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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities suffered another weak session yesterday as Q1 earnings season is set to kick off tomorrow and with weak sentiment largely driven by the continued rise in treasury yields and inflation concerns ahead of today’s CPI release (more on that below). The Nasdaq 100 index is approaching the major 61.8% Fibonacci retracement level at 13,831, a break of which could usher in a full test of the 12,942.5 low. The less yield-sensitive &P 500 index is farther above its respective 61.8% retracement level (4,299) but yesterday saw a broad sell-off that took the index to a new 17-day low close.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) rallied 0.9% and 1.2% respectively after the lunch break following market talks that the Chinese authorities were encouraging majority shareholders to buy shares of their companies. In the morning, positive news from China about new online game approval the first time since the sector being cracked down last summer, finetuning to moderate the lockdown measures in Shanghai, better than expected credit growth and the State Council’s pledge to remove unwarranted restriction on transporting essential goods have set a positive market backdrop but failed to excite investors other than some strong buying on online entertainment stocks.
Stoxx 50 (EU50.I) –the Stoxx 50 is somewhat behind other global indices in absorbing the bout of weak risk sentiment, as the cash session closed before most of the grinding down equity averages elsewhere, starting in the US session yesterday. The future is trading to multi-week lows this morning and near the 38.2% retracement level of the enormous rally off the spike lows posted in the wake of Russia’s invasion of Ukraine. The next levels are 3,626 (50%) and the important 3,551 (61.8%).
EURUSD and EUR pairs – the Euro trading heavily and not far from the cycle low of 1.0800, with the USD side of the pair watching US yields and the reaction to the US March CPI print today (more below). The euro was recently pushed lower by some ECB members insisting on maintaining the two-way potential for policy should growth stumble so badly due to the pressures on the EU economy that inflation eases – but for now, the concerns of soaring inflation predominate, while the ECB is clearly also worried that raising rates will push peripheral spreads higher, as a report was out Friday indicating that the central bank is developing a plan in the event that bond yields in weaker EU countries spike. Could we see the ECB sounding a bit more hawkish than expected at Thursday’s meeting, while also gearing up to keep spreads orderly (via limited QE or balance sheet management??) EURUSD cycle support at 1.0800 looks critical, with the ECB needing to go long a bit of credibility on its intent to start hiking rates sooner rather than later for this support to survive.
USDCAD is in the process of an interesting technical test in the 1.2650 area, which is the half-way point from the early March high after the panic selling in the wake of the Russian war in Ukraine to the subsequent lows near 1.2400. It is also just above the 200-day moving average in the low 1.2600’s The USD side of the pair will likely be swayed today by swings in risk sentiment and US yields today in the wake of the US CPI release, but CAD will watch for whether the Bank of Canada delivers the expected 50 basis point hike at tomorrow’s BoC meeting (largest rate increase since 2000) and how hawkishly it guides on further rate increases as it has a head start on the US Fed As with Australia, Canada’s significant commodity exports have dragged the country’s trade balance out of the deep deficit of recent years and solidly into the plus column.
Gold (XAUUSD) the gold price action has been a regular game of Whack-a-mole as the precious metal first challenged resistance yesterday at 1,966 only to stumble again back toward 1,950, although it is rebounding again in early European hours back toward that 1,966+ resistance, which is the key one ahead of the psychologically important 2,000 level. It is hard to wax bearish on gold when inflation concerns dominate, but rising yields have provided a head-wind.
Crude oil (OILUKJUN22 & OILUSMAY22) Brent crude once again challenged the important 100 dollar/bbl area yesterday before rebounding late yesterday. This seems the latest battle zone ahead of the sub-95 dollar lows from mid-March. The front contract has settled some 20 dollars lower from the late March highs (not the even higher spike highs from earlier in the month) as Covid lockdowns continue to drive demand worries in China, while massive global reserves releases are increasing short-term supply. It is telling that if we zoom out and have a look at the December 2023 contract, prices are actually above the late March highs, if slightly below new highs that were posted earlier this month.
