Global Market Quick Take: Europe – March 30, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Banking erased in prices

S&P 500 futures extended their momentum above the 50-day moving average as highlighted in yesterday’s QuickTake rallying 1.4% to hit the highest closing price 17 February erasing the losses caused by the banking crisis. This is extraordinary and highlight the strong sentiment there is still present in equity markets, but also the market’s reluctance to price in a recession. The index futures have continued to extend momentum this morning pushing towards the 4,100 level. There are no major US earnings today, so the driver today is technical flows and potentially a bit of impact from initial jobless claims later today expected to show a continued strong US labour market.

Chinese equities (HK50.I) and (02846:xhkg): Retreating with tech names leading the decline

Hang Seng Index slipped 0.5% and Hang Seng Tech Index lost 0.8% in the early Hong Kong afternoon session. Digital health platform names led the slide with Alibaba Health (00241:xhkg), JD Health (06618:xhkg), and Ping An Healthcare (01833:xhkg) plunging 3%-8%. EV names bucked the decline and were among the top gainers. PetroChina (00857:xhkg), surging over 6%, on an earnings beat and share buyback plan. The sentiment towards Alibaba (09988:xhkg) remains buoyant and shares of the e-commerce giant continue to advance for the second day following the reorganization plan. In A-shares, CSI300 edged up 0.2%. Semiconductors, lodging, and tourism outperformed.

FX: Yen retreats ahead of year-end as the safe-haven bid fades

As the fear of a US banking crisis subsided, the safe-haven bid for the Japanese Yen faded. Japanese corporate forex flows increased, as it is approaching the Japanese fiscal year-end on Friday. USDJPY jumped over 1% to 132.50 and EURYEN surged to 143.65. AUDJPY climbed to as high as 88.83 overnight before paring some of the gains to trade at around 88.65. Elsewhere in FX, action is very muted, although the Swedish krona jolted lower on the largest every drop in year-on-year Retail Sales volumes, with a –9.4% drop recorded in February as inflation bites.

Brent Crude oil finds resistance at $80

Crude oil continued higher on Wednesday with Brent reaching $79.70 and WTI $74.35 before profit taking emerged, especially following the weekly US stock report which despite showing the biggest reduction in crude stocks this year nevertheless helped attract some selling as momentum stalled. Gasoline stocks was at their seasonal lowest level since 2014 while distillate demand was at the weakest seasonal level since 2016, pointing to weakness in trucking and manufacturing. In a monthly survey published by the Dallas Fed, shale oil basin executives said the “uncertainty of the depth and duration of bank crisis is causing us to be nervous about capital spending plans in 2023”. In addition to access to credit, record costs from a shortage of labor and supply chain issues have led to a slowdown in production growth. Support in Brent at $77.45 and $76.

Gold tied in a range awaiting Fridays US inflation update

Gold traded withing a 16-dollar range on Wednesday, the tightest in almost three weeks as traders and investors await further directional input with the next major event being Friday’s US PCE print, the Fed’s preferred measure of underlying price pressures. An easing of banking sector fears this week has allowed some profit taking to emerge as risk-on boosted equities and reduced safe haven demand while also increasing the focus on the large disconnect between market and Fed expectations of the direction of rates. As the banking crisis ease inflation above target may trigger fresh rate hike expectations. On the upside, $2000 remains to be the key level to watch, while support is seen at $1933, the 38.2% retracement of the recent runup to $2000.

Treasuries oscillate in a mixed session

Treasuries had a mixed session with the 2-year yield rising 2bps to 4.10% and the 10-year yield dropping by 1bp to 3.56% on Wednesday. Volume was low. The strong rally in equities and a poorly received 7-year auction weighed on the front end to the belly of the yield curve. US PCE Inflation for February is up tomorrow.

What is going on?

