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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities have seen intraday volatility compress over the past couple of trading days with higher lows suggesting the market is stabilizing for now. S&P 500 futures are trading around the 4,250 level early European trading hours with the 4,275 being the natural resistance level to watch, and if it can clear that level then 4,300 is possible. However, key risks are that it is a Friday, and we have seen before that investor are de-risking going into the weekend, and the market is still headline driven, so things can turn very quickly.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) Hang Seng TECH (HSTECH.I) sold off sharply this morning, having fallen as much as 8.9% before recovering to trade down less than 5%. The wave of selling was carried overnight from New York, when the NASDAQ Golden Dragon China Index declined 10%, following the report that the U.S. Securities and Exchange Commission subjected five U.S. listed Chinese companies to potential delisting from the NASDAQ. JD.COM (09618), Bilibili (09626), Alibaba (09988), and Tencent (00700) fell 13%, 10%, 6% and 5% respectively. Hang Seng Index (HIS.I) fell 2%. A share CSI300 recovered in the afternoon to register a small gain, with buying in pharmaceuticals, medical equipment, food, agricultural business, rural consumption, turism and financials.
European equity markets – STOXX 50 futures up 1% in early trading hours despite a more hawkish ECB yesterday trading around the 3,660 level after almost touching 3,600 earlier in the session. The trading range in STOXX 50 futures is 3,600 to 3,800 indicating the high volatility in European equity markets.
EUR crosses – the ECB turned more hawkish than expected as the central bank is reacting to the accelerating inflationary pressures that in some respects look more entrenched than previously thought, although the ECB is stubbornly predicting inflation will cool down over the next 12 months. This could turn out to be a policy mistake as the commodity market will continue to add inflationary pressures into the economy. EURUSD retreated down below 1.10 yesterday and is bouncing a bit this morning.
JPY crosses - the yen fell to a five-year low against the dollar overnight after USDJPY broke the double top at 116.35 to reach 116.75. The move comes amid expectations for widening yield differentials with hot US inflation supporting the need for higher US rates, raising some speculation that the FOMC may opt for a 50-basis point hike next week. Rising US rates and elevated commodity prices weighing on Japan’s trade balance has left little incentive for buying yen at this stage. The near-term target being 118 followed by the psychological 120 level.
Crude oil (OILUKMAY22 & OILUSAPR22) is heading for a lower weekly close following a tumultuous week that saw Brent almost hit $140/b while trading within a record 33-dollar range. Even higher volatility was seen in diesel with ICE gasoil (GASOILUKAPR22), used as the pricing reference for all distillate trading in Europe and beyond, which at one point reached a price three times above the five-year average. Russia’s unjust actions against Ukraine has rippled through commodity markets with supplies from the world’s second biggest commodity exporter being regarded by many buyers as toxic and best avoided. Hopes for peace fire has prevented prices from surging even higher, but if prolonged we may end up in a situation where only lower demand from higher prices will balance the market.
US Treasuries (TLT, IEF). The US CPI figures came in line with expectations. However, a hawkish ECB contributed to lifting US Treasury yields ahead of the 30-year auction. After tailing 3-year and 10-year Treasury auctions this week the 30-year bond sale stopped through by 2.4bps. The bid to cover was at 2.458x, the highest since September 2021 while indirect bidders rose to 71.52% versus 67.95%. It shows that investors are concerned positioning in the front part of the yield curve amid a hiking cycle and war in Ukraine.
European Sovereigns (VGEA, BTP10). A hawkish ECB surprised the market yesterday. The central bank stated clearly that monetary policies will tackle inflation, while fiscal policies will need to look at growth. A faster end of QE, provoked yields to rise in the whole euro area, in particular the periphery which is fearful of less support coming from the central bank. The BTPS-Bund spread is poised to widen further.
US Corporate space (LQD, HYG, USIG). The Move index remains elevated while credit spreads continue to widen. The corporate bond space is facing serious headwinds that could provoke a tantrum. We remain concerned that inflation and interest rate hikes might continue to weigh negatively on credit spreads going forward.
What is going on?
U.S. CPI for February is uncomfortably high. It was out at 7.9 % year-on-year aligned with the market consensus. Inflation is now broad-based: core CPI was up 0.5 %, energy 3.5 % (gas 6.6%), food 1.0% and so on. Inflation is not transitory. There is strong evidence it is here to stay. The Ukraine war will certainly be an accelerator of inflationary pressures. Expect the U.S. Federal Reserve to increase interest rate by at least 25 basis points next week.
Hawkish ECB monetary policy meeting. The ECB brings forward plans to wind down extraordinary stimulus. The QE programme will end in the third quarter of this year, instead of the fourth quarter. This will open the door to an interest rate sooner than expected. The money market now expects a first interest rate hike of 25 basis points in September this year. This anticipation will be adjusted depending on the evolution of growth and inflation, but it is clear that we are entering a period of tightened monetary conditions. This decision follows an acceleration in inflation to 5.8 % year-on-year in February. There are still substantial upside risks regarding the inflation outlook, especially due to the consequences of the Ukraine war. The new staff projections have been released too. The ECB now expects CPI will be at 5.1 % this year, from 3.2% at the December 2021 meeting. But in all scenarios, the ECB sees it extremely likely that CPI will stabilize around 2 % from 2023 onwards. This is very optimistic, in our view.
US earnings recap. Oracle’s FY22 Q3 figures were mostly in line with estimates while providing an optimistic outlook for its cloud business which is expected to grow around 25% by the end of the current fiscal year. Combined with slightly better than expected operating margin that could increase investors’ risk appetite on the company. DocuSign shares fell 17% in extended trading as the company’s Q1 revenue outlook of $579-583mn missed estimates of $593.5mn.
China Premier Li Keqiang promises tax relief. The Chinese announced that this year will be his last in the job and said that the 5.5% GDP target would be difficult to meet but China’s would implement several policies to stimulate growth including a tax relief.
SEC highlights five Chinese companies that could be subject to US delisting. This announcement initiated a selloff in Chinese ADRs during the US session and Hong Kong equities followed through with the Hang Seng Tech Index down almost 5% in today’s session.
What are we watching next?
Nickel trading on the London Metal Exchange will stay closed at least until next week after being halted since Tuesday following a 250% two-day price spike. The unprecedented decision by the exchange to cancel all trades on Tuesday has triggered a lot resistance and protests from market participants. The exchange, owned by the HKEX, said the decision was made in order to save some market makers and not least Chinese tycoon Xiang Guangda, the world's largest nickel producer from default. A massive short position built up through his Tsingshan Holding Group attracted a margin call that could not be met, but the trading pause has given the group enough time to secure enough funds to continue. Given the price action on the Shanghai Futures Exchange since Monday LME nickel may eventually open lower by more than 40%.
Earnings Watch. The earnings week is over, and the number of earnings releases will be limited for now on until the Q1 earnings season kicks off in mid-April
- Today: EssilorLuxottica, AIA Group
Economic calendar highlights for today (times GMT)
- 0700 – Germany Feb CPI
- 0700 – UK Industrial Production
- 1330 – Canada Unemployment Rate
- 1500 – US March University of Michigan Preliminary Sentiment
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