Financial Markets Today: Quick Take – February 2, 2023 Financial Markets Today: Quick Take – February 2, 2023 Financial Markets Today: Quick Take – February 2, 2023

Financial Markets Today: Quick Take – February 2, 2023

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Traders felt that the FOMC failed to push back sufficiently against market expectations for the Fed to reach peak rates soon and begin cutting rates by year end, which drove a fresh rally in equities and took the US dollar to new cycle lows almost across the board. Let’s see if the key US data up on Friday further encourages the USD bears. In the meantime, the Bank of England and ECB are on tap today.


What is our trading focus?

Equities: Momentum continues on Powell declaring part victory over inflation

While the Fed is still cautious and wants to send hawkish signals including a goal of moving the policy rate to 5% or slightly more, Powell’s comments about inflation is beginning to ease was extrapolated in the equity market. S&P 500 futures rallied another 1% in yesterday’s session and this morning they have opened just below the 4,150 level suggesting traders are eyeing the 4,200 level which was the approximate air pocket area last time S&P 500 futures visited this area back in August of last year. The truth is that Powell did say anything new but as long as the message was not too hawkish the equity market had the excuse it needed for continuing higher. Adding to positive sentiment was Meta’s better than expected outlook announced after the US cash equity market closed.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) little changed in lackluster trading

The Hang Seng Index advanced modestly on the back of a strong rally in U.S. equities overnight and less upward pressure on domestic interest rates. Baidu (09888:xhkg), rising 7.3%, extended its strong recent gains on the ChatGPT concept and following BlackRock raised its stake to 6.6% from 5.4% in the Chinese search engine giant. Baidu was the best-performing stock on the Hang Seng Index for the second day in a row. Li Auto (02015:xhkg) climbed 2.4% after reporting delivery of 15,141 units of EV in January,  up 23% Y/Y. On the other hand, NIO (09866:xhkg) slid 4.3% following a 12% Y/Y decline in delivery to 9,652 units in January and on reports that the Chinese EV maker is cutting prices. Chinese mobile gaming stocks traded in the Hong Kong bourse soared with Forgame (00484:xhkg) leading the charge and jumping over 80%.  CSI 300 traded sideways and was flat to yesterday’s close as of writing. ChatGPT concept, eCommerce, Chinese white liquor, machinery, and semiconductor stocks outperformed.

FX: USD bears back in action after dovish read of FOMC

The USD was weaker across the board after the Fed Chair Powell stayed away from pushing back aggressively on the easing priced in by the markets for this year or the loosening of financial conditions. EURUSD broke above the 1.0930 resistance and was trading above 1.1000 in the Asian session. The ECB may need to match market pricing for further hawkishness today to sustain this level. An interesting test for EURGBP as it trades into the upper reaches of its range near 0.8900, by the way, on possible relative surprises from the ECB and Bank of England meetings today. USDJPY slumped back below 128.50 with focus turning to BOJ Governor nominees to replace Kuroda, who leaves in early April. AUDUSD rose to 0.7150 but USDCAD was choppier as lower oil prices weighed on the loonie.

Crude oil (CLH3 & LCOJ3) starting February on the backfoot

Crude oil started February by sliding more than 2.5% on Wednesday after US data showed a further inventory built. Crude stocks rose 4.1 million barrels, its sixth consecutive weekly build, to the highest since June 2021. OPEC+ meanwhile reaffirmed their commitment to current output quotas after meeting on Wednesday. It is monitoring the impact of China’s reopening on demand. On February 5, the EU will ban almost all seaborne imports of Russian refined products, and just like Russian crude, diesel is already selling at a heavy discount of more than 25 dollars a barrel. Oil staged a partial, but weak post-FOMC rebound as the dollar weakened. The Brent prompt spread remains in a bullish backwardation structure which points to some underlying strength.

