Summary: Equities tried to piece together a rally yesterday, but the rally failed toward the close of trade, resulting in a slightly negative session. The mood overnight in Asia was generally also downbeat, in particular for Chinese stocks, where the recent sharp downward slide accelerated overnight before bouncing. Oil prices remain elevated after the US and UK moved to ban imports of Russian crude oil, and Russia intends to restrict trading in some goods with a yet-to-be announced list of countries in response to the sanctions.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity futures are rebounding this morning with Nasdaq 100 futures trading around the 13,330 level with the 13,000 level being the key big level to watch on the downside should the selloff continue. The US administration decided yesterday to ban oil imports from Russia which could put further pressure on oil prices and push up inflation. For now US equities are calm, but the key risk is of course if Russia retaliates imposing export bans on key metals needed for US industrial production.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) –were down about 1%. SMIC (00981) rose over 2%, after reporting preliminary revenues and net incomes in the first two months of 2022 59% and 95% higher from the same period last year. ZTE (00763) reported 4Q21 earnings below consensus forecasts. China’s February CPI rose 0.9% YoY, same as survey and in January. Food prices came down 3.9%. Pork price, having fallen 42.5% YoY, dragged down the CPI by 0.95%. February PPI rose 8.8% YoY (vs survey 8.6%; Jan 9.1%).
European equity markets – STOXX 50 futures are trading 1.8% above yesterday’s close and 6% above the lows two trading sessions ago as investors are still trying to digest and quantify the implications of the sanctions against Russia and the fallout for Europe’s economy. The equity market is driven by short-term sentiment reacting to headlines and we expect volatility to remain high. STOXX 50 futures are for now boxed into a trading range from 3,400 to 3,700.
EUR crosses – the euro rallied again yesterday on the indication that the EU is set for significant new debt issuance on a fiscal push to fund new energy and defensive priorities in the wake of the Russian invasion of Ukraine (see more below). This move is a strong euro-positive, particularly if the EU innovates and issues the debt on a mutual basis. EU yields jumped back higher yesterday. But as long as the hot war on the ground in Ukraine remains and energy/power prices in Europe are divergently higher and pushing the EU toward a recession, the euro may have a hard time showing more than resilience. Still, watching the parity level in EURCHF as a line in the sand now for support, and the cycle lows in EURUSD at 1.0800.
JPY crosses – yields have snapped back higher, applying new pressure on the Japanese yen, which previously had generally strengthened as global markets absorbed the implications of Russia’s invasion of Ukraine. Any further rise in long yields and especially energy prices could add to the risks of a weaker JPY, and the top of the cycle in USDJPY above 116.00 bears watch here. In “real effective” CPI-adjusted terms, the JPY is still extremely cheap, only about 2% from its all-time lows from a few weeks ago.
Bitcoin and Ethereum - US president Joe Biden is widely expected to sign an executive order on cryptocurrencies today. A comment to this report from Treasury Secretary Janet Yellen was apparently by mistake leaked yesterday, referring that the executive order will "support responsible innovation" while accounting for related risks in the industry. The crypto community's initial reaction to Yellen’s comment is positive, and both Bitcoin and Ethereum are up 8-9 % over the past 24h.
Crude oil (OILUKMAY22 & OILUSAPR22) trades higher with Brent back above $130/b and up 39% since Russia started the war in Ukraine. The latest extension coming after the US said it would ban the import of Russian crude oil. Russia is a major producer and exporter of diesel and jet fuel and as a result the ICE gas oil (GASOILAPRUK22) futures contract has surged by 60% in just two weeks, primarily hitting consumers in Europe. OPEC’s Barkindo said there are no physical shortages in the market as of this moment, while Pioneer’s head said that US shale oil producers would not be able to replace supplies given labor, frack fleet, rigs and sand shortages. At current prices we are on the cusp of destroying demand according to the CEO of ConocoPhilips.
Gold (XAUUSD) & silver (XAGUSD) rallied strongly yesterday with falling yields, momentum, and haven demand more than offsetting recent dollar strength. Gold traded just shy of the 2020 record at $2075/oz on Tuesday before profit taking emerged. The outlook however remains supportive with US inflation heading towards 10% and even higher in Europe, while a flattening US yield curve highlights the risk of an incoming recession. Into this mess central banks will be struggling to raise interest rates, not least considering the war in Ukraine has already created the tightest global financial conditions in two years. Last time the gauge compiled by Goldman Sachs showed this level of tightness, the US Fed Funds rate was 2.5%. Platinum, meanwhile, is starting to look cheap relative to both gold at -$880/oz and palladium at -$2050/oz.
