Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary:
Yesterday saw the worst open-to-close performance for the US equity market since Russia invaded Ukraine, even if new intraday lows for the cycle have somehow not yet traded. In Europe, meanwhile, the war has crushed sentiment as most major European markets trade below the pre-pandemic highs. In commodities, wild two-way swings continue, an example being nickel which doubled overnight driven by forced short covering and margin calls.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday was the first serious negative session in US equity futures with S&P 500 futures down 3% and down an additional 0.8% this morning pushing towards the 4,100 level. In a proper risk-off driven by vaporizing liquidity and increased uncertainty the S&P 500 could go as low as 20% below the 200-day moving average which would be around the 3,500 level.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) were down 1% and 1.8% respectively. As nickel price surged, share prices of electric vehicle makers were sold off, falling 8% to 11% today. Lithium product supplier, Ganfeng Lithium (01772) fell over 10%. On the data front, China's export growth in the first two months of 2022 slowed to +16.3% YoY (vs +20.9% in Dec 2021). The growth of exports to the U.S. decelerated to +13.8% YoY (vs +20.5% in Dec 2021). Export was a major growth driver of the Chinese economy last year.
European equity markets – sentiment in European equity futures remain negative with STOXX 50 futures down 2% in early trading as big margin calls and erratic jumps in various commodities such as nickel and the threat of Russian cutting natural gas to Europe are putting more pressure on European equities. In addition, the liquidity conditions are worsening in the financial system indicating that the unintended consequences from the Russian sanctions are wrecking financial markets. The 3,400 level in STOXX 50 futures is obviously the key level to watch on the downside.
EUR crosses – the euro put up a modest fight yesterday and generally across the board, perhaps as short exposure is being reduced after the recent sharp run lower and ahead of the ECB meeting on Thursday. The ECB is caught in a bad place, as inflation is set to continue to soar in the near term, but with policy tightening irrelevant as a tool to address the situation as a recession will be bearing down on the Euro zone economy this year. It will likely focus its message at the meeting on continuing to support the financial system with QE, as European banks are bearing the brunt of exposure to Russian assets that have either been frozen or marked down to zero. For now, let’s see if some sort of at least temporary climax low is in place after EURUSD touched 1.0800 and EURCHF traded below parity briefly before this modest bounce. The euro may prove slightly resilient against less liquid currencies if the general “risk off” move we saw yesterday extends.
AUD crosses – a sharp setback in some commodity prices yesterday, including copper, but perhaps also general weak risk sentiment across markets, prompted a sharp reversal in the Aussie’s fortunes, as AUDUSD suddenly finds itself back below the 200-day moving average and key resistance area that it had broken on the way up (0.7300-15 area), trading below 0.7300 this morning. The plunge could continue fully back into the old range if the focus is on general position deleveraging and the Aussies can‘t quickly recover. Long Aussie positioning over the last two weeks has been a strong consensus trade on the strength of Australia’s commodity exports.
European gas (TTFMJ2) surged to a fresh record high yesterday with margin calls and illiquid market triggering panic conditions. The benchmark contract briefly leapt to €345/MWh, the equivalent of $110/MMBtu or $630 per barrel of crude oil, before settling at a record close at €227/MWh. Today it has opening higher after Russia threatened to cut supplies to Germany and Europe via the existing Nord Stream 1 pipeline. There are currently no gas shortages with flows and stock levels sufficient to meet demand, but threats like that will keep the market extremely nervous. Today the European Union Commision meets to map out a path to end the block’s reliance on Russian gas, potentially by as much as 80% this year.
Gold (XAUUSD) trades above $2000 and near an 18-month high as the all-metal rally continues led by nickel (see below). Global commodity prices continue to reach record highs as war and sanctions upend global supply chains, the result being lower growth and even higher inflation. All developments that combined with falling stock markets and lower yields support demand for precious metals, especially gold but also silver, receiving some additional tailwind from rising industrial metals. The London Bullion Market Association (LBMA) has suspended all Russian refineries from trading in the one of the world’s biggest markets, thereby preventing Russian gold bars from reaching the market. Focus turning to the record high at $2075/oz from August 2020.
US Treasuries (TLT, IEF). The yield curve continues to bear-flatten as the market inflation expectations rise, but long-term yields remain compressed amid the war in Ukraine. The 2s10s spread dropped to around 20bps yesterday while the 2s5s spread dropped to 14bps signaling that the US economy is losing momentum and that it may not be far off from a recession. Ten-year inflation-linked US Treasuries dropped below -1%. Today the US Treasury is selling 3-year notes. Despite the high yield offered, the question is whether investors will take the risk of buying them as the Fed prepares to hike rates next week. This week, the US CPI figures for February are going to be in the spotlight while there will be no speeches from Fed officials as they entered a blackout period before next week’s FOMC meeting. Markets are still pricing six rate hikes for this year. Everything is pointing to more bear-flattening of the yield curve.
