Summary: The Bank of Japan announced that it is doubling down on its existing policy of capping 10-year Japanese government bond yields and will intervene daily in unlimited auctions to defend its cap. This set loose an explosion higher in the Japanese yen, a move that was partially matched by a fresh surge in USDCNH. Are we set for a USD strength crisis? Elsewhere, US equities managed to pull back from the brink again, with less-bad-then-feared Meta results driving an after-close rebound.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Nasdaq 100 futures were struggling yesterday to make a powerful rebound move closing just above the 13,000 level, but earnings releases from Meta and PayPal have lifted sentiment. Nasdaq 100 futures opened higher at 13,191 and must get into Monday’s intraday range to remain bullish in terms of whether this rebound has more legs in short-term.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - In addition to President’s Xi’s push yesterday for more infrastructure spending, we also had the Standing Committee of the State Council pledged to stabilize employment and the economy as well as the smooth operation of transportation and logistics with a series of measures including waiving taxes on delivery platforms and RMB100 billion loans to support the transport and logistics industries. E-commerce names, Alibaba and JD.COM gained 2% but Meituan fell 1%. Hang Seng Index gained 0.8% while CSI300 fell modestly. The renminbi (CNH) weakened to 6.646, following the Japanese Yen which fell as the BoJ kept its extremely loose monetary policy unchanged in today’s meeting.
Stoxx 50 (EU50.I) - Stoxx 50 futures are continuing their rebound trading around the 3,695 level in early European trading hours trying to get back into the previous trading range. We are still seeing growing risks from inflation, cost of living crisis in Europe, falling consumer confidence, war in Ukraine, and Chinese supply constraints weighing on European equities for some time.
USDJPY – The JPY was torched overnight in the wake of the Bank of Japan decision to double down on its existing policy mix of unlimited defense of its yield-curve target, under which it maintains a cap on 10-year Japanese government bonds, with an announcement overnight that the BoJ will defend this level with unlimited operations daily, effectively meaning that the Bank of Japan is willing to lose control of the size of its balance sheet and any further rise in global yields will likely see continued pressure on the Japanese yen. USDJPY traded to new, 20-year highs just shy of 130 into early European hours and any further rise in US yields at the long end of the curve could drive USDJPY to 150 or higher until market pressure/volatility or the Japanese government forces the Bank of Japan down from its policy. The Bank of Japan did change its forecast for inflation to +1.9% for this fiscal year (through March 2023) from 1.1% but sees it weakening to 1.1% for the following year.
USDCNH is on the move again after the modest recent pause in its sharp weakening move begun last week. A good portion of the pressure likely stemmed from the huge USDJPY move overnight, which has the USD sharply higher versus all Asian currencies. The USDCNH rate rose about 1% to a new high since late 2020 above 6.645. The eventual focus, should the USD broadly strong, could be on the 7.00 area, which is now the same distance away as the early 2022 low.
Gold (XAUUSD) trades at a two-month low driven by relentless dollar strength. Yesterday both the euro and sterling hit multi-year lows and overnight the JPY trades down by more than 1% (see above) leading to technical selling below previous support at $1890. Year-to-date gold has gained 2.5% against the dollar and 11% versus the euro. In addition, the market remains nervous ahead of next week’s FOMC meeting. Silver (XAGUSD), hurt by dollar strength, and worries about the economic outlook, continue to weaken against gold with the ratio hitting 81.42 overnight. Below the November high at $1876, the next area of support may emerge below $1850 towards the 200-day moving average at $1835.
Crude oil (OILUKJUN22 & OILUSJUN22) remains stuck in a volatile trading range with dollar strength, global growth worries, continued lockdowns in China and US SPR releases being offset by the loss of Russian barrels and supply disruptions in Libya. EIA’s weekly stock report had a limited impact with a small build in crude stocks being supported by a net increase in imports and a near 3-million-barrel injection from strategic reserves. Brent is tracking the 21-day moving average lower with resistance today at $105.90 with an area of support seen between $100 and $98.
US Treasuries (IEF, TLT) weakened sharply yesterday, pulling US yields back higher, with the focus if the sell-off continues on the high yield for the cycle just below 3.00% for the 10-year benchmark (2.82% this morning). The 5-year treasury auction was slightly weak yesterday, with a 7-year auction later today.
What is going on?
The Bank of Japan doubled down on its yield-curve-control policy at its policy meeting overnight and the bottom drops out of the Japanese once again, with the move unleashing a fresh torrent of USDJPY and USD buying more generally as the USDCNH moved sharply higher as well in Asia overnight. More above in the USDJPY and USDCNH comments.
