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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures extended the rally yesterday on news that there was progress in the peace talks between Ukraine and Russia with Russia removing military activity around Kiev in token to strengthen the dialogue. However, little Russian movement has been observed and the commodity market is suggesting a lukewarm interpretation of this Russian gesture. S&P 500 futures pushed above the 4,600 level and is trading around the 4,624 in early European trading hours driven by gains in technology stocks.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng was up more than 1% while Hang Seng TECH Index (HSTECH.I) was flat. The WSJ “cites people familiar with the matter” that China is planning new restrictive measures on the live-streaming sector. BYD reported above-consensus 4Q revenues but earnings disappointed due to higher material costs. BYD’s gross margin fell to 11.3% 3.7% lower from last year and 0.7% lower from last quarter. Great Wall Motor (02333) reported better than earnings (+25% YoY), its share price rose 4%. In A-shares, CSI300 was up 2.4% driven by property developers, securities brokerage, solar, wind power, energy storage and lithium stocks outperformed.
Stoxx 50 (EU50.I) – Stoxx 50 futures had a strong session yesterday on the news coming out of the peace negotiations between Ukraine and Russia, but the move was faded before the close and today they are coming down a bit trading around the 3,910 level. The commodity market including prices on European natural gas are not suggesting a big chance on the ground in Ukraine and there are good reasons to remain skeptical of yesterday’s move.
USDJPY and JPY crosses – the yen bounced robustly as global bonds found strong support yesterday, helping to erode concerns of further runaway yen downside linked to the Bank of Japan’s yield-curve-control policy, which keeps Japanese 10-year yields from exceeding 0.25%. Given the energy in the market and the focus on yields, JPY crosses will continue to take their cue from the direction in global bond yields unless the Bank of Japan or Japan’s government signals something new, which is unlikely unless the yen is under significant renewed pressure.
EURUSD and EUR pairs – yesterday saw the euro getting a strong boost from the outcome of Ukraine-Russia peace talks in Turkey (more below), but if the real market impact of this story fails to result in lower energy prices – particularly natural gas prices – for Europe, it is hard to see a sustained euro rally. EURCHF was very quick to rally on the news yesterday and could be one of the more sensitive pairs to a material improvement in the real growth outlook for Europe, which is heavily dependent on a significant retreat in energy- and power-related input costs. Likewise, EURUSD was up testing the key 1.1100-1.1150 resistance zone, but may need further support from energy prices and risk sentiment to drive a return into the higher range toward 1.1500.
Crude oil (OILUKJUN22 & OILUSMAY22) fresh volatility in crude oil after Russia declared the intent to reduce military activity around some Ukrainian cities (more below). Trading has rolled forward into the June Brent contract, which is trading a few dollars lower than the soon-to-expire May contract. The price action bounced from yesterday’s low near 102.00 to above 108.00 this morning, with 100 dollars likely the key psychological support ahead of the sub-95 dollar lows from mid-month. Watching the weekly inventory numbers out of the US today as stocks of crude and distillates are at critical levels.
Gold (XAUUSD) saw a test of the support that is existential for the bullish outlook: the 1,890-1,900 area that was pivotal shortly before and after Russia’s invasion of Ukraine in late February. The sell-off yesterday was triggered by hopes that Russia’s intent to reduce hostilities in parts of Ukraine could move the war in the direction of détente, but a rally in global bonds helped offset this development. Otherwise, the backdrop of strong risk sentiment is generally a headwind for gold. To more fully pull away from support levels, the rally needs to extend above the recent pivot highs above 1,950.
US Treasuries (TLT, IEF). The yield curve between 2 to 10 years has inverted briefly yesterday. However, it’s not signaling an imminent recession, yet. Indeed, long-term yields are still on the rise, while real rates remain in deeply negative territory providing favorable financing conditions. Thus, we believe the Federal Reserve has room to be aggressive in tightening the economy. Yesterday’s 7-year auction tailed by 1.3bps despite offering the highest yield since February 2019. By the end of the day, yields plunged led by lower breakevens amid news of seemingly successful cease-fire talks between Russia and Ukraine.
What is going on?
Russia saying it will reduce military operations around Kyiv, western officials express doubts on Russian intentions. The declared intent to reduce action around Kyiv and Chernihiv was announced by the Russian side at peace talks between Ukraine and Russia yesterday in Turkey, but US sources sounded skeptical on Russia’s actual intent to de-escalate and said it could be a tactic to buy time and focus more energy on hostilities elsewhere. Russia has recently shifted its declared ambitions to focusing on the Eastern Ukrainian region of Donbas.