Gold (XAUUSD) breaks higher on dovish Fed

Gold reached a fresh cycle high after the Fed announced a 25bp hike and Chairman Powell said the committee had concluded the disinflationary process had started, and despite using the phrase “ongoing increases” he failed to push back enough on easing financial conditions. As a result, the market concluded the end of the rate hike cycle is near, and this focus helped weaken the dollar to a fresh cycle low while supporting a rally in gold to $1957, its highest since mid-April 2022. Next on watch will be $1963, the 76.4% retracement of the 2022 correction, following which there is no major level of resistance before the psychologically important $2000 level. Minor support at $1935, $1920 ahead of $1912. Silver (XAGUSD) meanwhile managed, for a change, to keep up with gold resulting in the XAUXAG ratio declining to 81 from above 82.5.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) dropped as hopes for rate cuts in H2 heightened

See more on last night’s FOMC dovish meeting below, but the general read is that Fed Chair Powell failed to push back against sufficiently hard against market expectations that the policy rate will soon peak and economic developments will see the Fed in easing mode in the second half of this year.  AFter a soft ISM Manufacturing data point and weak ADP payrolls growth, he yield on the 2-year and the 10-year tumbled 9bps each to 4.11% and 3.42% respectively. A stronger JOLTS job openings data (note: for December) failed to garner much attention.

What is going on?

Market reads FOMC monetary policy statement and presser as dovish.

The Fed delivered a 25bp rate hike, bringing the Fed Fund target to 4.50%-4.75% as widely anticipated and a statement largely unchanged from the previous one, reiterating that “ongoing increases” in the policy Fed Fund target “will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive,” The strong market reactions came from the response to Powell’s dovish statement in the post-meeting press conference. Powell said the Fed “can now say, I think for the first time, that the disinflationary process has started” though he cautioned that “the job is not fully done.”  Powell’s remarks saw the June-Dec 2023 SOFR spread widen to 54.5 bps, fully pricing in 50 bps of rate cuts in the 2nd half of 2023, following another 25bp increase in March. The SOFR futures curve implies further 143 bps of rate cuts in 2024. These implied rates bring the Fed Fund target to 4.25%-4.50% by Dec 2023 versus the Fed’s December dot plot of 5%-5.25%, and to 2.75%-3.00% by December 2024, that is 125bps below the Fed’s projection of 4%-4.25%

Meta earnings: greed triumph idealism

Mark Zuckerberg did listen to investors after all acknowledging that the idealism of the Metaverse and the huge capital expenditures it requires were too much given the environment. Meta announced a lower-than-expected operating expense and capital expenditures level for FY23 and that was exactly what the market wanted to hear. The shares rallied 20% in extended trading on this aggressive cut in expected expenses. In Q4, the company lost another $4.3bn on its Reality Labs segment (Metaverse bet), but revenue was higher in this segment and overall, in the entire advertising business. On the Q1 outlook revenue guidance was $26-28.5bn vs est. $27.3bn indicating a slightly better performance than Snap indicated yesterday for Q1. Meta also authorized the share buyback programme to be increased to $40bn.

US ISM manufacturing was weaker than expected, but Prices Paid above expectations.

ISM manufacturing declined for a fifth consecutive month to 47.7 from 48.4, short of the consensus of 48.0. While prices paid lifted to 44.5 (exp. 39.5, prev. 39.4), suggesting upside pressures in inflation sustaining, production and new orders fell to 48.0 (prev. 48.6) and 42.5 (prev. 45.1), respectively. Employment was also softer but still remained above the 50-mark at 50.6 from 50.8 previously. JOLTS job openings in December ramped back up to 11.012mln from the prior 10.44mln, surprising expectations for a fall to 10.25mln and now at their highest level since July. Overall, inflation risks are not going away yet, while growth concerns seems to be settling as well.

Eurozone headline inflation softens more than expected, but core inflation fails to drop.

