Summary: Risk sentiment has worsened after a weak close to trading last week and despite the first round of the French presidential election easing fears for now of immediate new existential pressures on Europe. Market concerns are likely driven most prominently by the ongoing steep rise in global bond yields, but also by the risk of widening Covid lockdowns in China and geopolitical concerns as Russia may be eyeing an intensification of its aggression in eastern Ukraine.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities closed on weak note on Friday, particularly for the more tech-heavy and more highly valued Nasdaq 100 index perhaps on the ongoing spike in US Treasury yields, which continued in the futures market overnight to start the week. The Nasdaq future traded below important support near the 14,300 level while the S&P 500 has yet to break below last week’s lows near 4,444 and has yet to post a daily close below the 200-day moving average, currently at 4,472 and therefore above the current price action in early European hours. Looking ahead, Q1 earnings season kicks off with the big US financial companies this week.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) fell more almost 3%. Hang Sang TECH Index (HSTECH.I) was more than 4% lower. EV maker NIO (09866) halted production due to delays in getting parts from suppliers in Jilin, Shanghai and Jiangsu which are under Covid related full or partial lockdowns. China’s retail passenger vehicle sales fell 10.5% YoY in March. Shares of auto makers fell 4% to 11%. Leading lithium producer, Ganfeng Lithium (01772) was down 14% and EV battery maker CATL (300750) declined 8%, after Elon Musk suggested Tesla (TSLA) might look into lithium mining and production. Chinese mega-cap tech stocks fell 3% to 12% China reported PPI (+8.3% YoY) and CPI (+1.5% YoY) slightly above expectation.
Stoxx 50 (EU50.I) – watching for the impact on European equity markets to the first round of the French presidential election after notable wobbles late last week ahead of the weekend. The local range support is near 3,800, while resistance comes in just above 4,000 and the 200-day moving average is still some distance off above that at 4,122.
EURUSD and EUR pairs – the euro saw a modest relief rally overnight. The market had begun to take the risks of the French presidential election first round far more seriously last week, but short-dated implied volatilities in EURUSD were already fading quite fast just ahead of the weekend, suggesting that hedging- or fear levels were not particularly extreme. EURUSD pumped as high as 10954 before fading back below 1.0900 and near the closing level Friday, suggesting other agendas afoot for the pair: namely that wobbly global sentiment continues to support the US dollar and as the war in Ukraine may be headed for a critical phase in coming days/weeks with a step-up of Russian pressure in the south and east of the country.
USDJPY is back higher at the critical cycle higher near 125 as US treasury yields continue to climb aggressively in today’s Asian session. Both Governor Kuroda and the official who heads up the monetary policy unit of the Bank of Japan (BOJ) reiterated today, in separate sets of comments, that the BOJ remains committed to its ultra-loose monetary policy and will ease even further if it sees fit. All eyes on any unscheduled bond purchases by the BOJ as its 0.25% cap on 10-year Japanese government bond yields is once again in the firing line.
Gold (XAUUSD) tried to get interesting late last week with a rally toward the 1,950 area, possibly as a hedge ahead of the French election, but the price action has stumbled somewhat in Asia, with the precious metal pressured in part by the rise further in bond yields. The price action needs to rise above the 1,966 area to suggest upside break potential, while the strong support is around 1,900 after a couple of brief spikes below that level in March.
Crude oil (OILUKJUN22 & OILUSMAY22) prices are under pressure for front contracts in particular for crude oil: on the demand side due to the fear of an extension and even widening of covid lockdowns in China, and on the supply side by the massive, coordinated release of strategic reserves in coming months is pressuring oil prices. For Brent crude, the 100 dollar/barrel remains an important psychological support.
US Treasuries (IEF, TLT) and European Sovereign Debt. US Treasury yields jumped higher still in the futures market overnight, with the US 10-year benchmark exceeding 2.75% and taking within 50 basis points of the more than 10-year high of 3.26% from 2018. The last several weeks have marked one of the most accelerated rises in long treasury yields in years. European sovereigns at the periphery also bear watching today after last week saw French yields to Germany widening precipitously on fears of a strong showing by right populist Le Pen in the French election.
