Financial Markets Today: Quick Take – April 5, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - strong session yesterday in S&P 500 futures, but momentum has stopped in early European trading with S&P 500 futures trading around the 4,575 level with the 4,600 being the key resistance level to watch on the upside. We continue to maintain a defensive stance on equities given inflation pressures, rising interest rates, rising financial conditions, a tough month ahead in the war in Ukraine, and the beginning of riots in developing countries.

Hang Seng (HK50.I) and China’s CSI300 - Chinese exchanges are closed for public holiday today. Overnight in the US equity market, Chinese ADRs continued their surge higher after the China Securities Regulatory Commission’s (CSRC) jointly consultation document with other relevant regulators in China issued last Saturday to solicit opinions from the public about proposed revision of the Chinese law to allow foreign regulatory entities’ access to audit work papers and carry out instigations. The proposed rare concession to foreign regulators, which is yet to be codified, may represent bigger picture signal that that the Chinese Government is willing to pull many stops to prioritize economic and financial stability in 2022.

Stoxx 50 (EU50.I) – sentiment in European equities improved yesterday and continues to improve today with Stoxx 50 futures trying to extend yesterday’s rally, and this is despite the Eurozone Sentix Investor Confidence figures for April yesterday reporting weaker than expected figures. Stoxx 50 futures are trading around the 3,875 level with the 50-day moving average at 3,922 being the key level to watch on the upside. Stoxx 50 futures have not been above the 50-day moving average since 10 February.

USDJPY and JPY crosses – The JPY jolted slightly stronger overnight on remarks in the Asian session from Bank of Japan governor Kuroda, who answered questions before parliament overnight. He noted that that the “moves in foreign exchange seem somewhat rapid.”. This is seen as evidence that the Bank of Japan does not like the pace of recent JPY depreciation, even if it has commented in the recent past that a weak JPY still benefits the Japanese economy. The USDJPY exchange rate most likely won’t be tested significantly to the upside (critical cycle high just above 125.00), however, until or unless long global bond yields rise to new highs for the cycle, given the Bank of Japan’s cap on 10-year Japanese Government Bond yields. The 10-year treasury yield, for example, is trading mid range since peaking above 2.50% early last week.

AUDUSD and AUD pairs – the Australian dollar ripped higher in the Asian session on a more hawkish tilt than expected in the Reserve Bank of Australia statement, that boosted short Australian rates back toward cycle highs. The statement removed the word “patience” in describing the board’s stance on the wait for removal of policy accommodation as it still maintains a 0.10% policy rate. The language in the statement still suggests that growth conditions may not be sufficiently robust to keep inflation in the desired 2-3% target band, and there is still the focus on wages as the key for a more significant factor in sustaining inflation. AUDUSD jumped above the 0.7556 pivot high from last October and traded above 0.7600. The next chart focus is likely the early 2021 high just above the round 0.8000 level, and the near 7-year high above that is 0.8136. Australia can boast of a wealth of commodity exports that have driven a significant revaluation of its currency – particularly against economies reliant on commodity imports, like Japan and Europe.

Crude oil (OILUKJUN22 & OILUSMAY22) trades higher for a second day as the strong bounce from key support at $102.50 in Brent continues. The attention has turned from the price negative impact of barrels being released from strategic reserves and a lockdown-related slowdown in Chinese demand to the prospect for fresh sanctions against Russia, potentially containing curbs on energy, being rolled out after withdrawing Russian troops were accused of having committed atrocities against Ukranian civilians. In addition to Russia, several other OPEC+ members are currently struggling to reach their production quotas. Some resistance can be expected around $110 in Brent.

Wheat traded in Chicago (WHEATMAY22) and Paris (EBMK2) continue to bounce after hitting a one-month low on the prospects for more sanctions on Russia. Worries about supply from the Black Sea region helped drive prices to record highs last month and in addition to the risk to Russian supplies, Ukraine’s agriculture minister has said 3.5 million hectares of farmland cannot be planted, and that exporting crops is challenged as Russian troops have cut off routes to export terminals on the coast. Worry about severe global food shortages is ongoing amid the uncertain export outlook for Russia and as Ukraine works with neighboring nations to find alternative routes for its grains.

