Financial Markets Today: Quick Take – May 4, 2022 Financial Markets Today: Quick Take – May 4, 2022 Financial Markets Today: Quick Take – May 4, 2022

Financial Markets Today: Quick Take – May 4, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Traders are holding their collective breath ahead of the FOMC meeting tonight, which is set to deliver the first-rate hike greater than 25 basis points in 22 years. The guidance in the statement and in the Powell press conference will be critical. US equities have been toying with the cycle lows ahead of this meeting and the US dollar sits atop a sharp recent rally. Will the Fed merely deliver what is expected and trigger a relief rally or is it set for yet another hawkish surprise in a bid to impress the markets with its determination?


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities continued their rebound yesterday ahead of tonight’s FOMC decision with consensus looking for 50 basis points move in the Fed Funds Rate to 1%. The important thing to watch tonight is when journalists ask Fed Chair Powell if he is willing to go 75 basis points on the next meeting as that will reveal a lot about the Fed’s intentions going forward. The recent bounce in equities is likely a short-lived mean reversion trade as we believe financial conditions will continue to tighten, pulling down equities.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Sang Index was down 1.2% and the Hang Seng TECH Index (HSTECH.I) fell over 3% following JD Health’s majority shareholder cutting its stake and the U.S. SEC’s probe on Didi (DIDI). The shares of JD Health fell 12% after Chairman and majority shareholder Richard Liu unloading 5 million shares. The U.S. SEC’s investigation on Didi’s 2021 U.S. IPO has also dampened sentiments towards Chinese internet stocks. Alibaba, Meituan, JD.COM (09618), Tencent and Bilibili (09626) fell 3% to 7%. As we suggested in our recent note, the hype in Chinese internet stocks from last Friday is set to fade. Shanghai and Shenzhen stock exchanges are closed for the Labor Day holiday.

EURUSD and USDJPY - these are two of the key pairs that comprise the USD index and will give us a read on the impact of the FOMC meeting tonight (preview below). Traders should also watch the long end of the yield curve in the US for the reaction function, because even a hawkish surprise from the Fed could send long yields sideways to lower (on fears that raising rates so aggressively will slow the economy and finally get ahead of inflationary risks). Either way, the yen is particularly sensitive to any sharp drop in long treasury yields after the meeting, while the US dollar could fall broadly if the Fed merely confirms what the market is currently pricing and the markets decide it was over-anticipating this meeting – basically a “sell the fact” reaction to the US dollar. First local resistance for EURUSD is just ahead of 1.0600, with the bigger resistance not until way up at 1.0750-1.0800.

EURGBP and GBPUSD - tomorrow brings a Bank of England meeting that is expected to deliver a rate hike of 25 basis points and thus take the policy rate to 1.00%, a level at which the Bank of England has preannounced that it will also begin to reduce its balance sheet (quantitative tightening). The BoE feels that the outlook for real growth in the UK is very poor, driven by a drop in real incomes and that it is tightening its policy as a necessity linked to intolerably high inflation. A further underlining of this sense of an impending slowdown at Thursday’s meeting could keep the policy outlook muted even further relative to global peers, especially the US Fed and weigh further on a weak sterling. The GBPUSD has poked below the psychologically key 1.2500 area of late and could be set for a run down to the huge 1.2000 are if the USD remains firm, while EURGBP has stayed in a lower range, but has tested upside resistance near the 200-day moving average several times recently (currently just below 0.8450, while the high of this year is just above 0.8500).

Gold (XAUUSD) trading near 11-week low ahead of today’s FOMC meeting where the focus will be on the size of the rate hike, and subsequent comments about the pace of future hikes. At this point, the market is targeting a Fed Funds rate of 3.25% by next February, and the question is whether that will be enough or whether it can be achieved at all given the risk of a sharp economic slowdown over the coming months. Key support below $1850 can be found in the low $1830’s with short covering from recently established hedge funds short unlikely to kick off before $1920. Also focus on silver which is trading close to critical support in the $22 to $21.50 area.

Crude oil (OILUKJUL22 & OILUSJUN22) - trades higher but still within established ranges with another potential sharp drop in US crude and fuel stocks helping to offset lower demand from China as lockdowns continue to hurt demand. Officials in Europe meanwhile are in the process of preparing a fresh package of sanctions against Putin’s regime, and it may include curbs on Russian crude oil. OPEC+ meets on Thursday to agree on another illusive production hike given reductions from Russia and outages in Libya cutting production to an 18-month low. A Bloomberg production survey for April highlighted OPEC’s current inability to increase production. The group added just 10k barrels a day compared with a scheduled 274k. For now, Brent remains stuck in a $98 to $110 range

US Treasuries (TLT, IEF) – US yields continue to charge higher at the short end of the curve as the 2-year yield posting new highs yesterday well above 2.75% in anticipation of a string of Fed rate hikes in coming months, while longer yields dipped slightly after the 10-year benchmark touched 3.00% briefly at the start of this week. The impact on longer yields from tonight’s FOMC meeting is likely particularly important for risk sentiment.

What is going on?

US dollar remains on the front foot going into the FOMC. The USD has eased slightly but it remains near its peak going into the FOMC meeting today. AUDUSD reversed somewhat after the kneejerk following the hawkish RBA surprise yesterday, but AUDNZD remains above the critical 1.10 at near 4-year highs despite hotter than expected Q1 wage growth data from New Zealand overnight. Even though the RBA has been late to the tightening game, AUD crosses are generally likely to push higher as RBNZ cannot match what's to come from the RBA now. Meanwhile, critical levels remain on test with the USDJPY stuck near the 130-level and EURUSD sticky near 1.0500.

