden plans to introduce legislation setting a 21% surtax on oil company profits that are excessive (profits of over 10% would be excessive under the bill). And the bill also plans to attack companies with over $1 billion in yearly revenue. The 21% tax is on top of regular company tax due. Companies to watch that could see some pressure include Occidental (OXY), Halliburton (HAL), Marathon (MAR), Devon Energy (DVN)and Exxon Mobil (XOM), which are all some of this year best performers in the S&P500 up 57%-114%.

China’s economic activities showed better-than-expected recovery in May.  Industrial production grew 0.7% YoY (vs consensus: -0.9%, April: -2.9%) and 5.6% MoM, led by mining.  The services sector was down 5.1% YoY.  Retail sales fell 6.7% YoY in May (vs consensus: -7.1%, April: -11.1%).  On a MoM basis, retail sales marginally improved by 0.05%.  Fixed asset investment for the first five months of the year grew 6.2% YoY but property investment fell 4%. Surveyed jobless rate fell to 5.9% in May from 6.1% in April.  However, the jobless rate for young people aged 16 to 24-year old rose to 18.4% from April’s 18.2%. 

Potential trading and investing ideas to consider?

How to play the FOMC? A knee-jerk reaction to the Fed announcement is almost always big, but it will also be key to watch the Fed’s dot plot and Chair Powell’s press conference today. With 200bps of rate hikes priced in for the next three meetings, it may be hard for the Fed to surprise on the hawkish side, but they need to chase market expectations to ensure credibility. USDJPY and USDCNH remain the key instruments to play policy divergence, especially if we see a 75bps coming through along with a hawkish commentary. However, trading the JPY faces a big BOJ risk coming on Friday. In a less likely scenario of Powell & co sticking with a 50bps, there is likely room for a bounce back in equities, yields to go lower and USD to sell off slightly. Long EURUSD or also AUDJPY has room to run higher in that situation.

USDJPY Put Spreads to play potential surprises from the BOJ after the conclusion of its monetary policy meeting this Friday.  With popular opinions and political pressure building up questioning the BOJ’s stance of allowing inflation to run, any hints about changes in the BOJ’s assessment of growth and inflation outlook may trigger huge volatility in the JPY.  John Hardy, Saxo’s Head of FX Strategy published an insightful article on this subject and a potential trading idea of buying a USDJPY 128-124 put spread.  

For a global look at markets – tune into our Podcast. 

Quarterly Outlook

01 /

  • 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...
  • 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 ...
  • 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/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

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. Android is a trademark of Google Inc.

©   since 1992