What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are trailing Chinese and European equities with S&P 500 futures up only 0.7% in early European trading hours. The key event today is the FOMC rate decision which will shape market sentiment and direction over the coming months. The current macro cycle is about tightening financial conditions and fighting inflation through lowering demand which will continue to pose headwinds for equities.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) - Hang Seng Index rallied more than 8% and Hang Seng TECH Index (HSTECH.I) surged 18%, following the remarks from Liu He, a Politburo member and Vice Premier, on Chinese ADRs and the economy delivered in a special meeting of the Financial Stability and Development Committee of the State Council. He reiterated the Chinese Government’s support to Chinese corporate to list in overseas exchanges.
European equity markets – positive sentiment in China is carrying over into the European session with the Stoxx 50 futures up 2.1% pushing above the 3,800 level that was the upper bound of the recent trading range. European equities are down only 3.5% from the day before Russia’s invasion of Ukraine which is mindboggling given the uncertainty and cracks observed in commodity markets. The only rational explanation is that the equity market has increased the probability of peace in Ukraine within the foreseeable future. However, even if there is peace sanctions will still be in place on Russia adding pain to commodity market and the current macro cycle is about tighter financial conditions which will create headwinds for equities in the year to come.
USD pairs over the FOMC meeting tonight – The US dollar has traded firmly of late, in part on wobbly risk sentiment, but also as expectations for Fed tightening have reached new highs for the cycle this week. The USD even rose to new local highs versus the weaker currencies among the G10, especially the Japanese yen, which is sensitive to long US treasury yields (given the BoJ’s yield-curve-control policy that doesn’t allow its 10-year JGB yields to rise above 0.25%) as the US 10-year benchmark rose well above 2.00% over the last week. The degree to which today’s Fed actions and guidance (preview below) fulfill expectations and impact yields both at the short end (rate hike size and guidance) and at the long end (any clear language on how aggressively the Fed wants to reduce its balance sheet) will be critical for the US dollar reaction. Watching the 1.10-1.1100 zone in EURUSD if the USD trades softer in the wake of the meeting for upside reversal potential, and perhaps 1.0900 if the Fed surprises hawkish. USDJPY is also a focus after its break higher above 116.35 and whether the move can extend further towards 120.00 if US yields trade higher still in the wake of tonight’s meeting (remember that the US has already set its clocks forward for summer time).
Crude oil (OILUKMAY22 & OILUSMAY22) trades higher after hitting trend-line support at $97.50/b and after concluding an 85-dollar roundtrip which by yesterday had seen the market, wrongly in our opinion, shed most of the Russian war gains. The market surged higher after the Russian invasion triggered a sharp reduction in Western demand for Russian oil through self-sanctioning, a situation that remains and can be seen through Russian Urals deep discount to Brent of more than 25 dollars a barrel. A prolonged period of lower Russian supply will underpin prices despite the current threat to demand, not only from temporary Chinese lockdowns, but also from signs high prices have started to cut demand around the world. Focus on continued Russia-Ukraine talks, EIA’s Weekly stock report and IEA’s Monthly Oil Market Report.
Gold (XAUUSD) trades lower for a third day ahead of today’s FOMC rate decision and after the recent correction across key commodities cooled inflationary expectations. While short-term momentum focused trading accounts have been forced to reduce exposure during the recent 170-dollar slump, asset managers and long-term investors have continued to accumulate exposure with total holdings in bullion-backed ETFs rising to a one-year. While the war premium will deflate and eventually disappear, the risk of lower growth and high inflation will in our opinion continue to attract demand. Key support at $1890/oz with a break above $1957 needed to signal fresh upside potential
US Treasuries (IEF, TLT). Inflation expectations remained sustained yesterday supporting 10-year nominal yields around the 2.15% level. The focus remains on today’s FOMC meeting as the market expects the central bank to be more aggressive than anticipated in light of sustained inflationary pressures. While a rate hike is taken for granted, investors will be looking at the dot plot and a possible announcement regarding the Fed’s balance sheet runoff for hawkishness. Any hawkish of dovish surprise can move the bond market sensibly.
EU Sovereigns (VGEA, IS0L, IGLT). Yesterday, European government bonds recovered some of Monday’s losses. Yet, following a hawkish surprise from the ECB last week, European sovereigns remain vulnerable to the FOMC meeting today. Sovereigns from the periphery will be more at risk as the only element to limit the widening of their spreads relates to the news of an E.U. bond joint issuance, which we believe will take a long time to be agreed upon by state members.
Russian government bonds (RSX). This week, Russia might default on its debt. While the Credit Derivatives Determination Committee has agreed that payment in ruble for six Russian bond issuances containing the “fallback optionality” will not constitute a default, there are two bond issuances that do not have such an option and require the payment in US dollars. If Russia pays interest on these bonds in local currency, the country might run the risk of default. Yet, a default will not be recognized before the end of a 30-days grace period. Therefore, this week we might get some sporadic news surrounding Russia's interest payments, but a default will only be confirmed a few weeks from now.
What is going on?
UK unemployment falls below pre-pandemic level. It dropped to 3.9 % in the three months to the end of January from 4.1 % in the final quarter of 2021. Employment, which is a more pertinent indicator to assess the real state of the labor market, increased 0.1 of a point to 75.6 %. Vacancies rose to a record 1.32 million. Finally, inactivity rose slightly to 21.3 %. All this fuels higher wages. Expect the BoE to carry on with its hiking cycle with week despite growth risks from the Russian invasion of Ukraine.
