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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - equity sentiment was improving yesterday until the shocking 0.6% m/m print in core US CPI hit the market like a hammer. Everything reversed and Nasdaq 100 futures tumbled 3.1% closing below 12,000; in early European trading hours Nasdaq 100 futures are extending their decline trading around the 11,915 level. The risk cluster Tesla, Ark Invest, and crypto was severely due to overlapping positions, and as we have highlighted Tesla is the key for this part of the market, and with the Shanghai lockdown weighing on Tesla’s production in China sentiment could weaken further. We view Bitcoin as the ultimate indicator of marginal liquidity and risk appetite and with Bitcoin breaking below 27,000 this morning, we expect a tough trading session ahead for US technology stocks. Initial jobless claims later today are more important than normal as the time series has recently turned around and the question is whether the job market is weakening further.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - After a weak opening, stocks in Hong Kong, Shanghai and Shenzhen rebounded from their lows. The Hang Seng Index (HSI.I) was down 1.2% and CSI300 (000300.I) recouped most its early loss. Infrastructure related A share, in particular county seat modernization names rallied. Sunac China, China’s 4th largest property developer, failed to make a coupon payment of a dollar bond. The news pushed down the shares of other Chinese developers traded in Hong Kong. As the USDHKD spot rate touches 7.85, which is the weak-side convertibility undertaking of the Hong Kong Monetary Authority, it intervened by buying HKD versus the dollar this morning, first time since 2019.
Stoxx 50 (EU50.I) - European equities were out of sync with the selloff in US equities yesterday, but is reacting a bit this morning with Stoxx 50 futures trading down to the 3,540 level. The 3,490 level is the key support level to watch today should risk-off continue and the major support level is of course down at the 3,400 level being the bottom during the selloff in March as reaction to the war in Ukraine.
Bitcoin and Ethereum suffered further aggravated weakness yesterday as Bitcoin broke down through a major support zone from the psychological low of 30,000 down through the mid 2021 low near 28.8k. Ethereum punched down through the 2022 lows and well below 2000. Market focus in recent days has been on the woes of one of the “stable coins” TerraUSD, which broke its parity with the US dollar and traded as low as 30 cents yesterday. The largest stable coin, Tether, closed yesterday at 0.9963, its farthest daily close from parity with the USD since March of last year, and has traded below 0.99 at times this morning.
AUDUSD and USDCAD – weak risk sentiment continues to see the Australian dollar suffering against nearly all of the other DM currencies, as global growth outlook fears, particularly centered on China, persist and due to the pressure on the Aussie from a liquidity angle. The break of 0.7000 in AUDUSD was in doubt yesterday after the strong US CPI release as the pair somehow traded back up to 0.7050, but the subsequent downdraft taking the price action below 0.6900 overnight suggests that the downside risks remain and with plenty of empty space on the chart below, only round levels like 0.6500 might be the focus for support. USDCAD has tried to hang on to the 1.3000 area after poking above range resistance near 1.2950, but CAD looks vulnerable to extending its weakness, particularly if crude oil prices correct lower.
USDJPY and JPY pairs – the USD was strong again yesterday, but the JPY managed to firm even more as sovereign bonds have begun to play their traditional role as a safe haven asset – at least when risk deleveraging in equities and elsewhere is at its worst. This offers the JPY a boost as well, due to the focus on the Bank of Japan’s yield-curve-control policy. One of the first major JPY pairs to suffer a technical breakdown has been GBPJPY, which has traded down through the important 160.00 area and is having a look at the major 158.00 level support as sterling is beset by weakness as a less liquid currency and where the BoE is forecasting a recession, suppressing its potential to hike rates as rapidly as elsewhere to fight inflation. USDJPY still trades clear of the first pivotal area around 128.50, but further drops in especially long US treasury yields could see it test down through that area.
Gold (XAUUSD) bounced on Wednesday after finding support at $1833, the trendline from last August’s low, as well as the 200-day moving average at $1837. A hotter-than-expected US CPI print highlighted the FOMC’ struggle in bringing inflation down to levels the market has priced in. Overall, however, the yellow metal remains challenged by the strong dollar and the general level of risk adversity forcing investors to cut exposure across-the-board. Silver (XAGUSD) trades below $21.50 driven by renewed weakness across the industrial metal sector, thereby potentially providing a downside pull to gold.
Crude oil (OILUKJUL22 & OILUSJUN22) jumped around 6% on Wednesday after tumbling 9% during the previous two sessions. Today some weakness has re-emerged, and it highlights how traders are struggling to price correctly the world’s most important energy contracts as the focus continues to alternate between China lockdowns hurting demand and high inflation killing economic growth while EU sanctions on Russian crude oil has yet to be agreed while Saudi Arabia and UAE have warned that all energy sectors are running out of capacity. Underlying this market looks supported as inventories of fuel such as diesel and gasoline continue to decline. Monthly Oil Market Reports today from IEA and OPEC.
