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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures closed just above the 4,000 level yesterday as US equities failed to extend their gains from Friday’s session. Tesla shares fell 6% as bubble stocks and crypto related companies fell almost 5% suggesting weakness in technology stocks continues. While the Empire State manufacturing PMI figures yesterday were from a little region of the US, they surprised significantly to the downside hitting levels typically consistent with low economic activity or even a mild contraction. S&P 500 futures are pushing higher trading around the 4,024 level with yesterday’s high at 4,043.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) rallied 2% and 1% respectively on prospect of relaxation of Covid restrictions in China. JPMorgan’s 180-degree reversal to turn overweight in Chinese internet stocks also help the market sentiment. Alibaba (09988), Tencent (00700), Meituan (03690) and JD.COM (09618) gained about 5% to 6%. Auto makers, batteries and semiconductors surged on the prospect of normalization of supply chain from lockdown. Great Wall Motor (02333) rose over 10%. Ganfeng (01772) rose 6.7%. Hua Hong Semiconductor (01347) gained 6%.
Stoxx 50 (EU50.I) - European equities continue to trade at levels lower than a year ago as weakness is still widespread due to the war in Ukraine with BOE chief Bailey warning yesterday of the extreme risks related to galloping food prices and security of supply. Stoxx 50 futures are trading just below the 3,700 level this morning with the 50-day moving average at 3,732 being the key resistance level to watch on the upside.
USD pairs – the US dollar weakened rather sharply yesterday as risk sentiment continued to stabilize. Traders should be on the lookout for whether the sell-off could extend sufficiently to trigger a tactical reversal in the USD bull trend. Levels worth watching include the 1.0500 resistance area in EURUSD, 0.7050-0.7100 resistance zone in AUDUSD, and 1.2400 resistance in GBPUSD. The Apr. Retail Sales report up later today could trigger market volatility.
JPY pairs – JPY crosses have bounced hard from the steep sell-off late last week as risk sentiment has stabilized since Friday and, to a lesser degree, as bond yields pulled back higher. The volatility looks excessive relative to coincident developments. USDJPY will watch US treasury yields over the US data today with resistance around 130.00, while a break down through the important 128.00-127.50 area and consolidation back toward 125.00 likely needing a significant consolidation lower in US treasury yields. AUDJPY and GBPJPY have been particularly volatile JPY pairs since a one-off meltdown last Thursday that has now largely been erased.
Gold (XAUUSD) trades higher supported by a softer dollar, higher oil prices and tailwind from silver (XAGUSD), as the industrial metal sector receives a boost from the prospect of easing lockdowns in China. The recent loss of momentum which helped attract fresh tactical short sellers was driven by the relentless rise of the dollar and the markets belief in the FOMC’s ability to bring down inflation without hurting growth. With the latter increasingly seeing downgrades, the risk of recession has not gone away, and it raises the question of whether real yields may pause following its March to May near 1.5% jump. Breaking the two-month uptrend in ten-year real yields, last at 0.09% would support such a development. Gold needs to break above its 200-day moving average at $1838 to force a further improvement in sentiment.
Crude oil (OILUKJUL22 & OILUSJUN22) returned to an eight-week high overnight after China signaled it would start unwinding lockdowns in the Shanghai area. Also underpinning prices is the continued strength in fuel products driven by strong demand and restrained refining capacity. Global demand has yet to show signs of meaningful demand destruction and with Chinese demand starting to recover the risk of higher prices remains, not least considering Europe’s continued efforts to reduce its dependency on Russian oil and gas.
HG Copper (COPPERUSJUL22) has bounced back after hitting a seven-month low last week, and as we highlighted in a recent update, the market has been under pressure due to China lockdowns, and with those now starting to ease a bid has returned. If the change in sentiment towards a more favorable outlook takes hold, hedge funds may soon be forced to cover a short position which according to the latest COT report doubled to a two-year high in the week to May 10. The industrial metal sector slumped 25% during since early March as China closed, but with lockdowns now easing, stimulus policies focusing on the property sector and infrastructure will likely support a recovery.
What is going on?
High yield credit spreads continue to widen, signaling rising stress in corporate debt markets. One measure of credit spreads, the Bloomberg US Corporate High Yield Average option-adjusted-spread, has widened to above 450 basis to US treasuries, the highest levels since late 2020. Back in late 2018, the spread peaked at 537 basis points just before the Powell Fed pivoted to easing policy.