European Sovereigns (VGEA, BTP10). The world will be looking for signs of hawkishness at the ECB meeting this week as the Eurozone inflation is at a record high level. The war in Ukraine caused markets to pare back on interest rate hike expectations in the euro area despite inflation looks likely to remain high for a longer period of time. Investors will be particularly interested in revisions of the ECB’s economic projections as speculation of an early end of QE is increasing.
US Corporate space (HYG, USIG). The primary high yield bond market resumed its activity without problems. The Move index is at the highest level since March 2020. Yet, the corporate bond space is facing serious headwinds that could provoke a tantrum. We remain concerned that inflation and interest rate hikes might weigh on negatively on credits spreads going forward.
What is going on?
Germany doesn’t want to sanction Russian energy imports. Russia threatens to cut off some natural gas supplies to Europe. In discussions yesterday on whether the EU should halt all imports of Russian oil and gas, German Chancellor Scholz spoke out against the idea, saying that “it cannot be done overnight”. In separate news, Russia threatened to cut off the supply of natural gas via the Nord Stream 1 pipeline, which delivers gas through the Baltic to a terminal in Germany, in retaliation for EU sanctions.
Gazprom paid a USD coupon yesterday despite Putin’s decree on Friday saying that investors based in hostile countries will only receive payment in rubles. The company apparently made the transfer before the new rules. On the 6th of March, Rosneft bonds issued by an Irish entity have matured. The company said that the payment will come through after a Russian public holiday on Wednesday, as the transfer for the settlement was made before the sanctions. Yet, the real test will come on March 16th as Russia is due $117 mil worth of coupons payments on Eurobonds. Payment in rubles in this case could trigger a default.
Nickel, traded on the London Metal Exchange and used in stainless steel and electric-vehicle batteries, has become embroiled in a historic short squeeze which saw it reach a historic $101,000 per ton in early European trading, a four-fold increase in the price since the beginning of the Russian war in Ukraine. Traders holding short positions, some of which are against physical holdings, have been forced to cover positions as supplies from Russia, which produces 17% of the world’s top-grade nickel, has dried up. Together with gas, wheat, and crude oil these are the contracts that have endured most of the pain related to Russia’s war and sanctions.
The Eurozone Sentix investor confidence plunged in March to minus 7 from 16.6 in February. This is the lowest score since November 2020. It is well-below the economist consensus of 5.3. Both the current assessment and expectations weakened sharply. The expectations index fell by 34.8 points, for instance. This is the biggest drop in the survey's history. The fall is explained by the Ukraine war, without surprise.
French president Emmanuel Macron is well ahead of the crowd ahead of the April presidential election. An IPSOS poll released on 5 March shows that Macron, who is now an official candidate, is above 30 % for the first time. This is mostly explained by the « rally around the flag » effect due to Ukraine war. The center-right candidate Valérie Pécresse is collapsing, now in the fifth position. The far-right candidates Marine Le Pen and Eric Zemmour are in the second and third position, respectively. Both are lower than in the previous polls (perhaps due to their previously loud Putin sympathies).
What are we watching next?
Poland’s central bank set to lift interest rates today, with expectations for a fifty-basis point hike to take the rate to 3.25%. The country lagged its CEE peers in hiking its policy rate in earnest, with the Czech central bank having already hiked to 4.50% and Hungary to 5.4%. But the Polish economy is facing enormous headwinds from the unfolding energy crisis, which is even worse in weak-zloty terms for the country, and as the country is absorbing the bulk of Ukrainian refugees from the war. As well, many Ukrainian workers in Poland have put down tools and headed back to Ukraine to fight in the war, reducing the labor force.
Australia’s economy continued to strengthen, for now. with Australian business confidence rising to their highest level in 4 months after Australian international borders recently opened. But we expect conditions to worsen amid rising oil and wheat prices. Tomorrow’s Australian consumer confidence for March will be an indicator to watch. Consumer confidence is expected to plunge as much of New South Wales and Queensland’s crops have been lost from floods, which adds to further inflation pressure.
Earnings Watch. The Q4 earnings season is grinding to a halt as this week is the lightest since the beginning of this earnings season. The key earnings to watch this week are XPeng, Adidas, JD Logistics, Oracle and JD.com.
Economic calendar highlights for today (times GMT)
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