US Treasuries (TLT, IEF). Amid rising commodity prices and yields rising in Europe, US Treasury yields rose with 5-year US Treasury yields hitting 1.80% before adjusting slightly lower. To contribute to rising yields is also the high-grade primary market’s busy schedule which is looking to sell $30 billion bonds this week. Demand for 3-year notes was weak at yesterday’s Treasury auction with the bid-to-cover dropping to 2.39x, the lowest since November. Indirect demand dropped to 55% from 68% a month earlier. It shows investors are afraid to enter in short-term rates as the Federal Reserve prepares to hike interest rates next week.
European Sovereigns (VGEA, BTP10). News of a possible E.U. joint bond to fund defense contributed to a deep sell-off of European sovereigns. Such issuance would pave the way for a better monetary Union which would see spread compression across countries. Indeed, investors will see scope to sell lower-yielding bonds to buy higher-yielding ones. That is why yesterday we have seen bund yields soaring dramatically, while BTPS Closed the day flat. The focus continues to be on tomorrow’s ECB meeting. 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 negatively on credit spreads going forward.
What is going on?
The EU is likely set for massive joint debt issuance to fund energy and defense initiatives. Little is known about the specifics, including the size and whether the debt would be issued directly from the EU Commission, but discussion of “new tools” to allow such issuance is in Bloomberg’s coverage of this story. More should be known within a week. If the EU is able to roll out a mutualized debt package to fund the new emergency priorities in the wake of Russia’s invasion of Ukraine, it looks euro-positive as it keeps euros invested locally rather than recycled abroad and would show once again that in an emergency, the path lies towards increasing fiscal integration. German 10-year Bund yields leaped 14 basis points yesterday.
Nickel, used in stainless steel and electric-vehicle batteries, has become the epicenter of the fallout from Ukraine war and sanctions on Russia. Yesterday, trading on the London Metal Exchange was halted and later all trades were cancelled after the price had surged by 250% in just two days. The exchange will not resume nickel trading this week as it works on ways to close a huge short position, the bulk of which is held by Chinese nickel titan Tsingshan who according to the WSJ could face losses of up towards 8 billion dollars. Overnight nickel futures trading in Shanghai also paused after prices hit their daily up limit of 17%.
The National Bank of Poland hikes 0.75%, more than expected. Yesterday, the National Bank of Poland hiked its key interest rate 75 basis points, taking the rate to 3.50%. A 50-basis point hike was expected, but the move is not a major surprise after EURPLN this week has traded all the way to the 5.00 level for the first time since PLN was redenominated back in the 1990’s. The central bank said that it is ready to intervene in the market if necessary to prevent currency volatility. Governor Adam Glapinski holds a press conference today on the decision and will likely provide further guidance.
Very strong German industrial production. It came in at 2.7 % month-on-month in January and 1.8 % year-on-year. This is a very strong figure. The increase was driven by all sectors, especially the construction sector which surged by more than 10 % due to mild weather in January. But this was before the war in Ukraine. It is likely that Germany will be hit severely by the ongoing supply chain disruptions and the sharp rebound in energy prices. In other news, the eurozone GDP for Q4 2021 was out at 0.3 % on a quarterly basis and 4.6 % year-on-year. This is in line with the initial estimate and the market expectation. Of course, the market reaction was mute.
Norway’s sovereign wealth fund offload Li Ning shares. The move in one of China’s largest sports retailers comes as the fund is worried the company is violating human rights in Xinjiang. The decision added to negative sentiment in Hong Kong and the investment community is contemplating whether large institutional funds in the developed world are evaluating their Chinese holdings.
Adidas FY22 revenue guidance stronger than expected. The German sports retailer reported Q4 earnings this morning posting a strong revenue guidance with sales growth in constant FX of 11-13% against 9.5% expected which includes €250mn revenue risk to Russia/CIS.
What are we watching next?
How quickly will the next recession arrive? Skyrocketing prices for key commodities and power prices in Europe mean that a recession is baked into expectations for the Euro zone economy this quarter. But the situation risks aggressively bringing forward a recession elsewhere, including in the US, where the sharp fiscal drag in the wake of peak pandemic stimulus almost exactly one year ago is an added factor. A general sentiment shift and behaviour change are added risks. The first data point of interest from the US for March is up at the end of this week: the preliminary March University of Michigan Sentiment reading. The February survey already showed sentiment falling to not far above the worst months of the global financial crisis.
Earnings Watch. XPeng has chosen to postpone their Q4 earnings release to 28 March against previous perception that it would be yesterday. MongoDB reported a stronger than expected trajectory towards profitability yesterday and delivered on its revenue outlook. Today’s focus in the US session is on Crowdstrike which is part of the cyber security industry.
Economic calendar highlights for today (times GMT)
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2024: The wasted year
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.
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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.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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