Financial Markets Today: Quick Take – May 16, 2022
Saxo Strategy Team
Summary: The strong close on Wall Street Friday has not brightened the mood for the start of this week, as China reported far worse than expected GDP data that soured sentiment overnight. In other news, the global food supply concerns have ratcheted higher as the second largest wheat grower, India, has shut off exports of the food after a recent heat wave has damaged its crop. And in precious metals, the gold rally has fully broken down through all major supports as the strong USD tightens liquidity on virtually everything.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities rose into the close on Friday with the S&P 500 futures closing above the big 4,000 level, but they are already retreating this morning trading below 4,000 again with the news of a major wheat export ban from India due to a failed harvest putting more pressure on inflation and food costs. Our view has not changed much on equities. We remain defensive and believe investors should fade every short-term rally. Inflation will continue to put pressure on central banks to tighten financial conditions even more from current already tight levels. Commodities are still by far the most critical asset class to get exposure to in your asset allocation portfolio.
Mainland China and Hong Kong stocks pared early gains on weak China data. Hang Seng Index (HSI.I), Hang Seng TECH (HSTECH.I) and CSI300 (000300.I) opened higher on news that China has cut the mortgage interest rate floor for first-home buyers and on optimism that a gradual lift of lockdowns in Shanghai will brighten the outlook. But markets lost momentum on weak Chinese data releases (more below).
Stoxx 50 (EU50.I) - European equities continued higher on Friday driven by a big sentiment shift in US equities, but Stoxx 50 futures are pushing lower today with the 3,600 level being the big support level to watch. Higher wheat prices (limit up today) could add more pressure on European households and negatively impact consumer confidence.
USD pairs – the US dollar was pushed lower on Friday as the currency seems to be the great liquidity indicator of the moment and correlates with swings in risk sentiment. Interesting to note to start this week that it has jumped aggressively back higher versus riskier currencies, like AUD (especially due to weak Chinese economic data) but that the Japanese yen is outperforming (more below) as safe haven US treasuries caught a bid to start this week after a modest sell-off. For EURUSD, watching the 1.0341 low from 2017 for whether the path to parity and lower opens up from here.
JPY pairs – at times in recent sessions, the JPY has served as an even higher beta currency to risk sentiment than the US dollar, likely because safe haven sovereign bonds have shown fitful signs of reverting to their old behavior as safe havens when the market is suffering a general deleveraging event. Watching whether the sell-off in JPY pairs since the outbreak of the war in Ukraine comes fully undone in coming sessions if yields at the long end of the US Treasury yield curve continue to push lower. GBPJPY has already broken back below its mid-February high, while EURJPY has teased a similar move (the 132.50-133.00).
Gold (XAUUSD) trades back to unchanged on the year after suffering the biggest weekly fall in almost a year. The relentless rise of the dollar and the markets belief in the FOMC’s ability to bring down inflation has reduced gold’s appeal and it culminated last week with a drop to a three-month low at $1800. The recent weakness was led by silver (XAGUSD) partly being dragged down by weakness across industrial metals. The loss of momentum and price weakness during the past few weeks had by last Tuesday reduced the hedge fund long to a three-month low and down 58% from the March peak. Gold remains technically challenged with a break above its 200-day moving average at $1838 needed for that to change.
Crude oil (OILUKJUL22 & OILUSJUN22) trades lower after dismal economic data out of China highlighted the price the country is paying for the government’s Covid Zero policy, with industrial output and consumer spending falling to the worst levels since the pandemic began in 2020. Brent crude oil remains rangebound within a $100 to $114 range with tight supply and sanctions against Russia being offset by global growth worries, led by China where crude oil processing last month slumped to the lowest level in two years. While US gasoline futures hit a record last week, Iran teasingly has been out saying it can double oil exports if the market needs it.
US Treasuries (TLT, IEF) – US treasury yields rose Friday on the sudden improvement in risk sentiment but have faded back lower as Asia has stumbled out of the blocks to start this week on ugly Chinese economic data. Every quarter-percent marker on the 10-year yield benchmark graph has seen sticky price action – so 3.00% is support and the next resistance levels are 2.75% and then 2.50% (the benchmark trading this morning near 2.90%).