January headline inflation data in the Eurozone came in softer at –0.4% MoM and 8.5% YoY from 9.2% YoY mostly underpinned by softer energy inflation, which remains high at 17.2% YoY (vs. 25.5% YoY in December). While the trend seems encouraging, inflation remains elevated at the core at +5.2% YoY versus the small drop to 5.1% expected. This data is unlikely to deter the ECB from staying on course with further tightening. A delayed German inflation print for January is due next week.

China’s President Xi called for moving faster to establish the new development pattern

In the second study session of the Chinese Communist Party’s new Politburo, China’s President Xi called for the country to move faster toward establishing a new development pattern, a concept that he first introduced in April 2020. He emphasized the importance of boosting domestic demand and deepening supply-side structural reform. President Xi also pledged to bring forward the construction of more new infrastructure projects and focus on the real economy and new industrialization. He also called for strengthening the measures against monopoly and unfair competition, as well as guiding and supervising the healthy development of private capital according to the law. The readout from the Politburo meeting mentioned neither “preventing disorderly expansion of private capital” nor “common prosperity”.

Shell beats on Q4 earnings

One of Europe’s largest oil and gas majors reported Q4 adjusted profit of $9.8bn vs est. $8.3bn driven by higher-than-expected oil and gas output for the quarter. Q4 dividends are lifted to $0.2875 per share vs est. $0.285.

What are we watching next?

ECB and Bank of England up today.

The market read on the Fed was dovish after fearing that Powell might be on the warpath against market expectations. Expectations for today’s ECB meeting are rather different as hotter core CPI reads in Europe have the market fearing considerable further ECB tightening – but can the ECB deliver beyond market expectations, with more than 100 basis points after today’s 50 bps hike expected at coming meetings?. After last night’s reaction to the FOMC meeting, the 2-year yield in 2-year's time for the EU and US is virtually at parity coming into today’s ECB meeting. The Bank of England meeting today is less certain, as the BoE may try to sneak in more cautious guidance, given the weak outlook for the UK economy, even if that outlook has improved. Besides today’s expected 50 basis points hike, watch for a potential downshift in guidance to less pre-commitment to further tightening, backed up by possible adjustments to inflation forecasts that are also due for a refresh today. The EURGBP in an interesting pair to watch today for relative central bank surprises as it pushes towards the top of its range into 0.8900.

Earnings to watch

Today is the week’s big earnings day with key earnings from Apple, Alphabet, and Amazon all being released after the US market close. With the animal spirits unleashed this year and helped by Powell’s comments yesterday better than expected results from these three technology giants could unleash a rally into the weekend.

  • Today: DSV, Dassault Systemes, Siemens Healthineers, Infineon Technologies, Deutsche Bank, Sony, Takeda Pharmaceutical, Shell, ING Groep, Banco Santander, Siemens Gamesa Renewable Energy, Nordea, Roche, ABB, Apple, Alphabet, Amazon, Eli Lilly, ConocoPhillips, Qualcomm, Honeywell, Starbucks, Gilead Sciences, JD.com, Ford Motor, Ferrari
  • Friday: Coloplast, Sanofi, Intesa Sanpaolo, Denso, CaixaBank, Naturgy Energy, Assa Abloy, Regeneron Pharmaceuticals

Economic calendar highlights for today (times GMT)

1200 – UK Bank of England Rate Announcement
1230 – UK Bank of England Governor Bailey press conference
1230 – US Jan. Challenger Job Cuts
1315 – ECB Rate Announcement
1330 – Q4 Unit Labor Costs / Nonfarm Productivity
1330 – Czech National Bank Rate Announcement
1330 – US Weekly Initial Jobless Claims
1345 – ECB President Lagarde Press Conference
1500 – US Dec. Factory Orders
1530 – EIA's Weekly Natural Gas Storage Change
1730 – Swiss National Bank’s Thomas Jordan to speak

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

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 Markets
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 Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML 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 Markets 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