German ZEW falls at record pace in March. The economic sentiment declined 93.6 points to a current value of minus 39.3 points this month. This was the biggest drop in expectations since the survey began in December 1991. The reading was also well below the economists' forecast of plus 10.0. The drop is essentially explained by the consequences of the Ukraine war.
Inflation is painfully high. France’s CPI for February rose to its highest level since 2008 at 3.6 % year-on-year. In the United States, the PPI for February reached double digits, at 10.0% year-on-year (as expected. The ex-food and energy level rose 8.4% vs. 8.7% expected). This is before we see the full impact of the Ukraine war on commodity prices, freight and so on. Expect March PPI and CPI in the developed world to keep climbing.
China in support of ADRs and growth. Liu He said in a speech today that China will support Chinese ADRs and that the Chinese and the U.S. regulators are in good communication and have already made progress in moving towards a cooperative resolution to address the U.S. regulator’s demand on access to accounting papers. He carried on emphasizing the Chinese Government’s determination to boost the economy. He said that monetary policy must take the initiative to respond, and new loans must maintain moderate growth to accommodate economic growth.
Ukraine Update – Russian leader Putin said that Ukraine is not serious in its negotiating stance ahead of further talks between Russia and Ukraine today. According to a survey released by the European Business Association, 42 % of small businesses have closed in Ukraine, 31 % have suspended work, and only 13 % have managed to continue full operations as of 14 March (see the full report). Today, the Ukrainian president Zelenskiy will virtually address the U.S. Congress at 1300 GMT. The International Court of Justice, based in the Hague, will issue a ruling on Russia’s war too. Ukraine is requesting that Russia be ordered to end its war and withdraw troops from the country.
Nickel trading on the London Metal Exchange will resume today at 8 am GMT after having been suspended for more than a week after prices rose 250% in little more than 24 hours. The exchange, however, will only allow a 5% move in either direction, and based on the lower price action in Shanghai since last Monday, we may see the price hit its down limit right on the opening.
Australia plans to challenge China and become the largest rare earth producer. Australia has some of the world’s largest rare earths reserves in the world, but China dominates 70-80% of the global industry in supplying the 17 rare earths elements needed in high-tech manufacturing. Today the Australian Prime Minister announced as part of its his Federal Election campaign, A$243 million ($175 million) will be allocated to four new projects, including a new nickel manganese cobalt battery material refinery hub in the Kalgoorlie region and a vanadium refinery project led by Australian Vanadium (AVL). In September Scott Morrison’s government announced a $2 billion loan facility to help secure Australian critical minerals projects. Rare earths stocks like Lynas Rare Earths (LYC) rose 3.3%, along with Australian Vanadium (AVL) surging 31% on the news.
What are we watching next?
FOMC meeting today. It’s finally FOMC time today as we await the Fed’s decision and guidance at a time of enormous uncertainty on the course of inflation due to the new pressures stemming from the war in Ukraine. Making life difficult for the Fed are that the fresh supply side shocks from spiking commodity prices will slow real economic growth, with or without a series of rate hikes that the market has now priced in. The majority of observers are looking for the Fed to hike 25 basis points and to indicate that it is likely to hike by 50 basis points at the May meeting, with a total of around 1.75% of rate hikes priced this year. The market will also scrutinize the latest Fed economic and policy projections, which will be refreshed in tomorrow’s “projection materials”. The degree to which the Fed emphasizes balance sheet reduction timing and severity will also be closely watched for potential impact on longer yields that are important inputs for valuation models and credit.
Formal Russian default today? Russia has said that it will only pay interest payments on foreign debt in rubles as long as sanctions are making settlement in US dollars impossible. Some $117 million in interest payments is due and the ripple effects into the country’s $150 billion in foreign debt are a concern, if one includes Russian sovereign debt and the debt of large Russian companies like Gazprom and Lukoil. The bond ratings agency Fitch said that Russia paying USD bonds in rubles would be considered a default.
Earnings Watch. Today’s focus is Inditex and Lennar with latter being the most interesting one given its signal value on the US housing market. On Thursday the two earnings releases to watch are from FedEx and Pinduoduo.
- Today: E.ON, Inditex, Lennar
- Thursday: Verbund, Veolia Environment, Enel, Accenture, FedEx, Dollar General, Pinduoduo
- Friday: China Merchants Bank, CITIC Securities, Vonovia, Ping An Insurance, Zijin Mining Group
Economic calendar highlights for today (times GMT)
- During the day: IEA’s Monthly Oil Market Report
- 1230 – US Feb. Retail Sales
- 1230 – Canada Feb. CPI
- 1300 – Poland Feb. CPI
- 1400 – US Mar. NAHB Housing Market Index
- 1530 – EIA's Weekly Crude and Fuel Stock Report
- 1800 – US FOMC Meeting (Statement and projection materials release)
- 1830 – US Fed Chair Powell press conference
- 2130 – Brazil Selic Rate Announcement
- 2145 – New Zealand Q4 GDP
- 0030 – Australia Feb. Employment Change / Unemployment Rate
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