Global Market Quick Take: Europe – March 17, 2023 Global Market Quick Take: Europe – March 17, 2023 Global Market Quick Take: Europe – March 17, 2023

Global Market Quick Take: Europe – March 17, 2023

Macro 8 minutes to read
Saxo Strategy Team

Summary:  The US equity market rebounded sharply yesterday, with the tech-heavy Nasdaq 100 Index soaring to its highest close in a month as market participants decided to overlook contagion risks from the banks and perhaps celebrated the backdrop of suddenly much lower yields. The ECB surprised many with a 50 basis point hike yesterday, which was initially read by the market as a policy mistake, but sentiment managed to recover.

What is our trading focus?

US equities (US500.I and USNAS100.I): big banks to the rescue

Risk-on was back yesterday with S&P 500 futures rallying 1.8% erasing the losses since the SVB Financial crisis started. The main driver yesterday was the news that the largest US banks led by JPMorgan Chase had agreed to deposit $5bn each and $2.5bn each from Goldmans Sachs and Morgan Stanley and the remaining $10bn from smaller banks to deposit in total $30bn into First Republic Bank to bolster confidence in the wider financial system. US financial conditions also eased yesterday and the plunged to ~23 indicating that the market is calming down. But is this calm warranted? The Fed’s discount window borrowing soared yesterday to the highest level on record suggesting we still have a problem in the banking system, but we have just transferred the problem from private sector to the ledger at the central bank. The ‘deposit game’ continues.

European equities (EU50.I): market shrugs off ECB rate hike

Rebounded in tandem with US equities yesterday and is continuing the rebound this morning with STOXX 50 futures trading around the 4,155 level. The lifeline to Credit Suisse yesterday was seen as a positive mitigation factor for European although we still observed some downward pressure and attention by the market in especially Swedish banks. ECB’s rate decision of hiking 50 basis points yesterday was on balance seen as a vote of confidence in the European banking system and an acknowledgement that fighting inflation is the top priority in the medium-term. But again, taking the other side of the market’s narrative the rise in the Fed’s discount window borrowing (explained the section above) still warrants caution.

FX: EUR rebounds after an initial post-ECB drop

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 shortly after the meeting before rebounding back to 1.0650 in the Asian session. The strong improvement in risk sentiment and bounce in some key commodities like copper helped AUDUSD back higher as well, and it managed to trade above 0.6700 into the early European hours. The JPY was broadly weak on the rebound in confidence in the US session yesterday, but did firm overnight in the Asian session, with USDJPY back blow 133.00 after trading as high as 133.76.

Crude oil steadies after three-day rout

Crude oil trades higher for a second day following a three-day rout triggered by the banking turmoil driving technical selling and forcing longs to reduce. In our latest update we highlighted the reasons why the sell-off became this aggressive, and what may happen next. During the past week, open interest has risen in WTI and especially Brent, signalling not only long liquidation but also an increased number of fresh long and short positions being added, a development that points to more volatility ahead. Sentiment improved after Russia’s Deputy Prime Minister Alexander Novak met with Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman to discuss oil markets and efforts by OPEC+ to promote market balance and stability. The groups monitoring comittee which can recommend a change in production, is scheduled to meet on April 3. From a technical perspective, a weekly close above $75 in Brent and $70 in WTI will be needed to ease concerns about a deeper sell-off.

Gold and silver resilience points to more pain

Precious metals trade near the highs reached during Wednesday’s Credit Suisse driven panic session with bids still emerging despite some easing of market tensions. Still, the sector remains supported amid continued banking sector concerns, a softer dollar and speculation about a peak in US rates followed by rate cuts later this year. Investors and traders in futures and ETFs who were heavy sellers during the February correction have returned on the buy side, not least ETF investors who have bought 18 tons this past week, the most in a year. Resistance the February top at $1960 with support seen at $1915 and $1890

Volatile treasury yields rebound after ECB, hopes for bank sector stability

US treasury yields rebounded sharply, although yesterday’s rise was just another chop within the very volatile range of late as the 2-year yield rose to as high as 4.2% overnight after trading below 4.0% yesterday, while the 10-year benchmark rose back above 3.50% yesterday after very briefly testing local lows below 3.40% around the time of the ECB meeting (and the hot-take that the surprise 50 basis point move would eventually prove a policy mistake). The 2-10 yield slope is near –58 bps.

