Financial Markets Today: Quick Take – May 30, 2022
Saxo Strategy Team
Summary: The squeeze higher in equities in the US finished with a punchy flourish on Friday, as dire sentiment readings finally gave market contrarians something to celebrate. Sentiment stayed buoyant to start this week on hopes China is set to ease Covid restrictions, although this in turn may be driving global oil prices higher after Brent closed last week just shy of the highest weekly close of the cycle. Any new rise in oil prices could quickly dominate market focus from here and drive fresh inflation fears.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
Nasdaq 100 futures are extending the rally that started on Wednesday last week interrupting the seven-week long decline in technology stocks. Nasdaq 100 futures are trading around 12,865 this morning in early European trading hours and the 13,000 level is likely a short-term key point to test for the market. We see little to stop this short-term sentiment rally as some short positions are likely being squared adding to the upward pressure. Overall, nothing has changed except maybe except for pressures in commodities, in particularly energy, that have gotten worse.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Both indices trades higher with Covid cases falling in Shanghai and Beijing, and after the Shanghai municipal government announced an economic support package of 50 measures. Starting from June 1, factories in Shanghai are allowed to resume production without having to apply for pre-approval from the authorities. Domestic consumption stocks gained on the prospect of reopening. Restaurant stock Jiumaojiu (09922) jumped over 10% and beverage counter China Resources Beer (00291) gained 8%. Chinese internet stocks followed through on last week’s post result rallies and continued to surge 2% and 10% on Monday. Meituan (03690) surged 7% ahead of reporting Q1 results on June 2.
The most traded USD pair has worked higher and is now threatening the next layer of resistance, which perhaps starts with the 38.2% Fibonacci retracement of the move from the February and 2022 highs near 1.1500 to the low at 1.0787. Above there, the old range low just above 1.0800 is another focus ahead of 1.0872, the 61.8% Fibo of the local wave. The EURUSD bear trend is so well entrenched that a trend reversal requires significantly higher levels towards 1.1500, although a quick move to 1.1200 (a major cycle low back in late 2021) and near the 200-day moving average, would significantly weaken the structural picture.
The AUDUSD pair an interesting one to watch for the status of the USD trend against more pro-cyclical currencies, as already the rise back above the 0.7000 has placed a question mark next to the status of the USD rally, as this was a major level on the way down. But the really important resistance in the local context is the 0.7260 area, which is a local pivot high from early May and near the 200-day moving average. The sentiment from news flow from China will weigh heavily from here, as will the impact of that news flow on key Australian commodity exports like iron ore, with general risk sentiment also an important driver.
Crude oil (OILUKJUL22 & OILUSJUL22)
Crude oil trades higher after closing at an 11-week high on Friday on continued signs of tight fuel inventories ahead of an expected busy summer driving season, and with China slowing easing anti-virus lockdown curbs the added demand is likely to continue to force prices higher until demand starts to ease. With refinery capacity coming back online after maintenance demand for crude oil from refineries, the ultimate buyer of crude, is likely to rise at a time where global supply and supply chains has been severely disrupted by sanctions against Russia. Having broken above resistance-turned-support at $115, Brent may now take aim at $124. OPEC+ meets on Thursday to rubberstamp another illusive 430k barrels per day production increase. The group has fallen well behind its own target with several countries, led by Russia, struggling to reach their quotas.
Gold trades higher with a softer dollar and lower bond yields, as well as rising fuel prices supporting a fresh attempt to challenge key support at $1868/70, the 38.2% retracement of the April to May 211-dollar correction. Silver (XAGUSD) meanwhile trades near a three-week high relative to gold supported by recovering industrial metals on hopes China’s easing of anti-virus curbs will drive a recovery in demand. The recent recovery in gold was supported by investors hedging themselves against a central bank policy mistake with aggressive monetary-policy tightening driving concerns over a potential US recession. Despite these latest tailwinds, the recovery has yet to show enough strength to challenge those looking for lower gold prices, hence a continued focus on economic data, the dollar and yield developments.
US Treasuries (TLT, IEF)Some softer data last week from the US and weak sentiment readings have longer rates settling in the 2.75% area and the market pricing of the Fed tightening regime easing slightly lower as the market prices in a Fed funds rate of 2.50-2.75% by the end of this year. But uncertainties abound on how the market will behave as the Fed withdraws liquidity via quantitative tightening (reduction of its balance sheet), which is set to kick off this week and ramp up to a pace of $95 billion/month over the following three months.
What is going on?
US core PCE pricesUS core PCE data was out on Friday, and it came in as expected at 4.9% y/y and 0.3% m/m. This was slower than last month's 5.2% y/y and may prompt more talk of inflation peaking out. While PCE is the preferred Fed metric, what cannot be ignored right now is that food and energy prices still have more room to run on the upside suggesting that inflation will remain higher for longer. The May CPI print is due on June 10, so that will be the next one on the radar for further cues in terms of Fed's rate hike trajectory but for this week, the focus will be on the jobs report due on Friday.
Goldman predicts end of battery metal bull marketGoldman is saying that the prices for key battery metals cobalt, lithium and nickel will fall over the next two years after an over-eager speculation phase. Goldman predicts that lithium prices could drop slightly this year to $54k from recent spot prices near $60k and fall to near $16k in 2023 before rising again further down the road. There’s been “a surge in investor capital into supply investment tied to the long-term EV demand story, essentially trading a spot driven commodity as a forward-looking equity,” the analysts said. “That fundamental mispricing has in turn generated an outsized supply response well ahead of the demand trend.”