US Treasuries (IEF, TLT) and European Sovereign Debt. The treasury yield curve continues to steepen sharply after the brief inversion of the classic 2-10 portion of the yield curve at the start of this month, an expression, perhaps, that the Fed remains behind the curve on getting ahead of inflation and/or that a fresh surprise to the upside in the US CPI today (and PCE inflation number released ahead of the May 4 FOMC meeting) will drive a more powerful reduction in the Fed’s balance sheet.
What is going on?
NVIDIA (NVDA:xnas), sold off over 5% yesterday, taking it close to the major range low of 206.50. This former high-flyer posted a high just shy of 350 last November. The equity price has been closely correlated with crypto prices as its chips and card are associated with crypto-mining applications, but a prominent analyst at equity research house Baird cut the rating on the stock to neutral yesterday on concerns for the demand outlook.
Wheat (WHEATMAY22) and aluminum are the new commodities to watch as oil volatility continues. Wheat continues to gain interest because of weather concerns and the supply from Ukraine has been cut off. Aluminum, on the other hand, has been in a decline because of China demand drop while the output is rising. Aluminum was down 3.75% to 2-month lows, overall down 6.75% in the last 1 month. Important stocks to watch in Asia will be Alumina (AWC) and South32 (S32) in Australia, Nippon Light Metal (5703) in Japan, Yunnan Aluminum (000807) as well.
China approved new online games for the first time since last July. China’s National Press and Publication Administration (NPPA) announced the approval of 45 new online games. This was the first time that the NPPA approved new online games since it was suspended from July last year. The move might signal that the Chinese authority is moving towards moderating its crackdown on the industry.
Honda (7267) plans to spend $40 billion on developing EVs. Honda plans to launch 30 EV models globally by 2030 with production volume of more than 2 million vehicles a year. The China market will remain a key target, where 2 models are set to go on sale this year. Honda also pledged that all models it introduces in China after 2030 will be electric and announced plans for several dedicated EV production plants in the country.
What are we watching next?
US March CPI release today and market reaction, particularly in US Treasuries This CPI release was already important, but a bit of extra anticipation is baked in today after the White House yesterday warned that the inflation reading will be “extraordinarily elevated”. Consensus expectations are looking for a massive +1.2% month-on-month headline reading for the CPI and a 40-year high of 8.4% for the year-on-year print, with the “ex Food and Energy” release expected at +0.5%/+6.6%. A particularly high spike could see the markets once again resetting the goalposts on what the Fed might do at the May 4 FOMC meeting.
Reserve Bank of New Zealand (RBNZ) meets tonight: guidance important as market pricing so much into forward curve. RBNZ is set to raise the official cash rate a fourth straight meeting on Wednesday to 1.25%. Inflation is at 30-year highs. Upward bias in AUDNZD remains given the demand in resource-rich Australian assets, although China-linked demand concerns have capped the late up-trend. Still, Australia’s business data continues to hold up for no
Ukraine war developments as Polish PM warns of coming largest tank battle since WWII. The US Pentagon is concerned that the war is set for a “more protracted and a very bloody phase.”
Earnings Watch. The Q1 earnings season kicks off in earnest this week with the usual blast of US mega-banks paving the way, starting on Wednesday. The more Main Street-oriented Wells Fargo bank will be interesting for a check-up on credit demand, and Citigroup’s global and EM-reach is another angle worth watching this week for guidance.
- Wednesday: Tesco, JPMorgan Chase & Co, BlackRock, Fastenal
- Thursday: China Northern Rare Earth Group, Fast Retailing, Ericsson, UnitedHealth, Wells Fargo, Morgan Stanley, Goldman Sachs, Citigroup, US Bancorp, PNC Financial Services, Coinbase, State Street
- Friday: Hangzhou Hikvision Digital
Economic calendar highlights for today (times GMT)
- 0900 – Germany Apr. ZEW Survey
- 1000 – US Mar. NFIB Small Business Survey
- 1230 – US Mar. CPI
- 1610 – US Fed Vice Chair Brainard to peak
- 2300 – US Fed’s Barkin (non-voter) to speak
- 0030 – Australia Apr. Westpac Consumer Confidence
- 0200 – New Zealand RBNZ Official Cash Rate
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