Financial Markets Today: Quick Take – April 19, 2022 Financial Markets Today: Quick Take – April 19, 2022 Financial Markets Today: Quick Take – April 19, 2022

Financial Markets Today: Quick Take – April 19, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Markets are trying to maintain an even keel as bond yields and oil prices continue to press higher. Europe returns from its long holiday weekend today as the war in Ukraine is heating up in the east and the hawkish Fed voter Bullard says he would not rule out a 75-basis-point hike at the May 4 FOMC meeting. Gold failed a bid to take the 2,000 dollar per ounce threshold yesterday.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities have been weak over the past week with negative reactions to earnings from US financials with JPMorgan Chase’s unexpected increase in credit provisions indicating credit conditions will worsen. This week major earnings releases in the US will dominate the reaction function and set the direction for the S&P 500 futures which are trading around the 4,400 level this morning with yesterday’s low at 4,355 being the key level to watch on the downside.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hang Seng Index retreated more than 2% after investors found the 25 bp reserve requirement ratio cut by the People’s Bank of China last Friday disappointing as they had been expecting a more typical 50 bp reduction and a 10 bp cut in the policy Medium-term Lending Facility (MLF) rate as well.  E-commerce names declined on report that the Chinse authority had asked e-commerce companies to a meeting and called on the latter to improve on practices on pricing and delivery of necessities to consumers during lockdowns. Alibaba and Meituan fell 3% to 5%. China Merchant Bank fell 11% following the abrupt departure of the Chinese bank’s president. CSI300 saw a modest decline with coal miners, agricultural chemicals and fertilizer producers, and energy sector seeing demand.

Stoxx 50 (EU50.I) – Stoxx 50 futures are stuck in the mud ahead of a critical week with US Q1 earnings releases and Russia’s new offensive in Donbass marking the beginning of the next and more critical phase of the war in Ukraine. Stoxx 50 futures are trading around the 3,750 level this morning and is boxed into a tight trading range from 3,710 to 3,800.

EURUSD – the euro traded and closed below the prior cycle low of 1.0800 after an initial sell-off through that level in the wake of last week’s ECB meeting failed to stick. Yield spreads at the short end of the curve, relative to the US, have generally trended sideways for nearly a month, although longer yields have risen more aggressively in the US since late March. USD liquidity concerns as risk sentiment is poor and the market fears more aggressive Fed quantitative tightening may be the key driver here. Watching the next chart level at 1.0636, the low from early 2020.

USDJPY and JPY crosses. The JPY continues to run away to the downside, with USDJPY hitting 128.00 for the first time since 2002, as long US treasury yields notched a new cycle peak yesterday and will soon threaten the 3.00% level if they continue to rise, underlining the policy divergence with the Bank of Japan, that continues to stick with its yield-curve-control policy that caps 10-year JGB yields at 0.25%. Both the Bank of Japan and the Japanese Ministry of Finance have stepped up their verbal interventions against JPY volatility as recently as overnight, but until a policy shift is spotted, or real intervention is mobilized, the market is content to continue driving the JPY lower. The next major chart point is the early 2002 high near at 135.00. AUDJPY has also surged to fresh record highs of 94.50+ as the AUD was slightly firmer following the hawkish tilt in RBA minutes. Suzuki is heading for a bilateral meeting with the US and comments would be on watch.

Gold (XAUUSD) attempted but failed to reach $2000, more a psychological than technical resistance level during Monday’s low liquidity session. Leveraged funds (futures) and asset managers (ETFs) both bought gold in the week to April 12, a sign the technical and fundamental outlook have – for now - aligned in support of the yellow metal. The World Bank cut its forecast for global economic growth while Fed’s Bullard talked up the prospect for a 75 basis point rate hikes given the need to raise rates to around 3.5% this year. While higher interest rates may weigh, worries about inflation, growth, and increased market volatility together with the geo-political uncertainties have maintain the upper hand. Support at $1965.

Crude oil (OILUKJUN22 & OILUSMAY22) has extended its pre-Easter rally after Libya shuts its largest oil field amid protest, thereby draining an already undersupplied market further. Chinese fuel demand, currently estimated to be down 2 million barrels per day is likely to recover swiftly once lockdowns are lifted after China vowed to repair the economic damage. More than 500,000 barrels per day is currently offline in Libya and together with the EU attempts to phase out Russian oil imports, the market is expected to remain tight despite the announced release from strategic reserves held by the US and IEA members. Brent finding some resistance around $113.75 with a break potentially signaling a fresh push towards $120 per barrel.

