Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: Market sentiment deteriorated further yesterday, with US equities suffering one of their weakest sessions of the cycle and descending to the lows for the year. Besides the background fears of a more hawkish Fed, yesterday saw Russian announcing it will cut off gas supplies to Poland and Bulgaria as a warning that others must pay for Russian gas in rubles, while Google parent Alphabet reported weak Q1 results after the close. Sentiment stabilized overnight on Chinese leader Xi calling for new stimulus.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - very ugly day yesterday as Nasdaq 100 futures were down as much as 5.5% hitting new lows since the peak in late last year driven by steep losses in Tesla down 12%. However, Nasdaq 100 futures recovered before the close to finish above the 13,000 level and are bouncing higher today following an opening print at 12,881. US earnings yesterday were mostly positive and EPS growth q/q in Q1 is now -1.1% in the S&P 500 Index suggesting companies have been able to protect profits at the expense of lower margins.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Construction, cement and other infrastructure related stocks rallied. President Xi Jinping told ministry officials in a meeting of the Central Committee for Financial and Economic Affairs yesterday to increase infrastructure construction, especially for transportation, energy, and water management. CSI CSI300 Index gained 1.6% and Hang Seng Index was up modestly. Ganfeng Lithium rose over 11% following reporting strong Q1 earnings and gross margin expansion due to the company’s ability to raise prices.
Stoxx 50 (EU50.I) - Stoxx 50 futures are holding up better than expected given that Russia has cut natural gas to Poland and Bulgaria suggesting the conflict between Russian and Europe is intensifying. Yesterday’s low at 3,625 is the key level to watch on the downside if risk-off kicks in. On the positive side European earnings releases this morning were better than expected.
EURUSD – the pair has traded to new lows for the cycle and has poked at the two-year lows posted during the panicky markets in early 2020 as the global Covid shutdown began at 1.0636. A further deterioration in risk sentiment and new pressures on Europe from Russia’s threat to cut off gas supplies could continue to drive USD strength and the EURUSD lower. Longer term, the Chinese stimulus announcement could prove euro positive, just as the EU’s more robust fiscal plans are a positive for the currency. The next levels lower are the psychological 1.0500 level and then the almost 20-year low ahead of parity, the early 2017 low of 1.0341.
USDCNH as some areas of the Chinese economy are grinding to a halt due to Covid lockdowns and limitations on activity linked to the spread of the virus, Chinese leader Xi was out overnight calling for an “all out” boost to the economy via spending on infrastructure. Chinese equity market sentiment rebounded strongly on the news, while the yuan traded sideways after its recent sharp slide versus the US dollar that many see as the start of a more significant “devaluation” of the currency, even if one that is unlikely to be allowed to run aggressively lower.
Dutch TTF benchmark gas (TTFMK2) jumped 24% on the opening after Russia said it would cut off gas supplies to Poland and Bulgaria from today for failure to accept the demand for payments being made in Rubles. The European Union has rejected the move in principle but now payment deadlines are starting to fall due, governments across Europe need to decide whether to accept Putin’s terms or lose crucial supplies and face the prospect of energy rationing. With Europe ill prepared for supplies to be cut off and Russia in need of the money, it is in the interest of both the EU and Russia to work out a solution. With that in mind, the risk of +€200/MWh should supply to Germany be cut off seems limited.
Crude oil (OILUKJUN22 & OILUSJUN22) managed avoiding being dragged lower by falling equity markets on Tuesday after Chinese economic assurances helped ease demand concerns. Prices also received a fresh supply disruption bid after Russia said it would cut supplies of gas to Poland and Bulgaria. Overall, however, the prospect of aggressive Federal Reserve Monetary tightening potentially driven an economic slowdown is likely to curb the upside risks for now. The EIA weekly stock report on tap today with the API last night reporting a 4.8-million-barrel increase. In Brent, the 21- and 50-day moving averages may provide resistance at $106.20 and $107.00 respectively.
US Treasuries (IEF, TLT) a strong bid into treasuries yesterday as markets were in ugly “risk-off” mode suggests that economic growth outlook fears are behind some of the negative energy in markets, helping to spark a safe-haven bid into treasuries after the aggressive run higher for several weeks from early March until last week. For the 10-year benchmark, after the rise in yields stopped a few basis points shy of 3.00%, the decline poked just below 2.75% yesterday and 2.50% looks like resistance, as it was a sticking point for the price action in late March.
