Summary: US equites have been met with wild swings, with short-term moves continuing to dominate. Despite that, Treasury yields suggest caution remains ahead of the Fed meeting next week. The EUR returns to gains after an initial post-ECB drop while crude oil makes choppy moves. Meanwhile, the banking sector risks continue to linger.
S&P 500 surged 1.8%, which is its biggest one-day rise since January, after large US lenders agreed to contribute $30 billion in deposits to First Republic, in a bid to stem the market turmoil, with bank shares somewhat rebounding. Some think this demonstrates the resilience of the banking system, but we think investors need to reflect that short term flows and trading are dominating the market. It seems some traders are also not convinced the pain could be over, as bond yields rose higher, while hedge funds have been increasing their gold longs, ahead of the Fed’s meeting next week.
After hours FedEx shares surged 11% after its quarterly results beat expectations, and its job cuts allowed the logistics company to upgrade its outlook. Meanwhile First Republic shares fell 11% after hours.
Yields on Treasuries did not react much to the 50bp rate hike from the ECB. The ECB downshifted its policy guidance from raising rates “significantly at a steady pace” previously to “ready to respond as necessary to preserve price stability and financial stability”. Selling pressure picked up later in the session mostly in the front end as bank stocks rallied. Yields on the 2-year closed 27bps higher at 4.16% and the 10-year up 12bps to 3.58%. The market is pricing in around an 80% chance of a 25bp hike at the FOMC next week.
Yesterday, banks, insurance, and energy stocks weighed on the benchmark Hang Seng Index, seeing the benchmark index down 1.7%. While the saga in the U.S. regional banks and Credit Suisse has stabilized somewhat, market sentiment remained fragile and investors opted for risk-off, in particular towards financial and cyclical names.
International bank names declined, HSBC (00005:xhkg) falling 2.4% and Standard Chartered (02888:xhkg) shedding 5.4%. Insurers AIA (01299:xhkg) and Prudential (02378:xhkg) lost 5 to 7%. Ping An (02318:xghk) dropped 3.5% following results missing estimates due to weaknesses in property and casualty insurance and investment. Baidu (09888:xhkg) plunged 6.4% after the launch event for its ERNIE AI chatbot disappointed investors. Samsonite (01910) surged 5.2% after the suitcase maker reported solid results.
In A-shares, Chinese banks are well bid and are among the top gainers on Thursday. CSI300 lost 1.2%, as coal, petrochemical, non-ferrous metal, and electric equipment led the decline.
Today, the ASX200 trades just a whisker away from its January closing low, remaining somewhat pressured by profit taking in gold equites. Meanwhile, iron ore miners are trading relatively steady after China is cutting back on steel production, with the market awaiting further developments to validate the next move. There is a lot of talk about defence today, with the US State Department approving a possible foreign military sale of Tomahawk Weapon Systems to Australia, as part of the AUKUS deal. The total estimated cost is about $895 million. The State Department also approved the possible sale to Poland of Hellfire missiles and related equipment at an estimated cost of $150 million, according to the statement.
EURUSD recovered quickly from an earlier slump after ECB’s 50bps rate hike was possibly seen as a policy mistake by the markets. EURUSD touched lows of 1.0550 before trading back above 1.06. AUDUSD recovered to 0.6660 amid a rebound in risk sentiment for the day and in some commodity prices. Kiwi testing the 0.62 handle this morning in Asia after slumping to 0.61 at the end of last week as banking concerns started. USDJPY however was higher at 133.50+ from lows of 131.72 overnight.
Crude oil found some support late in the session following a three-day selloff as technical selling eased. There was also a respite from deteriorating risk sentiment, but banking sector concerns continue to linger which may impact the demand outlook. Sentiment in the crude market was supported by Russia’s Deputy Prime Minister Alexander Novak meeting with Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman to discuss oil markets and efforts by OPEC+ to promote market balance and stability. WTI was near $68 and Brent just below $75 in early Asian session.
Despite Treasury yields reversing higher on some easing of the banking sector concerns yesterday, Gold was steady and inched above $1920 in the Asian morning. Still, banking sector concerns continue to linger, supporting potentially more upside in Gold, but the focus will be on the Fed meeting next week especially after ECB’s 50bps rate hike failed to bump up the EUR. Focus is clearly on the early February peak of $1960 with support seen at $1900 and $1880.
Despite the market pricing tilting more in favor of a 25bps rate hike ahead of the announcement amid the financial contagion risks, the ECB stuck with its February guidance of a 50bps increase and raised rates to 3%. But the bank embraced a dual track monetary policy approach yesterday, giving up on forward guidance as uncertainty prevails regarding the macroeconomic and financial outlooks in the short term. These are certainly the two most important paragraphs from the ECB press release:
-"Inflation is projected to remain too high for too long. Therefore, the Governing Council today decided to increase the 3 key ECB rates by 50bp, in line with its determination to ensure the timely return of inflation to the 2% medium-term target
-On TLTRO: "As banks are repaying the amounts borrowed under the targeted longer-term refinancing operations, the Governing Council will regularly assess how targeted lending operations are contributing to its monetary policy stance."
To sum up, the ECB will monitor very closely market tensions and stay ready to respond as necessary to preserve price stability and financial stability (dual track approach). The ECB also confirms it is fully equipped to provide liquidity to the financial sector, if needed. Think TLTRO or swap lines to banks, for instance.
Banking sector risks continue to linger
US weekly jobless claims for the week ended March 11 declined sharply to 192k from 212k in the previous week, coming in below the expected 205k. Continued claims fell to 1.684mln from 1.713mln, against the expected little change. While the last week data’s still shows a tight labor market, focus will remain more on the data from here as risks of a contagion in the financial sector picked up.
In February, 55 out of the top 70 Chinese cities surveyed registered new home price increases from January.
The Public Company Accounting Oversight Board (PCAOB) is sending officials to Hong Kong to conduct a new round of inspections on auditors’ works and audit papers of selected mainland Chinese companies that are listed in the U.S. The PCAOB completed its first round of inspections and was satisfied with the findings last year.
For what to watch in markets this week – read or watch our Saxo Spotlight.
For a global look at markets – tune into our Podcast.
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.
