Summary: Mixed sentiment across markets this Monday with US stocks higher despite rising Treasury yields as the market gets ready for rates to lift of, while stocks in China and Hong Kong has fallen further as the rout in Chinese technology shares continued and after China placed the 17.5 million residents of Shenzhen into lockdown for at least a week. Commodities led by oil trade softer as talks between Ukraine and Moscow show signs of becoming more substantive, prompting some cautious optimism.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities ended last week on a weak note driven by US technology stocks such as e-commerce and bubble stocks. Nasdaq 100 futures are attempting a rebound this morning trading around the 13,380 level with Friday’s low at 13,277 being the obvious key support level to watch on the downside today. In terms of risk this week will still be all about headlines coming out of the war in Ukraine.
Hong Kong’s Hang Seng Index (HSI.I) & China’ CSI300 (000300.I) - Hang Seng down 4% and the Hang Seng TECH Index (HSTECH) plunged almost 8% with the selling concentrated in mainland Chinese companies. Apart from the Shenzhen lockdown hurting sentiment (see below) a report citing unnamed U.S. officials about Russian asking China for military aid contributed to investors’ concern about how Sino-U.S. relationship will evolve from here given China’s ambiguous “neutral” stance. U.S. institutional investors are estimated to be holder of about 25% of U.S. listed Chinese ADRs and 15% of Hong Kong listed H-shares. Following a host of weak data, the market is expecting that the PBoC may cut MLF rate and 7-day OMO repo rate on Tuesday 15th March, may be 10bps.
European equity markets – STOXX 50 futures up 1.2% in early trading as the market is weighing rumours that Ukraine and Russia are progressing slightly in the peace talks and Russia’s plea for China’s help. European equities are helped by Brent crude trading lower, and several European countries said over the weekend that they have enough gas reserves to get through the last period of cold weather. STOXX 50 futures are still in the 3,600 to 3,800 trading range.
EUR crosses – despite a hawkish move by the ECB last week, although they soothed the move by unrealistic forward guidance on inflation, the EURUSD is trading lower than the initial level before the ECB meeting trading around the 1.0917 level this morning. The 1.09 level is a big support level to watch on the downside should the EURUSD continue to sell off.
JPY crosses – USDJPY is pushing higher this morning extending Friday’s big breakout effectively underscoring the movements we are seeing across all FX that heavy commodity import countries are seeing their currencies weaken vs USD. The big level to watch on the upside in USDJPY is of course 118.
Crude oil (OILUKMAY22 & OILUSMAY22) trades lower, but still within last week’s record wide trading range, after Ukraine’s president said talks with Moscow show signs of becoming more substantive. Self-sanctioning by buyers of Russian oil led to last week's tumultuous price action but since then some have been able to find workarounds while high prices for energy are already showing signs of negatively impacting demand across certain industries. Other news items the market must deal with is a virus resurgence in China and the Friday’s suspension of Iran talks after Russia put a spanner in the works. The extreme tightness noticed last week has eased with the Brent prompt spread at $3.66/b after almost hitting $6/b last week.
Industrial metals from copper (COPPERUSMAY22) to iron ore (SCOJ2) and steel traded broadly weaker in Asia as the rapid spread of highly infectious omicron variants in China cast doubt on the growth prospects for Asia’s biggest economy. Gold (XAUUSD) also declined with focus on Wednesday’s likely US rate hike decision and developments in the war in Ukraine. Continued gold buying during the past five weeks up until last Tuesday had lifted the net long by 113k lots or 180% and after failing to break above the 2020 record high at $2075 the temptation to book profit helped trigger the subsequent sharp correction which only paused on Friday when support was found at $1960, the 31.8% retracement of the February to March 290-dollar rally.
US Treasuries (IEF, TLT) - The focus is going to be on Wednesday’s FOMC meeting. The market is expecting a 25bps rate hike while there are uncertainties surrounding the dot plot and an announcement concerning the Fed balance sheet’s reduction. Any hawkish or dovish surprise can move the markets sensibly, especially because starting from this week the bond market lacks the support coming from the Fed's bond purchases under the QE program. In this environment, real yields and a further flattening of the yield curve could provide important signals.