What is going on?
Chinese leader Xi calls for “all out” infrastructure spending push. This boosted Chinese equities, and may help put a floor under industrial metals, especially copper and aluminum which have been falling recently on growth concerns, and China-linked currencies like the Australian dollar, which have recent been under pressure from Chinese lockdowns and concerns that aggressive rate hike expectations elsewhere were set to slow growth. Xi told local authorities to bolster the construction and efficiency of infrastructure networks in fields such as transport, energy, and water conservation. The committee also urged increased fiscal spending, a “broadening of long-term financing channels” for construction, and better cooperation with private capital on such investment.
US earnings recap. Microsoft earnings were solid across all business segments with revenue growth coming in at 18% y/y except for its gaming segment (Xbox) which is constrained a bit on components. Extended Chinese lockdowns could hurt PC and Xbox supplies according to Microsoft, so this is key risk for the company going forward. Alphabet (Google) was the biggest disappointment with a widening operating loss in its cloud segment and YouTube Q1 at $6.9bn vs est. $7.4bn suggesting advertising activity is slowing down faster than expected which is a clear omen ahead of Meta’s earnings tonight. Visa earnings were better than expected as travel is rebounding.
DSV Q1 earnings beat. The logistics company reports Q1 EBIT ex one-offs of DKK 6.5bn vs est. 5.2bn and revenue was DKK 61.1bn vs est. 57.2bn as bottlenecks in the global supply chain, something that has not gone away with recent lockdowns in China, is keeping logistics prices high boosting profitability in the industry.
Mixed U.S. data. The consumer confidence index from the Conference Board is out at 107.3 in April versus estimated 108.2 and prior 107.6. The present situation moved down to 152.6 versus prior 153.8, mostly reflecting fears inflation will negatively impact wage growth. On the upside, the expectations component ticked up to 77.2 versus prior 76.7. This is positive. In addition, durable goods orders beat expectations in March. Overall orders reached 0.8 % month-over-month, mostly due to an increase in computers and electronic products (+2.6 % in March). Orders for non-defence capital goods excluding transportation were above consensus, at 1.1 %. This reflects strong business spending resilience. Overall, the state of the U.S. economy remains solid, for the moment.
Japan spending plan to ease inflation concerns. PM Kishida has announced a 6.2 trillion yen package to ease the burden of high commodity/energy prices on companies and consumers. It is estimated this will shave 0.5 percentage point off overall CPI from May through September, according to the cabinet office. While this gives room to the Bank of Japan to stay course in claiming that inflation remains orderly, it also means further weakness in the yen is hard to avoid.
Hungarian wages spike by record amount ahead of election. Hungary’s wage data for February showed a rise of 31.7% year-on-year as private earnings surged 12%, but public sector employees saw a rise of over 90% year-on-year as large wage hikes and special bonuses were paid out that look suspiciously like a sitting government indirectly buying an election with an unsustainable fiscal outlay on wages. HUF traded some 1.5% weaker versus the euro yesterday, and this could trigger a further weakening of the currency as wage rises in the country were already outstripping the fast-rising pace of inflation, pointing to the risk of a further wage-price spiral and a weaker HUF.
Robinhood cuts 9% of its workforce. The post pandemic return to work for many people and the latest brutal bear market over the past five months have changed the retail investor industry putting pressure on earnings for Robinhood which is exposed to activity in cryptocurrencies and equity options. The signal from Robinhood suggests risk appetite is reversing among retail investors.
What are we watching next?
Will European importers of Russian gas be willing to pay for it in rubles? Russian leader Putin has made good on threats to shut off gas to Poland and Bulgaria after the two countries refused to pay for gas imports in rubles. While Poland and Bulgaria have both made provisions to avoid rationing of gas, the same cannot be said for major consumers led by Germxany. According to Goldman Sachs, a full interruption of Russian flows to Germany could potentially see European gas prices double to over €200/MWh this summer.
Earnings Watch. Today’s earnings focus is on Meta following yesterday’s disappointing revenue figures from YouTube suggesting advertising growth is slowing confirming Snap’s recent Q1 figures where the company guided significantly lower revenue growth for Q2 than consensus estimates. Earnings today from Qualcomm, PayPal, Boeing, and Ford are also key focus for investors.
Economic calendar highlights for today (times GMT)
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