Arabica Coffee (COFFEENYJUL22) surged the most on Wednesday in nine months. The high-quality bean hit a multi-year high $2.6045/lb in February as the outlook for a lower production in Brazil following last year’s frost damage, before slumping in response to a stronger dollar and a weaker demand outlook due to high inflation and the war in Ukraine. The 8% jump to $2.19 per pound was triggered by forecasts that freezing temperatures may hit key coffee regions next week. The jump comes just the day after the high-quality bean hit six months low at $2.02/lb, and in order to break the downtrend from the February high, the front-month contract now needs to break above $2.2750/lb.
US Treasuries (TLT, IEF) – US treasury yields at the shorter end of the curve ended the day relatively flat despite the hotter than expected April CPI print yesterday (more below), while the longer end of the curve saw support from safe haven seeking amidst general risk deleveraging, thus flattening the yield curve. The 2-10 measure has flattened from a high at the start of the week above 44 basis points to 25 basis points this morning. A 10-year T-note auction yesterday generally failed to generate headlines as demand was average. Today sees the auction of 30-year T-bonds.
What is going on?
Coinbase, the largest US crypto exchange, saw its shares plunge more than 25% yesterday. As of March 31, the company was the custodian of $256 billion in customer “funds”, a level which is much lower now with the steep loss of value in many crypto assets, as some of the smaller coins are down 50% or more in just a week. In a regulatory filing, the company said that in the case of bankruptcy, Coinbase’s customer assets might be treated as collateral. The Coinbase CEO said the company is in no danger of going bankrupt.
U.S. April Consumer Price Index (CPI) is still uncomfortably high. The headline number was +0.3 % MoM vs. +0.2% expected, but the ex-Food-and-Energy reading of +0.6% MoM number vs. +0.4% expected had more impact. Many are hoping that inflation has peaked in the United States, but there are two reasons why this may not be the case. First, most of the deceleration in the CPI number is due to a drop in gasoline prices. But since April, gasoline prices have risen again and were about $4.161 per gallon early this week after dipping below $4 in April (data from the Energy Information Administration). Second, we can observe a worrying shift from goods to service inflation inside the U.S. economy (airline fares are now up 33 % over the past year, for instance). This is a clear danger for the economy since services matter five times more in the computation of the CPI. Expect more volatility and a sustained increase in services inflation (including core services). The inflation headache remains for the U.S. Federal Reserve.
Sweden Apr. CPI out at +0.6% MoM and +6.4% YoY vs. +0.5% / +6.2% expected, respectively.
UK GDP and Trade Data. UK Q1 GDP reported at +0.8% QoQ and +8.7% YoY vs. +1.0/+8.9% expected, respectively, but the Bank of England is predicting that growth will turn negative as soon as Q4 of this year followed by a modestly negative GDP growth for the year 2023 as a whole. March GDP was out at –0.1% MoM. The March UK Trade data was out at –£23.9B vs. -£18.5B expected, showing a yawning trade gap and a risk to the currency.
US earnings recap. Disney reported FY22 Q2 revenue and EPS below estimates while Disney+ subscribers grew to 137.7mn vs est. 134.3mn. The initial reaction was positive, but the outlook was murky on the earnings call, sending the shares lower. Beyond Meat shares were down 20% in extended trading on a wider than expected operating loss in Q1 despite reiterating its FY22 revenue guidance of $560-620mn vs est. $586mn. Rivian shares rose 5% in extended trading despite worse than expected Q1 revenue of $95mn vs est. $131mn as the EV truck maker reiterated its production target for 2022 of 25,000 vehicles despite ongoing supply issues.
What are we watching next?
“Stable” coins in the crypto market as the crypto currency space suffers its worst market cap meltdown in absolute terms ever after the space narrowly missed $3 trillion in market cap in late 2021 and now threatens to fall below $1 trillion. A failure of one or more of the largest stable coins, which often serve as a kind of gateway in and out of crypto, to hold parity with the US dollar could trigger a further avalanche of negative sentiment and a liquidity crisis in the space, potentially large enough to add some contagion into risk assets more broadly.
Earnings Watch. In Europe this morning, the key earnings watch is Siemens, being one of the largest industrial companies in Europe with a footprint in many important cyclical industries. The German industrial company has reported better than expected FY22 Q2 (ending 31 March) revenue but delivering 4%-points lower operating margin as inflation is hurting costs. In addition, the company is winding down its Russia business booking a charge of €0.6bn in Q2.
- Today: Verbund, KBC Group, Brookfield, Fortum, Siemens, Allianz, Merck, Hapag-Lloyd, RWE, Atlantia, Snam, NTT, SoftBank Group, Aegon, Naturgy Energy, Motorola Solutions
- Friday: Deutsche Telekom, KDDI, Honda Motor, Alibaba
Economic calendar highlights for today (times GMT)
- 0800 – IEA's Oil Market Report
- 0805 – ECB's De Cos to speak
- 1000 – Sweden Riksbank’s Ingves to speak
- 1030 – ECB's Makhlouf to speak
- 1230 – US Apr. PPI
- 1230 – US Weekly Initial Jobless Claims
- 1430 – US Weekly Natural Gas Storage change
- 1800 – US 30-year T-Bond auction
- 1800 – Mexico Overnight Rate Announcement
- During the day: OPEC’s Monthly Oil Market Report
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