Summary: The week is off to a rocky start a risk aversion continues to hang over global markets after a rally attempt Friday in the US barely managed to avoid new lows for the cycle in the S&P 500. The tech-heavy Nasdaq 100 index did slip to new lows, however, and is well into bear market territory, down some 25% from the top last November. USD strength continues to suggest general liquidity conditions are poor, and risk-sensitive Bitcoin trades near the lows for the year.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equity sentiment continues to be weak with S&P 500 futures testing this morning the Friday lows around the 4,060 level, which is the key level to watch on the downside. If S&P 500 futures close below 4,100 today it will be the lowest close since May 2021 and reinforcing the downward trend. Financial conditions are still tightening, the VIX is above 30, interest rates are rising across the curve, and the USD is also rallying. This is an ugly mix of factors suggesting we remain defensive on equities.
Stoxx 50 (EU50.I) - Stoxx 50 futures have opened lower this morning but are attempting to rebound trading around the 3,570 level. Sentiment in European equities is weak following Asia where remarks about a grave jobs situation in China by the country’s premier have supported the view that China is currently subtracting a lot of growth due to its lockdowns. In the European session, the Sentix Investor Confidence figure for May is one of the first indicators for May and could impact intraday sentiment; consensus is looking for a declining m/m to .21.6.
The US dollar – US treasury yields pulled to new highs for the cycle on Friday at the longer end of the yield curve, even as the FOMC meeting was slightly dovish at the margin and shorter yields remain rangebound. Some of the pressure at the longer end of the yield curve may be in anticipation of Fed QT, which will see the market having to absorb more treasury issuance as the Fed allows an increasing number of bonds on its balance sheet to roll off without replacing them, starting on June 1 and rising to a pace of $95 billion/month three months later. The combination of rising US yields, a rising US dollar and falling risky asset prices is likely a self-reinforcing set of developments that it dangerous as long as correlations across assets remains so high. Watching key levels now for the major USD pairs during this strong USD episode including the 1.0500 area in EURUSD and the nominal lows a bit lower still, the huge 0.7000 level in AUDUSD that was tested overnight, the 1.3000 area in USDCAD, and the cycle highs in USDJPY above 131.00 that are under fire this morning.
USDCNH and CNH pairs – after a long bout of clearly managing the renminbi within a tight range versus a very strong US dollar in recent months, China took a decisive step and delinked its currency from the US dollar as of late April, with USDCNH pulling sharply higher from below 6.40 as recently as April 19th to 6.75 overnight, the sharpest move in this exchange rate since mid-2018, when US treasury yields were also rising toward their cycle highs above 3.00%. Much of the move is down to USD strength after an initial rush lower in CNH across the board, but watching CNHJPY and EURCNH for the possibility that China is on the path to a more profound CNH revaluation.
Cryptocurrencies - Bitcoin and Ethereum are both down 14 % over the past week, and Bitcoin is currently trading just above the lowest level for 2022. The inflow of Bitcoin to centralized exchanges is at three-month highs, indicating a higher desire to sell off holdings than usual.
Gold (XAUUSD) remains at the mercy of a continued rise in US Treasury yields and the stronger dollar with inflation data this week from the U.S. and elsewhere potentially driving additional volatility across market. China and India, two major sources of demand for gold, both seeing their currencies weakening against the dollar, thereby potentially negatively impacting the short-term demand outlook. Speculators made a pre-FOMC reduction in bullish gold futures bet to a three-month low while ETF holdings have seen reductions in all but one out of the last ten days. Support at $1850 and $1830.
HG Copper (COPPERUSJUL22) trades near a five-month low on continued demand concerns in China, the world’s top consumer. Trade data for April showed stagnating imports and the slowest export growth in dollar terms since 2020, underscoring the economic fallout from the zero covid policy which has seen millions of people being locked up in their homes for weeks on end. Iron ore (SOCA, SCOM2) traded in Singapore fell 5.7%, taking the key steel making ingredient’s price below US$130, its lowest level since Feb 17 as China’s lockdowns hits ports, with iron ore buying likely to slow till China eases lockdowns. Iron ore giants, BHP (BHP) and Rio (Rio) fell in Australia today, while Fortescue Metals (FMG) was down 5.9%.
Crude oil (OILUKJUL22 & OILUSJUN22) trades steady near a one-month high with the general risk aversity from a stronger dollar, the economic damage from China lockdowns, inflation and monetary tightening being offset by continued supply concerns from Russia and producers struggling to meet their production targets. G-7 leaders (see below) have joined the EU in making a commitment to phase out their dependency on Russian energy, including oil. The EU’s 27 members have, however, so far failed to reach an agreement. While the risk remains skewed to the upside, the latest developments are likely to keep crude oil rangebound with focus instead on refined products where multi-year highs are already hurting demand. Monthly oil market reports from EIA Tuesday, followed by OPEC and IEA on Thursday.
US Treasuries (TLT, IEF) – US yields continue to rise at the longer end of the yield curve while shorter yields remain rangebound after the FOMC meeting proved somewhat less hawkish than expected in removing 75 basis point rate hikes from the likely policy options going forward, thus steepening the yield curve. All eyes are on the cycle high from 2018 in the 10-year US T-Note benchmark yield at 3.25% as it traded to 3.15% overnight. A move above that 2018 high would be the first new 10-year or greater high in the benchmark since 1981. Treasury auctions this week include a 3-year auction tomorrow, 10-year Wednesday and 30-year Thursday.
