Summary: Equity market sentiment turned lower yesterday, reversing some of the gains inspired by hopes of promising developments in the war in Ukraine, as the Russian retreat from around Kyiv may not be a signpost on the way to a more comprehensive détente. Crude oil prices turned sharply lower from late yesterday as US President Biden promised a huge release of strategic stockpiles, although at the pace Biden plans to drain these emergency reserves, they risk fast becoming more tactical than strategic.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures trade around the 4,600 level this morning in Europe following the risk-off session yesterday led by declines in technology stocks. Despite the recent rally in US equities the Chicago Fed Financial Conditions Index tightened further as of 25 March suggesting that despite of rising equities, financial conditions are tightening and will soon reach levels where they will begin impact equity returns in a meaningful way. Today’s key risk is the PCE Deflator report for February which could spook US equities if the inflation gauge prints an upside surprise.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - both indices were modestly lower. Hang Seng TECH Index (HSTECH.I) fell more than 1%. The U.S. SEC added Baidu to the provisional list of delisting and asked the companies to prove its eligibility for a waiver by April 20, 2022. Baidu fell over 4%. ICBC and Agricultural Bank of China reported better than consensus results. Ganfeng Lithium reported 2021 full-year earnings up 400% and revenue doubled. CNOOC reported slightly better than expected results but delays in dividends payout due to A-share listing dampened sentiment, it fell 3%.
Stoxx 50 (EU50.I) – Stoxx 50 futures are digesting yesterday’s selloff almost erasing most of the previous trading day’s gains as it became clearer that there was no clear breakthrough in the peace talks between Ukraine and Russia. Yesterday’s low at 3,853 is the natural support level to watch if risk-off continues today. The recent trading days have also pushed up European natural gas prices, adding further pressure on European households and companies.
USDJPY and JPY crosses – the yen weakened slightly on the last day of the quarter and financial year in Japan overnight, often an important calendar pivot point for the yen, especially as we watch the status of global bond markets in coming days after this week’s rally (and fall in yields that helped offer the yen some support) may in part be due to large-scale portfolio rebalancing flows after a terrible quarter for bonds. JPY crosses track bond yields due to the BoJ’s yield-curve-control policy that keeps 10-year Japanese Government Bond yields capped at 0.25%, meaning that if yields rise elsewhere, the JGB market can’t absorb the pressure, which is taken by the JPY. USDJPY resistance at 125.00 and first support at perhaps the psychological 120.00 level.
EURUSD and EUR pairs – the euro rally that started on Tuesday was triggered by hopes that a Russian retreat from hostilities around Kyiv and another city were signs of a move toward a more comprehensive détente, which western intelligence sources indicate may not be the case. And as long as prices for natural gas/power remain divergently high for Europe, clouds remain over the growth outlook for Europe. Nonetheless, EURUSD finds itself in the pivot zone between 1.1125 and the major 1.1186 low posted in January that was the low for the cycle before the Russian invasion of Ukraine – this is the area that decides whether the zone back toward 1.1500 can be reopened or if the lower zone remains to 1.0800 remains the focus.
Crude oil (OILUKJUN22 & OILUSMAY22) trading sharply lower overnight on news the Biden administration is considering a plan to release a million barrels of crude oil a day from Strategic Reserves for several months, to combat rising inflation and to offset losses from Russia. OPEC+ meets virtually today and without addressing slumping exports from Russia they are likely to rubberstamp an already agreed but increasingly impossible achievable increase of 432k b/d, higher than the usual 400k due to fine tuning of individual nations production quotas. Brent trading below its 21-day moving average for a third day signals loss of momentum with the next support being the $101.50 to $102 area.
Gold (XAUUSD) trades lower with crude oil as the US administration consider releasing 180 million barrels of oil from its reserves during a six-month period to combat inflation at the pumps. Gold has in recent weeks seen a battle between sellers in the futures market from leveraged and often short-term technical traders cutting loss making long positions versus long-term strategic buyers who have been strong buyers in the ETF market. Reasons for buying being worries about the growth outlook, a prolonged period of inflation forcing strong Fed action and with that the risk of a policy mistake. Adding to this a general uncertain outlook for stocks and bonds reducing the otherwise normal adverse impact of rising real yields. Key support in the 1,890-1,900 area while a move above 1,950 is needed to ignite fresh speculative buying.
US Treasuries (TLT, IEF). The yield curve between 2 to 10 years remains close to inversion. However, we believe it is not signaling an imminent recession. Indeed, long-term yields are still on the rise, while real rates remain in deeply negative territory providing favorable financing conditions. Thus, we believe the Federal Reserve has room to be aggressive in tightening the economy. Investors will focus on the PCE Index today, which could provoke yields to resume their rise.
European sovereigns (IS0L, VGEA, BTP10). European government bond yields soared yesterday after inflation figures from Spain and Germany came higher than expected. In Spain, inflation rose to the highest in four decades, while in Germany it rose to the highest level since early 1990s after the country’s reunification. Consequently, yield curves bear flattened. We can expect more selloff today and tomorrow as CPI figures are released in Italy, France and for the Eurozone as a whole. Lane and Guindos will speak.
What is going on?
US President Biden considering plan to release 1 million barrels/day of oil from strategic reserve and to do so over a period of months to lower prices (into the mid-term election...ahem). The reserve has been drawn down buy 50 million barrels over the last six months and stands at around 568 million barrels, so roughly six months of net imports.
