What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Nasdaq 100 futures broke below the 12,455 level yesterday that we highlighted as a key support level, but in a sign of short-term strength the index futures pulled back ending the session above the prior day’s close. The move has brought Nasdaq 100 futures back into the consolidation range following the rebound that started two weeks ago. The key resistance level to watch on the upside is 12,894. The VIX Index pushed to its lowest level since late April closing at 24.02 and the US 10-year yield is still sitting around 3%.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
China’s National Press and Publication Administration announced the latest batch of approval of monetization licenses (banhao) for 60 new online games. China had stopped issued banhao since July last year amid a clamp down on the online gaming industry until the suspension ended in April with the approval of 45 banhao. Chinese gaming stocks surged, with Bilibili (09626) +15%, XD (02400) +5%, CMGE (00302) +4%. IGG (00799) +6%. While having been excluded from the two batches of approval, the share price of Netease (09999) still climbed 3% and Tencent (000700) was up 5%. Shares in Shanghai and Shenzhen traded higher initially but closed lower for the morning session. CSI300 (000300.I) was down 0.4%.
USDJPY and JPY crosses
The yen continued its near free-fall overnight, this time without the usual source of pressure on the currency, as global bond yields actually consolidated a few notches lower in yesterday’s trade. Today sees an auction of US 10-year treasury notes and USDJPY will likely remain very sensitive to the direction in longer US treasury yields, with the cycle high (and late 2018 high) near 3.25% an important focus. The cycle high from early 2000’s of 135.00 is the next upside technical focus, but there is likely to be no effective ceiling until either global bond yields are in firm retreat or the Bank of Japan caves on its commitment to capping JGB yields under its yield-curve-control policy.
The EURUSD has been coiling in a range between 1.0627 and 1.0787 for over two weeks and ahead of the ECB meeting tomorrow. The ECB has guided that it will wind down its QE purchases ahead of a rate hike July meeting. A more hawkish tone from many ECB officials of late has the market looking for a steeper pace of rate tightening thereafter, but how aggressively the ECB is ready to guide the market, especially with its latest staff projections on growth and inflation, is a key uncertainty. The meeting is likely to trigger a move out of the range.
Crude oil (OILUKAUG22 & OILUSJUL22)
Crude oil trades around $120 with focus on US oil and fuel inventories and recovering fuel demand as China’s major cities relax Covid-19 curbs, and ahead of an expected busy summer driving and flying season. Weekly figures from the American Petroleum Insititute showed rising inventories of crude as opposed to expectations of an EIA drawdown, while both gasoline and distillate stocks rose. In its monthly STEO report, the EIA left US 2022 production unchanged at 11.91m b/d while boosting the next year by 120k b/d to 12.97m b/d. In addition, they warned Russia’s production could drop by 18% by the end of next year. Refineries across the world are running at close to capacity to replace sanctioned barrels from Russia, and with supply being this tight, prices will likely need to go higher in order to kill demand, thereby balancing the market.
Gold has managed to hold above support in the $1843 area where the 21- and 200-day moving averages meet. This after the World Bank cut its forecast for global growth and a FED GDP tracker showed the US economy could be on the brink of recession (see below). Leveraged traders in futures and investors in ETF’s are currently showing no clear conviction with positions in both having been rangebound for the past month. Ahead of Friday’s key US CPI print, resistance at $1870 will likely curb the upside with continued inspiration until then being found in treasury yields and dollar movements.
Uranium miners jumped on Tuesday
Uranium miners jumped after the US administration pushed lawmakers to support a $4.3 billion plan to buy enriched uranium directly from domestic producers to wean the US off Russian imports. The US currently has only one remaining commercial enrichment facility and investments are needed, especially given the risk of Russia halting exports. The Global X Uranium ETF (URA:arcx) which tracks a broad range of companies involved in uranium mining jumped 6% with strong individual gains seen among major companies such as CCO:xtse, NXE:xtse, PDN:xasx, EFR:xtse, DML:xtse and UEC:xase.
What is going on?