What is going on?
Chinese Premier warns of “complicated and grave” challenges for the Chinese labor market due to Covid lockdown measures and instructed government organs to prioritize job retention measures. His statement came after the Chinese Politburo late last week warned against any attempt to question China’s strict Zero Covid approach to fighting the virus and after March employment data showed the unemployment rate ticking up to 5.8% from 5.5% in February and a post-pandemic outbreak cycle low of 4.9% late last year.
A HSBC shareholder urges split. Peter Ma, leading Chinese insurance company Ping An, is urging HSBC chairman Mark Tucker to considering splitting the bank and listing its Asian operations separately. Former insiders are saying the probability of a split is still low due to the costs involved of such a split.
G-7 leaders commit to dropping Russian oil imports after a video call with Ukrainian president Zelenskiy yesterday. The announcement was made the day ahead of today’s May 9 Victory Day celebrations in Russia. The boycott of Russian oil will take some time to implement, with January given as a target date by the heavily reliant EU, while Japan failed to offer a deadline even as it signed on to committing to the boycott, while Prime Minister Kishida said that Japan plans to retain its interests in Russian oil and natural gas projects, Sakhalin 1 and 2.
US NFP outperformance provided little comfort. US nonfarm payrolls were better than expected, rising by 428k against expectations of 391K in April, but there was a downward revision for February and March. The broad increase in hiring was led by the leisure and hospitality sector, which added 78,000 jobs. Manufacturing payrolls rose by 55,000 jobs after increasing by 43,000 in March, indicating that demand for goods remains strong, which should help to underpin consumer spending. The Wage growth, however, slowed with average hourly earnings increasing 0.3% after advancing 0.5% in March, but still that did nothing to ease fears of a wage price spiral. The unemployment rate held at 3.6%.
Battery metal news: Albemarle (ALB) the lithium giant, outperformed the market last week after upgrading its annual earnings forecasts (citing higher lithium prices in 2022 amid supply shortages). Can this new trend continue? Albemarle shares rose 2.5% Friday, taking its weekly gain to 26%, which snapped its 4-week downtrend. The company upgraded its annual earnings, seeing 100-140% earnings growth this year with earnings (EBITDA) to rise to $1.7-$2 billion in the year.
Speculators cut bullish commodity bets across 24 major futures contracts to a four-month low in the week to May 3 as a recent red-hot sector continues to cool. Driven by China lockdowns, rising inflation and monetary tightening have led to a loss of momentum, especially across industrial and precious metals. From a recent pre-war and pre-China lockdown peak on February 22 the net long in energy is, despite strong price gains, down by 23%, the metal sector is down 67% while the agriculture sector is up 2% led by softs.
The U.S. April job report is uneventful. The headline number was out at 428k. This is above the consensus expectation of a 391k increase. The largest increases were leisure/hospitality +78k, goods-producing +66k, education/health +59k and manufacturing +55k.The unemployment rate printed at 3.6 %, slightly above the estimate of 3.5 %. The average rate of job growth over the past three months was at 523k – a solid figure. Finally, the three-month average hourly earnings cooled from 5.2 % in March to 4.4 % in April. This should, on the margin, ease concerns of investors over the direction of the Fed’s monetary policy.
Unusual statement by ECB Governing Council member François Villeroy de Galhau. The governor of the French central bank mentioned that there are early signs inflation expectations are less anchored in the eurozone. This is very unusual for the ECB to say this, especially from a pragmatic Governing Council member. This could further indicate that the ECB will move towards a first hike at the July meeting (which will happen only one day after the release of the eurozone Q2 GDP). The ECB survey of professional forecasters will be released right after the meeting. This survey is usually closely monitored by market participants.
Disappointing Spanish industrial production in March. It was out at 0.10 % over the same month in the previous year. This is much less than expected (2.7 %) and prior (2.8 % revised from 3.0 %). Without much surprise, high energy prices, supply chain disruptions and risk of stagflation are hurting the country’s industrial production. This is more or less the same situation in other eurozone countries.
What are we watching next?
Russian Victory Day speech from Vladimir Putin – today is one of Russia’s most important holidays, the May 9 Victory Day celebrating the Soviet victory over Nazi Germany in World War II, and there has been considerable speculation on whether Russian leader Putin will mark the occasion with a declaration of general mobilization to double down on efforts in Russia’s invasion of Ukraine or other announcements that reposition Russia’s ambitions there.
US inflation may prove a short-term respite. Consensus expects US CPI due on Wednesday to come in at 8.1% y/y, below 8.5% y/y seen in March. Still, inflation is likely to stay top of mind for central banks and investors. As we noted in a previous piece, there are signs that headline inflation may be peaking. But there are new concerns from food prices, services inflation and deglobalization, suggesting the pace of moderation will be extremely slow.
Earnings Watch. Today’s focus in Europe is Infineon Technologies which is one of the largest suppliers of semiconductors to the car industry. In the US, earnings from Palantir are our focus today given the risk-off rout taking place among technology companies.
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.
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.
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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