US March Consumer Confidence very mixed as expectations drop to new lows for cycle. The US March Conference Board Consumer Confidence headline was out in-line with expectations at 107.2, slightly up from a revised 105.7 for February (original survey was 110.5). The Present Situation portion of the survey rose ten points to 153.0, but the expectations portion fell to 76.6 from 80.8, taking the gap to –76, one of the lowest ever readings, save for a handful of readings in 2019 and 2020 and in 2001.
Apple market value approaching $3trn. The world’s most valuable company has risen for 11 straight sessions and is now close to its all-time high. Sentiment has been lifted by the potential move to a subscription model on its iPhones as this model would have several benefits for the company. It will make demand predictions and this planning more predictable, and it would help roll more customers into newer models as the upgrading cycle has continued to lengthen. Overall, such a move would likely help improve profitability.
The iron ore futures price (SCOA) rose 1.6% to US$157.15, on optimism Chinese demand will rebound quickly from covid-19 outbreaks. While iron ore continues its long term rebound, shares in the world’s biggest miner, BHP (BHP) closed above AU$50.00, for the third day in a row. The market however thinks Champion Iron (CIA) has the most upside in share price growth. But balance sheet strength favours BHP (BHP), Rio (RIO), and Fortescue (FMG), which are tipped to pay above market dividend yields of 9.5% (BHP), 9.3% (RIO) and 15.3% (FMG) this year supported by the iron ore price rebounding out of a bear market.
US earnings recap. Micron Technology rose 4% in extended trading on a strong outlook for the current quarter with the company guiding adj. EPS of $2.36-2.56 vs est. $2.24 and revenue of $8.5-8.9bn vs est. $8.2bn driven by better pricing and strong demand in datacenters. Micron says Ukraine may drive up some costs but not impacting production and indicates that the Chinese smartphone market is weakening. Lululemon shares rose 8% in extended trading on a strong outlook for the current quarter with revenue guided at $1.53-1.55bn vs est. $1.4bn and EPS of $1.38-1.43 vs est. $1.27 driven by a dramatic upside surprise to sneaker sales. The company says logistics are still an issue with ocean shipping being the biggest bottleneck.
What are we watching next?
End of quarter tomorrow. There have been huge losses in bond portfolios in an historic Q1 for the asset class – some of the sudden support over the last couple of sessions may be due to portfolio rebalancing flows to top up fixed-income allocations. Worth noting as a factor as we roll into a new quarter on Friday, and for Japan, into a new financial year (especially given the yen’s sensitivity to global yields given BoJ policy as noted above.)
Signals from China on the status of its relationship with Russia as Russian foreign minister Sergei Lavrov is scheduled to arrive in China today. This will mark the first face-to-face meeting between high-level representatives of the two countries since Russia invaded Ukraine. Any notable shift in China’s stance on its relationship with Russia will have enormous implications for the latter, but potentially also for the wider geopolitical situation. Sinopec, a Chinese state-owned oil, gas and refining giant, overnight announced that it had suspended talks for a half-billion dollar investment in a venture in Russia.
US Feb. PCE Inflation data up tomorrow – for how the market reads this data relative to the anticipated pace of Fed rate hikes this year.
Earnings Watch. Today’s earnings focus is on Ganfeng Lithium being one of the biggest lithium miners in the world in this important metal used in batteries for electric vehicles.
- Today: Kweichow Moutai, ICBC, Agricultural Bank of China, CNOOC, COSCO, SD Holding, Haier Smart Home, China Vanke, Ganfeng Lithium, China Longyuan Power Group, BOE Technology, Paychex, BioNTech
- Thursday: PetroChina, China Overseas Land & Investment, China Resources Land, CITIC Ltd., Walgreens Boots Alliance
Economic calendar highlights for today (times GMT)
- 0800 – ECB President Lagarde to speak
- 1200 – Germany Mar. Flash CPI
- 1315 – US Fed’s Barkin (non-voter) to speak
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 1700 – US Fed’s George (Voter) to speak
- 2350 – Japan Feb. Industrial Production
- 0130 – China Mar. Manufacturing and Non-manufacturing PMI
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