Lithium stocks are in focus. US President Biden wants accelerate US production of electric car critical minerals. The White House is discussing adding battery materials to the list of items covered by the 1950 Defense Production Act. What this means is that lithium, nickel, graphite, cobalt, and manganese industries in the US could effectively receive government support. So instead of the US taking out loans to buy minerals, it could begin to rely on its own production. A decision by the White House could be made as soon as Thursday. Nevertheless, global lithium stocks outperformed overnight and today in Australia. In the US, domestic lithium shares gained such as Lithium Americas shares rising 12%, Livent rose 6%, Albemarle rose 2%.
Chinese State Council and PBOC on the move to support Chinese economy. In a State Council meeting led by Premier Li Keqiang, the Chinese Government pledged to prioritize to stabilize growth and was drafting contingency plans to deal with uncertainties arising from the geopolitical situation and COVID outbreaks. Premier Li said China would stick to the 5.5% GDP growth target for 2022. Overnight, the Chinese Manufacturing and Non-manufacturing PMI were out at 49.5 and 48.4, respectively, signaling contraction. In its quarterly monetary policy meeting, the People’s Bank of China said it was going to increase its support of the economy with monetary policy and would address structural issues as well.
Fortescue Metals and E.ON will supply green hydrogen to Europe. One of the biggest companies in Australia, along with Germany energy giant, E.ON have agreed to deliver 5 million tons of green hydrogen (produced from renewable energy) per year to Europe, to reduce dependency on Russian Energy by 2030. 5 million tons of hydrogen is equal to about a third of the energy Germany imports from Russia. There are still logistical, infrastructure and financing hurdles to overcome, but it highlights the importance of focusing on companies that are pivoting to green energy. Fortescue Metals shares jumped 4.2%.
H&M Q1 misses estimates. Pretax profit misses estimates and gross margin at 49.3% vs 47.6% a year ago missed estimates of 50.4%. H&M is planning a bigger net decline in new stores than previous guidance suggesting H&M is accelerating its digitilization.
Chinese earnings mostly beat. Most earnings releases in China over the past 24 hours have surprised to the upside across both banks and energy companies. Ganfeng Lithium reported a 400% jump in net income on soaring prices for lithium carbonate and also increased its production guidance for 2025 to 300,000 tons up from previously 200,000 underscoring the rapidly increasing demand for lithium-ion batteries used in most electric vehicles.
The US SEC downplayed the prospect for any imminent resolution on Chinese ADR. The SEC Chair Gensler said that there was no imminent deal with the Chinese authorities to avoid Chinese ADR delisting. He said that the U.S. would not concede their demand for full access to audit work papers without first being filtered by the Chinese authorities. The SEC added Baidu, Futu, Iqiyi, and two others to the provisional list of delisting and asked the companies to provide the otherwise by April 20, 2022. In response to Gensler’s comment, a China Securities Regulatory Commission (CSRC) official said in a TV interview that the CSRC Chair had had three rounds of video meetings with Gensler since August last year and the progress towards a potential resolution had been satisfactory.
What are we watching next?
The USDA will publish its Prospective Planting report today. It is one of the most important releases in any year as it offers the market the first survey-based glimpse into potential harvest outcomes for the upcoming US growing season. Surveys, however, are showing some wide ranges highlighting the uncertainty about farmers planting intentions this year. The three major crops trade up between 24% and 32% during the first quarter, led by wheat which has surged on supply worries from the Black Sea region, but also corn and soybeans, the two dominating crops, with traders trying to estimate the impact of the surging cost of fertilizer. While the US cost of fertilizer has risen far less than other regions - given the availability of cheap gas required for production - it may still favor more soybean acreage over corn which requires a massive amount of nutrients. Surveys point to a 1.36 million acres reduction in corn to 92 million, a 1.62 m increase to 88.8m in soybeans and a 1.14m to 47.8m in wheat.
US Feb. PCE Inflation data up today and US jobs report tomorrow. Any Fed response incoming? Many have suggested that after a sharp easing in financial conditions over the last couple of weeks (tightening credit spreads, a collapse in equity market volatility) despite the general sharp rise in yields, that the Fed is behind the curve in credibly signaling its fight against multi-decade highs in inflation. Today sees the release of the Fed’s most important inflation indicator, the Feb. PCE Deflator and PCE Core numbers, expected at new highs since the early 1980’s at +6.4% and +5.5% year-on-year, respectively. Given the powerful easing in financial conditions and fresh signs of soaring inflation, the wait until the May 4 FOMC meeting feels like a very long one. Will the Fed have to surprise the market with an extremely rare inter-meeting move to buy back some credibility next week? The only high-ranking Fed member currently scheduled to speak next week is Fed Vice Chair Brainard, who will speak on Tuesday on the “unequal impacts of inflation” at a virtual discussion hosted by the Minneapolis Fed.
End of quarter today. There have been huge losses in bond portfolios in an historic Q1 for the asset class – some of the sudden support over the last couple of sessions may be due to portfolio rebalancing flows to top up fixed-income allocations. Worth noting as a factor as we roll into a new quarter tomorrow, and for Japan, into a new financial year (especially given the yen’s sensitivity to global yields given BoJ policy as noted above.)
Earnings Watch. Today’s US earnings focus on the last day of the first quarter is Walgreens which likely continued to see headwinds in the previous quarter from pandemic which has impacted Walgreen’s store network for two years. In two weeks Q1 earnings releases start rolling out from US companies starting with US financials.
Economic calendar highlights for today (times GMT)
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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