Copper (COPPERUSJUL22) reached its second highest ever close on Monday, as global mining disruptions continued to weigh on a market where exchange-monitored inventories are already at alarmingly low levels. Around 20% of Peru’s exports are out of action following local community protests. In addition, a Chinese government pledge to support the economy once lockdowns are lifted, and the increased urgency to reduced dependency on fossil fuels via electrification are likely to underpin the price further. Resistance at $4.86, a local high, and support at $4.65, the 50-day moving average.

US Treasuries (IEF, TLT) and European Sovereign Debt. Despite the fresh hawkish talk from St. Louis Fed president Bullard, who is a voter at FOMC meetings this year, the short end of the US yield curve remains relatively steady, while long yields have continued to test higher as the US yield curve steepens. The next major obvious test for the long end is the 2018 high for the 10-year Treasury benchmark at 3.25%

What is going on?

World Bank downgrades global growth estimates. The World Bank cut its 2022 outlook to 3.2% from 4.1%, dragged down by Europe and Central Asia amid the Russian invasion of Ukraine. World Bank Chief Economist Carmen Reinhart said there is “exceptional uncertainty” in global markets and further downgrades cannot be ruled out.

Get ready for more hawkish Fed talk this week. We had James Bullard on the wires yesterday, and he planted the seeds of a 75-basis points rate hike given that the Fed needs to get to neutral rate very soon. The base case for the May meeting is still a 50-basis points rate hike, and a final word on that should be watched from Fed Chair Powell on Thursday as he speaks at the IMF conference. Still, brace for more volatility in yields and further gains in the US dollar as Fed continues to raise the bar of its hawkishness.

The Bloomberg Grains Subindex (AIGG:xlon) has returned to challenge to the March record high with the near month corn contract (CORNJUL22) exceeding $8 per bushel for the first time in almost a decade while wheat (WHEATJUL22) has also resumed its recent strong rally. Catalysts being the war in Ukraine, potentially reducing this year's corn crop by 40%, as well as drought and heat damage to crops in the US Midwest. In addition, the recent strong surge in US natural gas prices has further lifted the cost of fertilizer, thereby potentially seeing US farmers switch more acreage to less nutrient intensive soybeans from wheat and corn.

What are we watching next?

JPY intervention? The verbal intervention from the Bank of Japan and the Japanese Ministry of Finance have failed to impress the market. At some point the Japan’s MoF may feel it is necessary to mobilize an actual intervention in the market, something it has a long history of doing, though in the past, ironically in the direction of avoiding further JPY strength, not weakness. These interventions may not achieve more than temporary success if the underlying policy and market dynamic don’t shift (I.e., the Bank of Japan sticking to its current policy while inflationary pressures and yields elsewhere continue higher). But the risk of tremendous two-way, intraday volatility should be appreciated.

War in Ukraine developments as Ukrainian president Zelenskiy said that Russia is initiating an effort to take the Donbas region in Easter Ukraine. An isolated force of Ukrainian forces in Mariupol continues to hold out against Russian efforts to take the city.

Earnings Watch. The Q1 earnings season started last week with EPS beating in all cases but Schwab indicated that earnings momentum is intact among US financials. JPMorgan Chase’s earnings release showed higher than expected credit provisions which may be early signs that the credit cycle is moving into its next phase. This week the key focus is on Johnson & Johnson (today), Netflix (today), Lockheed Martin (today), Halliburton (today), ASML (Wed), Sandvik (Wed), Tesla (Wed), Procter & Gamble (Wed), CATL (Thu), Nidec (Thu), ABB (Thu), NextEra Energy (Thu), Snap (Thu).

  • Tuesday: Shenzhen Mindray Bio-Medical, Johnson & Johnson, Netflix, Lockheed Martin, IBM, Halliburton, 
  • Wednesday: China Mobile, China Telecom, ASML, Heineken, ASM International, Sandvik, Tesla, Procter & Gamble, Abbott Laboratories, Anthem, CSX, Lam Research, Kinder Morgan, Baker Hughes
  • Thursday: Contemporary Amperex Technology (CATL), Sartorius Stedim Biotech, Nidec, Investor AB, ABB, Danaher, NextEra Energy, Philip Morris, Union Pacific, AT&T, Blackstone, Intuitive Surgical, Freeport-McMoRan, Snap, Dow, Nucor

Economic calendar highlights for today (times GMT)

  • 0800 – Switzerland SNB Weekly Sight Deposits
  • 1215 – Canada Mar. Housing Starts
  • 1230 – US Mar. Housing Starts and Building Permits
  • 1605 – US Fed’s Evans (non-Voter) to speak
  • 1630 – Switzerland SNB’s Jordan to speak
  • 2350 – Japan Mar. Trade Balance
  • 0115 – China Rate Decision

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