Copper (COPPERUSMAY22), the so-called king of green metals, trade near a one-month high at $4.8150 after Chile, the world’s largest producer of the metal, reported a 7% year-on-year decline to 399,817 tons in February. This follows a drop of 7.5% year-on-year in January. In addition, copper has also enjoyed the tailwind from strength in other industrial metals, the latest being zinc which reached a 2006 high on Monday. Together these developments have offset lockdown-related growth concerns in China and flattening yield curves elsewhere also pointing to lower growth in general.

What is going on?

Inflation nightmare in Turkey. It was out at 61 % year-on-year in March – a new post-2002 record. In the details, food prices surged 70 % and transportation costs 99 %. Interest rates are 47 percentage points below inflation – by far the widest gap among major economies.

Peru declares curfew due to inflation protests. Yesterday, we highlighted Sri Lanka as the canary in the coal mine in terms of impact on frontier economies from the food and energy crisis. Today, we observe cracks in Peru and the crisis mode will spread to many other countries within the next six months.

Elon Musk acquires a passive 9.2% stake in Twitter becoming biggest shareholder. Shares rose 27% on this news with market betting that the future is brighter with Elon Musk as a shareholder, but the question is whether it changes anything for Twitter. The next key catalyst to watch for Twitter is its earnings release on 29 April 2022. Also consider Twitter’s earnings are slowing. The market thinks Twitter’s revenue growth will slow from 37% in 2021 to just 18% revenue growth in 2022.

Eurozone Sentix investor confidence index falls further than expected. It was out at minus 18 in April versus expected minus 9.35 and previous minus 7.0. The drop is partially explained by the Ukraine war and expectations that the European Central Bank will not be able to do much to fight against inflation, at least in the short-term. This is another disappointing data for the eurozone.

SNB weekly sight deposits increased by 5.7bn CHF. This is the largest increase in almost two years. This seems to indicate that the Swiss central bank has been intervening to mitigate CHF appreciation.

What are we watching next?

US March ISM Services Index is out later today after February saw a sharp deceleration to 56.5 from a string of prior readings above 60, including record highs at the end of last year in the near 25-year history of the survey. The services sector dominates US growth and bears watching for the impact of falling real incomes on activity as inflation has outstripped wage gains.

Xi-Zelenskiy call? Speculation is rising that China’s Xi Jinping could speak directly with Ukraine’s president Zelenskiy for the first time since Russia invaded Ukraine in late February after top diplomats in both countries held a call yesterday.

India’s bonds continue to wait to be admitted to global bond indices. FTSE Russell will continue to keep Indian government bonds on its watch list for possible inclusion into its emerging markets debt index. India’s bonds are also under review for inclusion by JPMorgan. India’s inclusion into global bond indexes would lure around $40bn of inflows into the country’s debt market.

Earnings Watch. No earnings are released today. Tomorrow our earnings watch will focus on Chr Hansen which produces cultures, enzymes, and probiotics, and is experiencing unprecedented input cost pressures. Analysts expect revenue growth of 9.2% y/y and EPS growth of 9.8% y/y reflecting rising profitability, which we think may prove too optimistic.

• Wednesday: Hengli Petrochemical, Cathay Biotech, Levi Strauss, RPM International, Chr Hansen
• Thursday: Seven & I, Bank of Ningbo, Guosen Securities, Huali Industrial Group, Industrivärden, Conagra Brands, Constellation Brand
• Friday: Aptiv, AECC Aviation Power, Aeon, StarPower Semiconductor, Yaskawa Electric, PPD, Acceleron Pharma

Economic calendar highlights for today (times GMT)

• 0715-0800 – Euro Zone Mar. Final Services PMI
• 1230 – US Feb. Trade Balance
• 1230 – Canada Feb. International Merchandise Trade
• 1400 – US Mar. ISM Services
• 1405 – US Fed Vice Chair Brainard to speak
• 1630 – US Fed’s Daly (non-voter) to speak
• 1800 – US Fed’s Williams (voter) to speak
• 0145 – China Mar. Caixin Services Index

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