Apple (AAPL) has hired a 31-year Ford (F) executive to help ramp up its electric car work, who has experience developing EVs and working through regulatory issues. Apple shares rose slightly (up 0.13%) in afterhours trade.

US earnings recap. Strong results from AMD driven by its datacenter segment as the computer chipmaker is still gaining ground against the competition. AMD is saying PC demand is softening in line with comments from Microsoft. Airbnb delivered good Q1 results beating slightly on both revenue and operating income while guiding Q2 revenue above consensus estimates. Lyft was punished by investors for its weak Q2 revenue guidance as the on-demand ride hauling platform is still struggling to become profitable.

Soybeans (ZSN2 & SOYBEANJUL22) trade near the lowest level in a month as traders focus on the weather outlook during the U.S. planting season and the impact of Covid-19 lockdowns in top importer China. In addition, a 7% slump in soybean oil (ZLN2 & SOYBEANOILJUL22) this week after Indonesia signaled the Palm Oil export ban would be probably not extend beyond a few weeks has also helped attract some profit taking. China and Malaysia reopen on Thursday after a three-day holiday, while markets in Indonesia, the biggest producer of palm oil, are closed all week. Abundant rains in central and southern areas of the corn and soybean belt in the US Midwest will slow seeding while eventually supporting growing prospects.

What are we watching next?

FOMC meeting tonight. Tonight’s FOMC meeting is expected to deliver the first 50 basis-point rate hike in over twenty years, and at least the following two meetings are expected to deliver additional half-percent rate moves, which would be the first time the Fed has done more than one move of this magnitude at consecutive meetings since 1994. This year is priced for the Fed to end with a policy rate of 2.75-3.00%. A hawkish surprise would be a move of greater than 50 basis point or clear guidance that such larger hikes are possible. The Fed will also guide on its intention to shrink its balance sheet, perhaps set to reach a pace of $95 billion per month in coming months. Fed Chair Powell’s press conference will also bear close watching for guidance, since we likely only have a new monetary policy statement and his presser to provide hints on coming Fed actions after this meeting, with the next quarterly forecasts on the economy and policy issued at the June meeting. The last interesting data point ahead of the meeting is the April ISM Services survey, which represents the bulk of US economic activity and is expected above 58, which would be a robust reading suggesting strong expansion.

PC demand is in a secular downtrend. AMD reported solid revenue and EPS growth in Q1, along with a strong Q2 outlook. It is however worth noting that this included the acquisition of Xilinx which closed in February, and some analyst estimates may not have reflected the consolidated forecasts. Still, concerns around softness in PC sales were rampant - a warning we also shared last week. AMD gained share in high end computing and gains in cloud and enterprise data centers may sustain. However, it is hard to imagine growth in semiconductor firms can continue at this pace amid the supply chain challenges and diminishing demand outlook.

We could see a short-term rally in beaten down stocks; With financial conditions tightening ahead of the Fed’s interest rate decision on Wednesday, the Fed could be more dovish. Since the Fed’s last meeting, the 10-year yield topped 3% for the first time since 2018 (today), the US dollar rallied 5%, The S&P500 has fallen 8.74%, and hedge fund exposures fell to a 1.5 year low. So, the Fed may be a little more dovish than expected, and we could see a short-term rally in tech and cyclical stocks that have been hit the hardest. Keep in mind though, the longer-term picture is still very bearish, medium and longer-term, as the Fed is taking out $1 trillion a year out of the system and the economy is expected to slow.

Earnings Watch. Today’s focus in Europe is on Maersk on logistics, Vestas on the green transformation and commodity inflation, Volkswagen on EV transition and competition with Tesla, and in the US the earnings focus is on Uber, Fortinet, and Albemarle.

  • Today: ANZB, Barrick Gold, A.P. Moller – Maersk, Vestas Wind Systems, Pandora, Sampo, Airbus, EDF, Volkswagen, Siemens Healthineers, Enel, Equinor, CVS Health, Booking, Regeneron Pharmaceuticals, Uber, Marriott International, Moderna, Fortinet, Ferrari, eBay, Albemarle

  • Thursday: National Bank of Australia, Anheuser-Busch InBev, Shopify, BCE, Coloplast, Credit Agricole, Societe Generale, BMW, Zalando, UniCredit, Shell, ArcelorMittal, ConocoPhillips, Zoetis, EOG Resources, Block, MercadoLibre, Illumina, Lucid Group

  • Friday: Macquarie Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, ING Groep, Cigna

Economic calendar highlights for today (times GMT)

  • 0715-0800 – Euro zone Apr. Final Services PMI
  • 0830 – UK Mar. Mortgage Approvals
  • 0900 – Euro zone Mar. Retail Sales
  • 1215 – US Apr. ADP Private Payroll changes
  • 1230 – US Mar. Trade Balance
  • 1230 – Canada Mar. International Merchandise Trade
  • 1400 – US Apr. ISM Services
  • 1430 – US Weekly DoE Crude Oil and Product Inventories
  • 1800 – US FOMC Meeting
  • 1830 – US Fed Chair Powell Press Conference
  • 2010 – New Zealand RBNZ members testify on financial stability report
  • 2130 – Brazil Selic Rate announcement
  • 0130 – Australia Mar. Trade Balance & Building Approvals
  • 0145 – China Apr. Caixin Services PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Support Centre
For existing clients, please click here to request support via the Support Centre.

Have a question about our products, platforms or services? Visit the Support Centre to find answers for our most frequently asked questions. If you are still unable to locate an answer to your question, you will also find contact details for your local Saxo office to speak with a representative.

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.