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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures dipped below the 200-day moving average yesterday but have mustered a rebound above the level in early European trading hours trading around the 4,464 level. The 4,445 level is the key downside level to watch. Key risk events to watch today are US preliminary PMI figures for March.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index was down modestly and Hang Seng TECH Index (HSTECH.I) was off about 1%. Tencent reported a slowdown to 8% YoY revenue growth and a 25% decline in non-GAAP EPS in 4Q21. Advertising revenues from education, gaming and real estate, which were hit particularly hard by tightened regulatory policies, were weak. Tencent’s share price was down 4.7%. China Mobile rose more than 4% after reporting better than expected results, driven by better ARPU due to 5G migration and improvements in broadband business.
Stoxx 50 (EU50.I) – European equities are bouncing back this morning following yesterday’s selloff as commodities rallied again on the back of Russia’s intentions to get paid in RUB for their natural gas and oil. Stoxx 50 futures are trading around the 3,800 level with 3,760 level being the key level to watch on the downside should risk-off continue. There are a lot of preliminary PMI figures today that can move sentiment so watch out for those reports.
USDJPY and JPY crosses – the JPY continues to trade lower, under the twin pressures of rising rates elsewhere, which the yen absorbs rather than the Japanese government bond market because of the BoJ’s policy of capping 10-year JGB yields at 0.25%, and on Japan’s near total reliance on imported commodities, especially energy. Japan is turning its back on Russian LNG, which will mean it has to compete with others in a very tight market for LNG from other sources. Australia is the top exporter and AUDJPY has seen a spectacular ride higher of late on Australia’s impressive portfolio of all the key commodities that are in short supply due to the war in Ukraine. Elsewhere, the next major resistance for USDJPY is the 125.86 level from 2015, a nearly 20-year high.
EURUSD – is under a bit of pressure on the recent rise in US yields as a more aggressive Fed is priced in for coming meetings, but also as energy prices are spiking again, in Europe more so than elsewhere, if we include gas. And today is expected to bring a set of coordinated announcements between the US and the EU on reducing reliance on Russian energy exports. If 1.1000 slips more thoroughly away from the price action, the pair could be drawn toward the 1.0800 cycle support again.
Crude oil (OILUKMAY22 & OILUSMAY22) jumped yesterday as Russian leader Putin called for foreign countries sanctioning Russia to pay for their imports in Russian rubles, but possibly also in anticipation of coordinated moves between the US and the EU to reduce European reliance on energy from Russia, which puts pressure on prices from non-Russian sources. The May Brent contract closed above 120 dollars per barrel for only the third time for this cycle.
Gold (XAUUSD) is holding steady in a range above the key 1,900 support area, but below 1,950, a solid performance, given the resilient US dollar and the dramatic pricing of Fed rate expectations higher in recent weeks. The next step would be either a move sustaining the price above 2,000 or a failure of the rally through 1,900-1,890 support, with whether the Fed can establish credibility in its fight against inflation a key factor from here.
US Treasuries (TLT, IEF). Long-term US treasuries benefitted from a strong 20-year Treasury auction, with a record high bid-to-cover, and record low allotment to dealers as investors bid aggressively. Thirty-year yields dropped 12bps to 2.48% provoking the yield curve to flatten with the 2s10s falling below 20bps once again. In the meantime, inflation expectations continue to rise with the 10-year breakeven rate hitting 2.97%. More bear-flattening is to be expected.
UK Gilts (IGLT). Gilt yields dropped and the yield curve flattened as the DMO announced a larger than the expected cut of Gilt issuance for next year. The CPI numbers for February came stronger than expected indicating that the BOE might need to tighten the economy aggressively to combat it.
What is going on?
Russian leader Putin to ask sanctioning countries to pay for natural gas in rubles. This saw a new spike in European gas prices and a firming of the Russian ruble by more than 5% as market participants scrambled to understand the implications of the move, whether it is a breach of contract, as well as how rubles can be sourced and reduce Russia’s inflow of foreign currencies for paying for imports.
Singapore moves towards endemic COVID. Singapore announced moves to ease restrictions, lifting mask mandates outdoors, increasing the workplace and events capacity to 75% and hinting at easing travel requirements to almost like pre-Covid times. A stark contrast to Hong Kong's strict rules, and bodes well to attract more businesses. Travel related stocks like Singapore Airlines (SG: SIAL), ComfortDelGro (SG: CMDG) rose on the news. USDSGD to see downside pressure with MAS tightening moves also on the cards in April.