Soybean oil futures in Chicago (ZLN2) trades at a record high as Indonesia’s sweeping ban on palm oil exports and rationing of sunflower oil at supermarkets in Europe further stretches global supplies of edible oils. Export restrictions for palm oil used in everything from cooking to cosmetics and fuel will stay in place until domestic prices ease. Indonesia President Joko Widodo has said the palm oil export can be lifted once domestic demand has been met, and given the Indonesia consumes only one-third of its production, we should expect exports to resume once inventories are rebuilt and prices stabilize. The edible oils sector which according to the UN’s food index has risen by 56% during the past year is the hardest hit by weather woes and the war in Ukraine, the world’s biggest exporter of sunflower oil, and it is leading to food protectionism by producers, which inadvertently may boost prices further.
TotalEnergies increases buybacks after Q1 result. The French oil major sees profits triple on higher oil and gas prices promising investors to buy back own shares worth $3bn in first half. Investments this year are set to $15bn vs previously $14-15bn, so no indication of a major increase in investments.
Meta shares up 18% on Q1 earnings. EPS came in at $2.72 vs est. $2.56 and Q1 revenue was in line with consensus which given recent results from Alphabet and Snap a relief for investors. The Q2 revenue guidance was $28-30bn vs est. $30.7bn suggesting q/q growth but slowing, but it is clear from the market reaction (shares up 18%) that the market was more pessimistic than sell-side analysts. The results are impressive given the lack of tracking on iPhones following the latest changes by Apple that Meta has said would be negative for the company in selling ads. Reality Labs segment (the future metaverse bet) lost $3bn in Q1.
PayPal gains despite FY guidance cut. Q1 figures were in line with estimates and investors sent shares higher in extended trading despite the FY adj. EPS guidance $3.81-3.93 missed estimates of $4.62 suggesting investors were even more bearish. However, on the conference call management said the outlook could get worse and the company has removed its medium-term outlook.
Fortescue Metals, the world's 4th biggest iron ore producer delivered better than expected quarterly results, seeing its shares rise about 8% today in Australia, its biggest jump in 5 months. FMG’s iron ore shipments rose 10% in the March quarter, beating expectations and leading Fortescue to upgrade annual export guidance, to hit another record. What fuelled this was that Fortescue ramped up production of one of its projects. Last week, mining giant peers, BHP and Rio both reported a drop in iron ore shipments, compared to the previous quarter amid covid-related labour constraints and delays in project expansion. We expect labour shortage issues to be resolved later in the year.
What are we watching next?
Strong USD risks destabilizing global financial markets and even economies – eventual coordinated response? The spike in the US dollar risks aggravating already high volatility across global markets and comes before the Fed has even started reducing its balance sheet, a move that is expected at next week’s FOMC meeting. As the US dollar effectively remains global money, its sharp rise of late may have reached a destabilizing tipping point that eventually requires coordinated intervention. How much worse will the situation become before the central banks/governments respond and what form would the response take? One risk may be that the Fed sees the rising US dollar as benign because it eases inflationary risks for imports, and few are ringing the alarm bell on this important development, so the situation may have to escalate dramatically before a response is forthcoming.
US Q1 advance GDP estimate on the wires later today and PCE Inflation tomorrow. Annualised GDP is expected to come in at 1.0%, but some analysts are looking for a small decline after a 6.9% annualised growth rate in Q4. Underlying factors will be considered, as consumer and business sentiment remain strong while the yawning trade deficit and a decline in government spending are likely to weigh. Focus will shift to the core PCE inflation release on Friday, that being the measure of inflation preferred by the Fed.
Hangzhou started mass Covid testing while Shanghai’s cases fell for a fifth day. Hangzhou, a city in which many technology companies, including Alibaba are based, starts mass Covid testing today. Guangzhou cancelled over 90% of flights today after finding infected cases during regular testing of its staff. On the other hand, new cases in Shanghai yesterday fell for a fifth day to 10,662. There were 50 new cases reported in Beijing. The vice director of the Shanghai municipal heath commission indicated that the restriction on people in “districts with basically no community spready” would be somewhat relaxed.
Earnings Watch. Another important earnings day today with key focus on Apple, Amazon, Intel, and Caterpillar. Revenue growth is now negative q/q across S&P 500, Nasdaq 100, and MSCI World suggesting growth is slowing as prices are raised by companies and such we would expect revenue to grow.
Economic calendar highlights for today (times GMT)
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