What is going on?
French President Emmanuel Macron emerges reasonably ahead in the first round, at 28.3%, while far right populist leader Marine Le Pen is at 23.6 % and the far left populist Jean Luc Mélenchon once again came in a close third place with 20%. This election marks the end of the traditional parties in France: the Socialist party’s candidate only managed 2% and the center right Les Républicains, Valérie Pécresse (who polled temporarily in second position in November 2021!), only received 4.8% of the vote. What is happening is a replay of 2017. Our baseline expectation is that Macron has an 80 % chance of being re-elected over Le Pen in the second-round run-off on April 24. But this would not be the triumph of reformism. Macron is seen as a ‘default choice’ by a majority of voters. No matter how large his parliamentary majority will be at the National Assembly, he will not have a popular mandate and will face much more anger and protests than in the past five years.
Lockdowns in Shanghai, China continue as the city registers another daily record of covid cases. The lockdowns began on March 28 and have failed to stem the spread of the virus, with Chinese authorities racing to deliver sufficient food and medical care to residents. Elsewhere, authorities in the Guangzhou area (north of Hong Kong, with an urban area population of some 18 million) are concerned that 20 cases discovered there could indicate an outbreak there, with primary and middle school children to switch to online learning today.
Food price gains are coming to bite the Asian consumer. The UN FAO Global Food price index jumped to 159.3 from 140.7, a 33.6% y/y increase. This is on top of rising fertilizer and transport costs. Food prices will continue to see upside pressures, and this is especially important for Asia where food (and oil) make up a large component of the CPI baskets. This may justify a hawkish pivot from Asian central banks in the week ahead. Monetary Authority of Singapore (MAS) and Reserve Bank of New Zealand (RBNZ) have meetings scheduled in the week ahead, and both are expected to make further tightening moves.
Lithium stocks in focus again. Today, in Australia, a ASX300 new entrant, Lake Resources (LKE) shares rose 16% after it signed a deal to sell lithium to Ford Motor Company (F). This highlights the global push to electric vehicles, that will require car producers to buy more lithium, to achieve the Energy Information Administration’s (EIA) target of selling lithium powered vehicles by 2030. Late last week, lithium-related stocks sold off sharply after Elon Musk tweeted that he is considering getting into lithium mining if the lithium price doesn't fall after its recent sharp spike.
What are we watching next?
Global bond yields continue to rip higher. This development is adding to the most potential energy to global asset markets and bears watching closely, particularly for the general impact on risk sentiment, as historically, steep run-ups in bond yields have preceded considerable market volatility, with notable historical examples in 1987, 2000, and 2018.
US-India virtual meeting on “Indo-Pacific ties” and war in Ukraine today. The war in Ukraine has brought a test of the strength of US ties with India, as the former has voiced concern about India’s continuing to import Russian goods and not joining US- and other countries in sanctioning Russia. The very term “Indo-Pacific” is not new, but was prominently refreshed by US President Trump at a speech in late 2017 to promote a “free and open Indo-Pacific...where sovereign and independent nations...can all proper side-by-side, and thrive in freedom and peace.” and was considered as one piece of a growing effort to indirectly declare China a geopolitical rival.
US March CPI reading will be watched closely tomorrow as inflation is tipped to hit 8.4% year on year at the headline, taking it to a new 40-year high after 7.9% in February. If the data release surprises to the upside and further pressure long US treasury yields, we could see selling in high valuation stocks, namely tech stocks that are trading at high valuations. The Nasdaq is trading at price to earnings ratio of 53 times earnings.
Earnings Watch. The Q1 earnings season kicks off in earnest this week with the usual blast of US mega-banks paving the way, starting on Wednesday. The more Main Street-oriented Wells Fargo bank will be interesting for a check-up on credit demand, and Citigroup’s global and EM-reach is another angle worth watching this week for guidance.
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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