Awful forecasts for the UK economy. Yesterday, the Office for Budget Responsibility released its latest forecasts for the UK economy. GDP growth is expected to slow to 3.8 % this year versus the previous forecast of 6% and fall further to 1.8% in 2023. Inflation will likely remain elevated, with an average of 7.4% this year. (The UK Feb. CPI was out yesterday at 6.2% YoY on the headline and 5.2% core, versus 6.0%/5.0% expected, respectively). The next 6-12 months are not going to be pretty for the UK economy. Chancellor of the Exchequer Rishi Sunak also announced that the fuel duty will be cut by 5p per liter, as expected, until March 2023. This will cost the government about £5bn in revenues.
Port congestion is still a problem. Port operators of the West Coast in the United States are about to negotiate new contracts with the dockers’ trade union – the International Longshore and Warehouse Union. These will be the first wage negotiations since 2014. Expect it to be tough. There is a significant risk of strikes, in our view. If this should happen, merchandise traffic from Asia could shift to ports on the East Coast, which are already overstretched. This could lead to higher freight rates.
China’s CSRC working to address concerns of the PCAOB. China Securities Regulatory Commission (CSRC) is reportedly considering issuing an interpretation of the Securities Law that will provide auditing firms guidance on the conditions that they need to meet to handover audit working papers to the U.S. Public Company Accounting Oversight Board (PCAOB). CSRC is also in conversation with the PCAOB for a list of required information and documents or a set of criteria for the Chinese side to consider.
U.S. renewing tariff waivers on imports from China. The U.S. Government said that it will renew tariff waivers for 352 categories of imports from China, including electric motors, machinery, chemicals, bicycle parts, seafood and others.
What are we watching next?
US and EU set to announce deal to help Europe reduce its reliance on Russian energy imports this week as US President Biden will visit Brussels for meetings with NATO, G-7 and EU leaders. A key focus is on increasing alternative supplies of natural gas for the next two winters.
Preliminary Mar. PMI’s up today from Europe and the US today, where we watch for the impact of the war in Ukraine on services activity, in particular on signs that confidence is cratering.
Multiple central bank rate announcements up today. This morning, we have Norway's Norges Bank out and expected to hike its deposit rate 25 basis points to 0.75%, with many more hikes seen on the way this year. The guidance via the policy rate forecast will be important for the fast-rising Norwegian krone. The Swiss National Bank is seen likely to hold steady with its –0.75% policy rate as inflation has picked up far less in Switzerland and a strong currency has helped on damping the inflation seen elsewhere. South Africa’s Reserve Bank is expected to deliver a 25-basis-point hike to bring the policy rate to 4.25% and the Mexican central bank to hike by 50 basis points to take the rate to 6.50%. EM currencies trying to maintain credibility via policy tightening have generally been on a strong run of late.
Earnings Watch. Today’s key focus is NIO which has been called China’s Tesla, but the EV-maker has recently slipped on deliveries against other Chinese EV-makers such as Li Auto and XPeng. Analysts expect NIO to Q4 revenue of $9.7bn up 46% y/y.
- Today: China Life Insurance, Industrial Bank, Foshan Haitian Flavouring, China CITIC Bank, NIO
- Friday: China Shenhua Energy, Bank of Communications, Anhui Conch Cement, Longfor Group, People’s Insurance, China Everbright Bank, Meituan
Economic calendar highlights for today (times GMT)
- 0800 – Hungary Deposit Rate Announcement
- 0815-0900 – Euro zone flash Mar. Manufacturing and Services PMI
- 0830 – Switzerland SNB Meeting
- 0900 – Norway Deposit Rate
- 0930 – UK flash Mar. Manufacturing and Services PMI
- South Africa Reserve Bank Rate Announcement
- 1230 – US Fed’s Kashkari (non-Voter) to speak
- 1230 – US Weekly Initial Jobless Claims
- 1230 – US Feb. Durable Goods Orders
- 1300 – UK BoE’s Mann to speak
- 1310 – US Fed’s Waller (voter) to discuss US Housing Market
- 1345 – US flash Mar. Manufacturing and Services PMI
- 1430 – US Weekly Natural Gas Storage Change
- 1500 – US Fed’s Bostic (non-voter) to speak
- 1900 – Mexico Central Bank Rate Announcement
- 1900 – ECB's Schabel to speak
- 0001 – UK Mar. GfK Consumer Confidence
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