Lockdowns start to ease in Chinese cities. China’s nationwide (excluding Hong Kong) new local cases fell to 1,049 (sharply lower from the April 13 high of 29,317 cases), of which 823 cases from Shanghai and 52 cases from Beijing. Shanghai reported three consecutive days of zero community (i.e. outside of quarantine) transmission. The municipality expects to gradually resume public transportation services from May 22. Starting from today train services and air flights to and from other Chinese cities is gradually resuming services. The Shanghai government expects that the lockdown will be completely lifted in June.
Chinese tech stocks trade higher on hopes for easing stance from regulators. A symposium hosted by a prominent advisory body today in China has sparked hopes for a revival of tech stocks as executives of prominent companies like Baidu Inc were invited. JP Morgan Chase & Co. analysts yesterday announced upgrades to ratings on major Chinese tech names like Alibaba and Tencent Holdings.
Bank of England Governor Bailey fears “apocalyptic” risk from rising food prices. Governor Bailey testified before a parliamentary committee yesterday and said the rise in prices is “a major worry not just for this country but for the developing world.” Bailey bemoaned the series of supply shocks that are driving a cost-of-living crisis for the many UK citizens as the price of food and energy, in particularly have risen sharply, the latter a direct result of the Russian invasion of Ukraine. Bailey also noted a 1.3% fall in the size of the labor market, which also limits economic growth potential. Deputy Governor Ramsden added that “we hear companies telling us that even people on median incomes are overextended.”
RBA opening the door for bigger rate hikes. Minutes of the Reserve Bank of Australia's May monetary policy meeting showed that members considered three options, raising the cash rate by 15 basis points, 25 basis points or 40 basis points. The 40bps rate hike was avoided considering that the board meets monthly and would have the opportunity to review the data flowing in to decide on the size of future interest rate hikes. With inflation being seen as a key concern and Q1 inflation hitting 5.1% - the fastest pace in two decades – this likely suggests that there is room for 40bps (or more) of rate hikes in the upcoming meetings.
What are we watching next?
The European Commission downgraded GDP forecasts for 2022 and 2023. The EU Q1 GDP estimate is out later this morning. Official real GDP growth in both the European Union and the euro area is now forecast at 2.7 % in 2022 and 2.3 % in 2023, down from 4.0 % and 2.8 % (2.7 % in the euro area) in the last forecast released in February 2022. The forecast for 2022 is likely too optimistic. Several countries are facing a very challenging economic environment (stagflation risk in Germany and risk of technical recession in France, for instance).
France’s wage negotiations are kicking off. According to a blog article published by the Bank of France last week, wages are likely to increase by 3% this year, on average. From 2014 to 2020, wages barely moved (+1 %). This is still not enough to cope with higher inflation (4.8 % YoY in April).
April U.S. retail sales are out today. Expect the positive momentum to remain in place. Several factors are pushing retail sales up: solid auto sales, significant cash savings buffers (built during the pandemic) and rising wages (though they are not keeping pace with the increases in the cost of living). In the short-term, we believe consumer spending will remain robust and the domestic economy will be in a good position.
Earnings Watch. As with many earnings release dates for Chinese companies they are postponed and that happened to Meituan yesterday. The Q1 earnings release has been postponed to 23 May. Today’s focus in Europe is Vodafone which could show its qualities as a defensive company during the current declines and then Nibe Industrier which is big on air-to-heat water pumps which are a declared preferred technology by the EU in its quest to become independent of Russian natural gas. In the US session, the focus will be on Walmart, Home Depot, JD.com and Sea Ltd. The two big retailers Walmart and Home Depot will provide great insights into consumer behaviour in their outlook.
- Today: Engie, Vodafone, Nibe Industrier, Sonova, Walmart, Home Depot, JD.com, Sea Ltd
- Wednesday: Tencent, Experian, Burberry, Singapore Airlines, Cisco, Lowe’s, Target, Analog Devices, TJX, Synopsys, Copart, Trip.com
- Thursday: Xiaomi, Generali, National Grid, Applied Materials, Palo Alto Networks, Ross Stores, DiDi Global
Economic calendar highlights for today (times GMT)
- 0900 – Euro zone Q1 GDP forecast
- 1005 – UK Bank of England’s Cunliffe to speak
- 1230 – US Apr. Retail Sales
- 1315 – US Fed’s Harker (non-voter) to speak
- 1315 – US Apr. Industrial Production and Capacity Utilization
- 1400 – US May NAHB Housing Market Index
- 1700 – ECB President Lagarde to speak
- 1800 – US Fed Chair Powell Interview at event
- 1830 – US Fed’s Mester (voter) to speak
- 2030 – API Weekly Report on U.S. oil and fuel inventories
- 2350 – Japan Q1 GDP estimate
- 0130 – Australia Q1 Wage Price Index
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