What is going on?

The ECB hiked interest rates by 50 basis points to 3% - surprising many

The ECB 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."

As well, the ECB noted it will monitor “market tensions” very closely 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.

US banks have rushed to access liquidity. First Republic Bank in the spotlight in the US

Data published by the Fed shows that banks borrowed some $165 billion from Fed facilities, including $153 billion from the “discount window”, a traditional liquidity backstop. That is significantly more than the prior all-time high of $111 billion from the 2008 financial crisis. Elsewhere, 11 large US banks teamed up to help one of the most troubled banks, First Republic (FRC), with USD 30bn in uninsured deposits. This comes after reports that FRC was exploring strategic options including a sale, while it has been weighing options for shoring up liquidity and is expected to draw interest from larger rivals. However, risks continue to linger, and broader sentiment remains fragile, especially with the Fed decision coming up in the next week.  After finishing the day up 10%, FRC shares only to fall some 17% in late trading yesterday after the company suspended dividend payments, revealed its shrinking cash position ahead of the rescue efforts noted above.

FedEx earnings: A strong beat as logistics remain firm

FedEx reported Q3 revenue (ending 28 Feb) below estimates but adj. EPS at $3.41 vs $2.71 was much better than anticipated by investors. The FY EPS outlook at $14.60-15.20 vs previously $13-14 was driven effective execution of their cost cutting programme. FedEx sees air transportation networks as having the biggest headwinds as global logistics prices and capacity have stabilsed. Shares were up 12% in extended trading.

Rheinmetall and Vonovia earnings

Vonovia put out yesterday a disappointing funds from operations (FFO) outlook for 2023 at €1.75-1.95bn vs est. €1.98bn suggesting that the cash flow situation is adjusting to the new operating environment in real estate following the much higher interest rates over the past year. Rheinmetall reported yesterday very strong results with the fiscal year operating margin outlook at 11.8% vs est. 11.4% bolstering sentiment among investors.

US jobless claims fall back below 200k

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 last week’s data still shows a tight labor market, focus will remain more on the data from here as risks of contagion in the financial sector picked up.

EU proposes classifying copper and nickel as critical metals

A landmark legislation proposal was presented to EU lawmakers on Thursday which would classify copper and nickel as critical metals alongside other metals key to the green-energy transition, aerospace and defence. The new Critical Raw Materials Act could open the door to expedited permitting and financing of copper and nickel mining projects in the EU, as the bloc looks to boost domestic production and ease reliance on imports. Copper, the so-called king of green metals was not included in the original list from 2020 but was added given the need to support a steep increase in production over the coming years.

What are we watching next?

Fed expectations for next week in the spotlight post-ECB

Expectations of a Fed rate hike next week rose slightly and are nearing +20 basis points (I.e., increasing odds that the Fed hikes 25 basis points next Wednesday. Beyond next week’s meeting, the market has priced the rate to max out in May at +35 basis points (implied rate of 4.93%) followed by the rapid onset of a rate cutting cycle that has the Fed Funds rate priced at 4.15% by the December meeting.

Earnings to watch

There are no important earnings today, but looking ahead to next week our key earnings focus is Nike and Tencent. Analysts expect Nike to report 6% revenue growth for the quarter ending 28 Feb as the sports retailing market is adjusting to lower growth amid the fallout from inflation. Tencent is expected to deliver another quarter of no top line growth and EBITDA of CNY 42.7bn, down from CNY 47.3bn a year ago.

Next week’s earnings releases:

  • Monday: Sunny Optical Technology, PDD Holdings
  • Tuesday: RWE, Anta Sports, Partners Group, Nike
  • Wednesday: Tencent, China Telecom
  • Thursday: China Mobile, Accenture, General Mills, Darden Restaurants
  • Friday: China Merchants Bank, Meituan, China Petroleum & Chemical

Economic calendar highlights for today (times GMT)

1000 – Eurozone Final Feb. CPI

1315 – US Feb. Industrial Production & Capacity Utilization

1400 – US Feb. Leading Index

1400 – US Mar. Preliminary University of Michigan Sentiment

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