What is going on?
Weaker than expected Chinese economic data out overnight. China’s latest economic data spooked sentiment overnight, as April Industrial Production was recorded down –2.9% year-on-year vs. +0.5% expected, and April Retail Sales were down –11.1% YoY vs. -6.6% expected. The Surveyed Jobless Rate rose to 6.1% in April vs. 6.0% expected and 5.8% in March. Residential property sales were down 32.2% YoY. The impact of Covid lockdowns amidst China’s zero Covid policy is clear, although an easing of the Shanghai lockdowns is currently ongoing.
Wheat (ZWN2) jumped by the exchange limit of $12.475 overnight after India over the weekend moved to restrict exports, thereby adding further risks to an already tight global market. Just a few weeks ago the market had expected exports this year would almost double from last year’s record 8 million tons, but a record-breaking heatwave during the past month has parched the crop during a crucial period, driving expectations for a slump in yields. Last week the USDA lowered its forecast for US wheat production by more than expected while war-hit Ukraine could see its production and exports slump to the lowest since 2012/13. In addition, European growers have already been struggling with warm and dry weather this early in the season, raising concerns about the output from the world’s top exporter. Adding to all this the dollar, which has risen by close to 10% this year, and the pain for key emerging market buyers of wheat is clear for all to see.
Is Musk looking for an escape route? As we alluded to a couple of times last week on our daily Saxo Market Call podcast the relentless decline in technology stocks was putting pressure on Musk’s acquisition of Twitter as his premium looked more and more outrageous. Over the weekend, Elon Musk said the deal is on hold until verification of the size of bots on the social media platform, and Twitter followed up saying that Musk violated his NDA revealing the bot sample size. In any case, the deal looks fragile at this point.
Downbeat US consumer sentiment. The preliminary US May University of Michigan sentiment survey showed the Current Conditions reading drop to a new cycle low of 63.6, a bad miss relative to the 69.6 expected. The reading was only worse for three months during the financial crisis of 2008-09. Expectations fared poorly as well, with a reading of 56.3 vs. 61.5 expected. The longer term inflation expectations component was stable at 3.0%.
German Social Democrats suffer historic defeat in regional election in North Rhine-Westphalia, the most populous German state. The SPD polled at 27.1% according to exit polls, down over 4% from 2017, while the CDU won almost 36%, up about 3%, and the Greens advanced from 6 to 18%.
What are we watching next?
Status of crypto market as a sign of weak liquidity conditions: The cryptocurrency market survived last week’s volatility event after “stable” coin TerraUSD was blown up and the largest stable coin Tether suffered its worst challenge with parity since late 2020. Bitcoin broke down well through 30k, but the subsequent rally has failed to carry the price action away from that level, and the crypto space shows a near one-to-one correlation with US equities, which suggests that crypto assets offer no diversification. Stable coins stability and renewed break-down risk remain concerns until that asset class shows a life of its own.
Official NATO application from Sweden and Finland. The is a major political event as it ends 200 years of Swedish neutrality and Russia has already reacted by cutting electricity to Finland (around 10% of the country’s consumption but can easily be filled by Sweden and the Baltics) and generally threated NATO with consequences. It seems all NATO countries are favouring to include Sweden and Finland the defense alliance except for Turkey with Erdogan commenting over the weekend that the two countries are housing Kurdish terror organisation.
Earnings Watch. The worst earnings season since the bottom during the early phase of the pandemic is coming to an end. Data confirms that revenue growth is slowing down and earnings lower due to margin pressure from commodities. This week will be dominated by large Chinese earnings from Meituan, JD.com, Tencent, Trip.com, Xiaomi, and DiDi Global.
- Monday: Meituan, Ryanair, Recruit Holdings, Take-Two Interactive
- Tuesday: 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)
- 0840 – ECB's Lane and Panetta to speak
- 1200 – Poland Apr. CPI
- 1215 – Canada Apr. Housing Starts
- 1230 – US May Empire Manufacturing
- 1255 – US Fed’s Williams (voter) speaking
- 1300 – Canada Apr. Existing Home Sales
- 1415 – UK Bank of England Governor Bailey and other MPC members to speak
- 0130 – Australia RBA meeting minutes
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