Technology leaders call for six-month pause on the training of more powerful AI systems

More than 1,100 people have now signed an open letter calling for a six-month pause on the training of AI systems more powerful than OpenAI’s GPT-4. The signatories, which include tech leaders Elon Musk and Steve Wozniak, and AI experts Stuart Russell and Yoshua Bengio, warn that the technology could “pose profound risks to society and humanity.” The warning call from the tech and AI communities comes amid growing concerns from Europol regarding the criminal applications of ChatGPT. Earlier this month, the OpenAI team debuted its most advanced language model system to-date, GPT-4, whose training data remains a mystery. Notably, nobody from the OpenAI team signed the open letter, according to a report from TechCrunch, nor has anyone from Anthropic, an AI safety and research firm. (Source: Quartz)

ECB’s Schnabel: no signs of EU depositor flight, but pick up in money market interest

ECB governing council member Isabel Schnabel said she sees no evidence of a general depositor flight from EU banks but has seen a pickup in flows into time deposits. She said that the recent bank turmoil could have a disinflationary impact, but that EU banks are resilient and there would likely be less impact into the Euro Zone from the situation than in the US.

H&M earnings: Significant Q1 operating income beat

The Swedish fast fashion retailer reports Q1 operating income of SEK 725mn vs est. loss of SEK 1bn as gross margin improves to 47.2% for the quarter against 45.8% expected. March revenue in local currencies is expected at around 4% y/y as the fashion industry is hit by a decline in volumes like so many other industries as household budgets are squeezed due to inflation. H&M expects to reduce the store network by net 100 stores in the current fiscal year.

The grain market awaits key reports on stocks and planting intentions.

On April 1 the USDA will release its 2023 Prospective Planting and Q1 stock reports. The planting report is the government's first attempt to gauge which crops farmers will be planting in the coming season. If trade estimates are met farmers will plant the most wheat in 7 years while Q1 stocks will be the lowest in 15 years and corn in 9 years. The cotton acreage is expected to be cut by +19% and together with reductions in other small crops such as barley and oats it has made room for more planting of the bigger crops. Wheat traded in Chicago reached a one-month high on Wednesday at $7.24, before running into profit taking, after Cargill said it would take a further step back from the Russian market. In addition, speculation about a temporary halt in Russian wheat and sunflower exports continues to create nervous market conditions.

US considers tightening regulations over mid-size banks

During his 2-day appearance before the US Congress, Fed Vice Chairman for Supervision, Michael Barr expressed support for tighter capital and liquidity requirements on midsize banks with assets between USD 100 billion and 250 billion. Meanwhile, the Wall Street Journal reports that the White House is planning to call for stricter regulations from the Fed and other government agencies, including tighter capital and liquidity rules and stress tests.

US FDIC considers making large banks pay more for deposit insurance.

A Bloomberg article notes that the US lawmakers want to shield smaller banks from the costs of a draw on the FDIC’s deposit insurance fund, so the regulatory agency is considering charging the large US banks the $23 billion needed to shore up the deposit insurance fund after the recent turmoil.

Taiwan’s president Tsae Ing-wen in US

Taiwan’s president Tsae Ing-wen spoke late yesterday in New York, saying that Taiwan is at the “front-lines of democracy” and as a Bloomberg article paraphrased here speech, that the “security of the world hinges on the self-ruled island’s fate.” She will wrap up her visit today before traveling elsewhere in Latin America before swinging back through the US on her way back home in two weeks, with a meeting reportedly scheduled with US House speaker McCarthy. Recall the dramatic Chines response to then House speaker Pelosi’s visit to Taiwan last year, which triggered extensive military drills off Taiwan. The Biden administration is trying to play down the significant of Tsae Ing-wen's visit.

What are we watching next?

Initial Claims expected to stay below 200K, PCE inflation up tomorrow.

The next key data point to watch is the initial jobless claims today before the PCE tomorrow. The market consensus as per the Bloomberg survey is expecting it to tick up to 195K but still below 200K. The GDP report today is the third revision and is not expected to surprise. The PCE core inflation readings will be in focus tomorrow after the January data showed core inflation higher than expected at +0.6% MoM and +4.7% YoY. Consensus expectations on tomorrow’s core PCE inflation prints is +0.4%/4.7%.

Earnings to watch

H&M is our European earnings focus today (see earnings review above).

• Thursday: Kweichow Moutai, Great Wall Motor, H&M

Economic calendar highlights for today (times GMT)

0700 – Spain March CPI

1200 – Germany March CPI

1230 – US Initial Jobless Claims

1430 – EIA's Weekly Natural Gas Storage Change

1900 – Mexico Rate Decision

1240 - Sweden Rikbank's Bunge to speak on financial stability

1700 - US Fed's Kashkari (Voter 2023) to speak

2330 - Japan Tokyo Mar. CPI