EU Sovereigns (VGEA, IS0L, BTP10) - Following a hawkish surprise form the ECB last week, European sovereigns remain vulnerable to the Federal Reserve and BOE decisions as well as to news concerning the war in Ukraine. Sovereigns from the periphery will be most vulnerable as the only element to limit the widening of their spreads are linked to the news of more E.U. bond joint issuance.
What is going on?
China placed the 17.5 million residents of the southern city of Shenzhen into lockdown for at least a week, as authorities sought to gain control of a spreading Covid-19 outbreak from Hong Kong in the vital technology hub. Called with little notice on Sunday, the order will last until March 20. Except in limited situations, residents will be barred from leaving Shenzhen, home to the headquarters of tech giants Huawei Technologies Co. and Tencent Holdings Ltd., as well as one of China’s busiest ports, which for now remains operational, though with tighter Covid controls. Developments dashing the hope for China to moderate its stringent “dynamic-clearing” COVID strategy to this year to almost nil, while also casting additional doubts among economists on China’s ability to meet its 5.5% GDP growth target when exports are expected to slow from last year’s stellar performance.
Spain’s February final CPI is uncomfortably high. It was out at 7.6 % year-on-year against 7.4 % preliminary. This is the fastest pace of inflation since 1986. The main drivers of inflation are energy prices, of course, but the rest of goods and services in the consumer basket too. Inflation is now broad-based, especially for food and non-alcoholic beverages. Our worst-case scenario is becoming reality: inflation is well-entrenched in some several eurozone countries.
Very strong labor market figures in Canada. Employment increased by a net 336,600 in February versus expected 130,000. In addition, the country’s unemployment rate fell by a full percentage point to 5.5 % versus expected 6.2 %. Expect wages to go substantially higher in the near term unless growth capitulates. The Bank of Canada will have no wiggle room in the monetary policy meeting of April. A 25-basis point interest rate hike is very likely. A potential start of quantitative tightening could be discussed too.
Speculators turned major sellers of crude oil last week as prices jumped 20%. According to the latest COT report covering the week to March 8, speculators or hedge funds cut their combined length in WTI and Brent crude oil futures by 19% to a three-month low at 435 million barrels, the largest one-week reduction since last July. Long liquidation across all three fuel products added to the story of speculators reducing exposure after one-week gains up towards 42% had taken all three to record highs. During 2021 the 30-day volatility on the BCOM Spot index traded between 9% and 19.5% but since the war started on February 24, it has surged higher and reached 28.5% on Friday, thereby forcing many hedge funds targeting a certain level of volatility to cut their exposure.
Cryptocurrencies - Later today EU lawmakers will vote on EU's MiCA (Markets in Crypto Assets) regulatory framework. A key concern is whether cryptocurrencies break EU's environmental standards, and this specifically relates the cryptocurrencies using the proof-of-work consensus algorithm such as Bitcoin and the current state of Ethereum.
What are we watching next?
Nickel trading on the London Metal Exchange remains closed until further notice as market participants wait to see how a powerful short squeeze is resolved. Trading has been halted since last Tuesday following a 250% two-day price spike. The unprecedented decision by the exchange to cancel all trades on Tuesday has left many traders holding position in the dark but given the price action on the Shanghai Futures Exchange since Monday, LME nickel may eventually open lower by close to 40%.
Earnings Watch. The earnings season is on after burning with a couple of more important earnings releases this week. Volkswagen is the key earnings to watch on Tuesday for its update on EV deliveries in Q4 and progress on getting production lines back online following the fallout from the war in Ukraine. On Wednesday the market will focus on Inditex and Lennar with latter being the most interesting one given its signal value on the US housing market. On Thursday the two earnings releases to watch are from FedEx and Pinduoduo.
Economic calendar highlights for today (times GMT)
No economic releases today
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