FED GDP tracker shows the US economy could be on the brink of recession
A widely followed Federal Reserve gauge is indicating that the U.S. economy could be headed for a second consecutive quarter of negative growth, meeting a rule-of-thumb definition for a recession. In an update posted Tuesday, the Atlanta Fed’s GDPNow tracker is now pointing to an annualized gain of just 0.9% for the second quarter. Following a 1.5% drop in the first three months of the year, the indicator shows the economy doesn’t have much further to go before it slides into what many consider a recession.
UK Chancellor Sunak promises tax cuts at the fall budget announcement
The focus in Sunak’s comments is on cutting taxes for business at a time when those taxes were actually set for a rise to 25% from 19% currently. A pandemic-era tax incentive that provided 25% for every pound sterling invested in plant and equipment expired in April.
World Bank cut its global growth forecast
The World Bank has further downgraded its global growth forecast to 2.9% for 2022 from January’s prediction of 4.1% and April's 3.2%. Along with the cut to forecasts, it was noteworthy that the Bank also gave out a debt distress warning for the low- and middle-income countries, something we had been highlighting since the Sri Lanka crisis given the high dependence of frontier economies on energy and food imports. A similar warning was also seen from the IMF which called for countries to protect the poor.
Japan Q1 GDP revised higher
The final print of Japan’s Q1 GDP was upgraded but remained in contraction. GDP was down 0.5% q/q sa from -1.0% in the preliminary print. The revised data showed that private consumption increased 0.1% from the previous quarter, compared with a flat reading in the preliminary data. That is a positive sign, and we will possibly see more of that in Q2 as pent-up demand supports consumption. But a weaker yen and higher price pressures will weigh.
Inditex reports Q1 revenue above estimatesThe Spanish based fashion retailer reports better than expected Q1 revenue of €6.7bn vs est. €6.2bn while Q1 EBIT is in line with estimates at €1.03b. The retailer expects gross margin to be stable in 2022.
What are we watching next?
First round of the French parliamentary election on Sunday
Some polls suggest President Emmanuel Macron's centrist alliance may struggle to get a majority (289 seats) in the new National Assembly while others forecast a Macron victory. The difficulty here is that seat projections are based on national figures, past trends and surveys of key sets. This is basically impossible (and too costly) to poll 577 constituencies. Therefore, polls are likely less precise than for the presidential election. Overall, we still expect Macron to win a narrow majority of seats. He will therefore be able to implement his economic platform, including the most controversial proposals (such as pension reform). The left-green alliance NUPES will likely be the second party in the National Assembly (currently averaging around 25.6 % of votes). But for how long? This alliance will not last for five years, in our view. There are too many disagreements on key issues between members (for instance on secularism). The second round of the parliamentary election is scheduled for 19 June. Expect little to no market impact.
Retailer earnings may see further hits
With Target (TGT) cutting its guidance on operating profit by half within three weeks of reporting earnings, it is clear that inventory issues at retailers are glaring. We wrote about this in our macro note suggesting that retailers will need mark-down prices going forward to clear their inventory, suggesting further earnings pressures. While strong household balance sheets may help retailers sail through with these higher inventory levels, especially after the stock outs of the last two years due to supply disruptions, it is certainly something to watch as a leading indicator of economic momentum. The key to watch will be if other retailers such as Walmart (WMT) also issue further inventory/profit warnings.
Earnings WatchA quiet day ahead as Inditex has already reported (see earnings review above) in early European hours. Tomorrow’s focus is on DocuSign, Vail Resorts, and NIO.
- Today: Acciona Energias Renovables, Nuance Communications, Dollarama, Brown-Forman, Five Below, Inditex, Campbell Soup, Aveva Group, Full Truck Alliance
- Thursday: Chow Tai Fook Jewellery, Sekisui House, China Resources Power, Saputo, DocuSign, Vail Resorts, NIO, Bilibili
Economic calendar highlights for today (times GMT)
- 0700 – Hungary May CPI
- 0830 – UK May Construction PMI
- Poland National Bank of Poland Rate Announcement
- 1430 – EIA's Weekly Crude Oil and Fuel Stock Report
- 2301 – UK May RICS House Price Balance
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