Oil prices are becoming an important cross-asset driver
Brent crude oil closed last week just shy of the $120/barrel level (see above) and also just shy of the highest weekly close for the front month contract since the outbreak of war in Ukraine. As the $120 area was often a resistance area during the high oil price period during 2011-14 (although at that time, the US dollar was far weaker), any further significant advance from here will likely dominate market attention and work against further strong improvements in risk sentiment as high energy prices cloud the growth outlook and would erode corporate profit margins.
Benchmark Capital and Sequoia Capital put out a dim outlook for technology
Both venture capital firms were around during the dot-com bubble run-up and burst, and they have both put out perspective and action plans for the companies they have invested in. Those presentations talk about a much dimmer outlook and investors are shifting focus from revenue growth and revenue multiples to that of free cash flow here and now. Cost-cutting and focus on profitable unit metrics are now paramount to survive the coming years.
What are we watching next?
US Memorial Day Holiday today
This is a major national holiday, so all US markets are closed today.
Eurozone inflation prints out this weekThe energy price shock has been bigger for Europe, and May prints are due for Spain, Germany, France, Italy and the Euro-area in the week ahead. Food price pressures continue to build up amid the supply shortages and protectionist measures, and further gains in May will add more weight to the ECB’s resolve to exit negative rates from Q3 with more aggressive tightening.
Special meeting of the European Council today and tomorrowTalks will focus on the implementation of a proposed embargo on oil imports from Russia (from 2024 onwards according to the latest draft). Hungary is the only EU country against it. The problem is that any new sanctions against Russia require the unanimous agreement of the 27 member states in order to pass. Expect tough negotiations. Hungary’s Prime minister Viktor Orban has recently passed on a “wish list” of demands he wants met to support oil sanctions. This includes a swap line with the European Central Bank and end to the rule of law Article 7 and “conditionality mechanism” procedures, amongst other things.
Australian GPD and balance of trade on watch and could disappointAustralian GPD data due Wednesday is expected to show economic growth fell from 4.2% YoY to 3% YoY in Q1. Quarterly GPD is expected to grow just 0.7%, following the 3.4% rise in Q4. If data is stronger than what consensus expects, the RBA has more ammunition to rise rates more than forecast, so the AUDUSD might rally. If GPD is weaker, then, the AUD will likely fall. For equities, Australian financials could rally if data is stronger than expected. Secondly, Australian Export and Import data is released Thursday. The market expects Australia’s surplus income (Export income minus imports payments) to rise from $9.4b to $9.5b in April. But given the iron ore price fell 13% in April, the trade data could miss expectations.
Several central banks in focus this weekTomorrow, the National Bank of Hungary (NBH) will likely deliver a hike of 50 basis points to 5.9 %. The NBH has recently flagged a slowdown in the pace of rate hikes which had a detrimental impact on the Hungarian currency. What the central bank needs to do now is to define more explicitly the risks to growth, the effect that it would have on inflation this year but especially in 2023, the pace of rate hike and how financing conditions could evolve in the next 12-18 months. On Wednesday, the Bank of Canada is expected to increase interest rates by 50 basis points, from 1% to 1.5% (it has downplayed the possibility of a 75-basis-point hike in the short term). The move has already been priced in the market. Further interest hikes will come in the coming months in order to fight inflation which is running at a 31-year high of 6.8% YoY in April. Last week, former Bank of Canada governor Stephen Poloz mentioned the risk that the country will fall into stagflation this year.
This week’s earnings releases are weak in terms of impact expect from earnings from Salesforce, Lululemon and Meituan. Analysts are expecting Salesforce to report FY23 Q1 revenue (ending 30 April) growth of 24% y/y on top of a significant operating margin expansion expected to boost free cash flow generation substantially.
- Monday: Sino Biopharmaceutical, Huazhu Group
- Tuesday: DiDi Global, Salesforce, HP, KE Holdings
- Wednesday: Acciona Energias Renovables, China Resources Power, Veeva Systems, HP Enterprise, MongoDB, NetApp, Chewy, GameStop, UiPath, SentinelOne, Elastic, Weibo
- Thursday: Trip.com, Pagseguro Digital, Remy Cointreau, Toro, Cooper Cos, Meituan, Crowdstrike, Lululemon, Okta, RH, Asana, Hormel Foods
Economic calendar highlights for today (times GMT)
- 0900 – Euro zone Economic, Industrial, Services Confidence surveys
- 1200 – Germany May Flash CPI
- 1500 – US Fed’s Waller (Voter) to speak
- 1700 – ECB's Nagel to speak
- 2030 – New Zealand RBNZ’s Hawkesby to speak
- 2300 – South Korea Apr. Industrial Production
- 2330 – Japan Apr. Jobless Rate
- 2350 – Japan Apr. Jobless Rate
- 2350 – Japan Apr. Industrial Production
- 0030 – New Zealand May ANZ Business Confidence survey
- 0130 – China May Manufacturing/Non-manufacturing PMI
- 0130 – Australia Apr. Building Approvals
- 0130 – Australia Apr. Private Sector Credit
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