Nasdaq 100, S&P 500, Bitcoin, Crude Oil And Forex Pairs - Financial Markets Today: Quick Take

US Close – Stocks Crumble, Oil lower on demand concerns, Gold holding up, Bitcoin lower | Oanda

Macro  6 minutes to read

Summary:  Markets are a bit nervous to start the week as the steep acceleration higher in US treasury yields continued in the Asian session overnight. Even a casual inspection of prior market regimes shows that a steep back-up in yields at some point will prove dangerous for equity valuations. The 5-year US Treasury yield has vaulted above the 30-year for the first time since 2006. Elsewhere, oil is several dollars lower on hopes for a peace deal in Ukraine.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures closed on Friday just around the 100-day moving average which were breached twice in February without extending the gains so this time will be more critical. S&P 500 futures are rolling over a bit this morning trading around the 4,518 level with the 200-day moving average around 4,471 being the gravitational point should risk-off come into the market. The key risks for US equities are the rapidly rising US interest rates and headlines coming out of the war in Ukraine.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index and Hang Seng TECH Index (HSTECH.I) recovered early losses from the news of COVID-related partial lockdown of Shanghai. At the time of writing, Hang Seng Index was up 1% and Hang Seng TECH Index rose 2.5%.  Chinese Internet stock lead the charge higher. Meituan surged 14% after reporting better than expected operating margins and smaller than expected loss in 4Q21. Revenue and operating profits from food delivery beat expectations because of higher order volume. Coal mining stocks surged both in Hong Kong and in A-shares. In A-shares, apart from coal miners, financials, real estates, infrastructures did relatively well, while beverage, defense and electrical equipment underperformed.

Stoxx 50 (EU50.I) – European equity futures are flat to slightly higher this morning with the Stoxx 50 futures trading around the 3,790 level putting the index futures in a very tight trading range with the 3,765 level being the key level on the downside; on the upside the 3,865 level is the key to watch. Commodity prices are coming down a bit and the preliminary PMI figures for March in Europe were better than expected last week so the information picture is mostly getting better for European equities, but the key risk is still headlines coming out of the war in Ukraine.

USDJPY and JPY crosses  USDJPY rose sharply once again overnight on a further rise in US Treasury yields and as the Bank of Japan overnight was out announcing an unlimited bid for 10-year Japanese Government bonds (JGB’s) as it has declared a 0.25% cap on the yields of these bonds under its yield-curve-control (YCC) policy. The bonds traded as high as 0.251% overnight. As long as global yields continue rising and the Bank of Japan pledges unlimited support for its bond market, the pressure on the JPY to weaken continues. It is worth keeping in mind that the end of quarter and end of the Japanese financial year are both approaching this Thursday, which may bring significant portfolio flows, given a brutal quarter for fixed income in Q1. The next major resistance in the USDJPY chart is the near-20 year high from 2015 at 125.86.

AUDUSD and AUDJPY – the strong AUD could be trading as the flip-side, or funding side, of the weak Japanese yen in Asia. Australia’s terms of trade have experienced a seismic shift on the dramatic rise in key commodity prices, all of which Japan lacks. Australia is the world’s largest exporter of LNG, for example, which Japan relies on heavily to power its economy. Even before the war in Ukraine broke out, LNG prices soared on reduction of Russian exports. The AUDUSD has traded above 0.7500 since late last week, within striking distance of the major top from last October at 0.7556, while AUDJPY has risen a staggering 15% from its January lows. One can’t help but see AUDJPY as the ultimate high-beta trade that is linked to both commodity prices via AUD and the weakening Japanese yen that is also heavily impacted by the recent rise in global bond yields (see above in USDJPY comments).

Bitcoin rallied 5 % on Sunday and is now trading at just below USD 47k, continuing its two-week stealth rally, and Bitcoin is now back at positive returns YTD. Several factors drive the rally such as the positive sentiment in S&P 500, Do Kwon’s (creator of Terra - 9th biggest crypto) plan to buy a large amount of Bitcoin, and the record low Bitcoin balances on crypto exchanges.

Crude oil (OILUKMAY22 & OILUSMAY22) trades lower in early trading with Friday’s rebel attacks on Saudi Arabia are being offset by concerns about the short-term demand outlook in China, after the world’s largest importer of crude, said it would lock down half of Shanghai for mass testing as virus flare-ups continue to spread. Russian and Ukraine peace talks resumes this week but with Putin’s government regarded as toxic to many key buyers, self-sanctioning is likely to continue despite a potential solution. On Thursday, OPEC+ meets virtually to set targets for May but given their inability or unwillingness to discuss the elephant in the room, the drop in Russian production, hopes for additional barrels from GCC producers remain slim. Key resistance in Brent at $123/b while a break below $112/b would signal further loss of momentum.

Gold (XAUUSD) trades lower as the global bond rout continues to gather momentum with the US ten-year Treasury yield surging past 2.5% in Asia while crude oil trades lower as China’s virus flare-ups worsens and Ukraine appears to be ready to discuss a deal (see below). Having failed to punch through resistance at $1962 last week, the market is once again trading on the defense with focus on ETF flows, the key source of underlying demand during the past month. Support at $1939 and $1930.

Copper (COPPERUSMAY22) trades lower for a third day with traders worried about the short-term impact of demand as China, the world’s top consumer, continues to battle virus flare-ups. In addition, Jiangxi Copper Co., China’s top producer of the metal, warned on Friday that prices of the metal may fall this year along with other commodities as countries roll back stimulus and high prices curb demand, while logistics bottlenecks ease.

US Treasuries (TLT, IEF). Last week, markets advanced bets on interest rate hikes, pricing 200bps rate hikes by the end of the year. Two-year yields rose to 2.26%, and they could continue to rise to 2.7% if markets begin to price rate hikes for next year. This week the focus is going to be on the PCE Index and the non-farm payrolls on Friday as strong inflationary and jobs data might provide ground to the Federal Reserve to be more aggressive.

What is going on?

Shift of war focus in Ukraine. Ukraine appears ready to discuss a deal that would take the situation back to the status quo prior to the Russian invasion in February, with Russia still possibly in possession of Crimea as well as a willingness to discuss the status of the Donbas region. Ukrainian president Zelensky downplayed claims from Turkish President Erdogan that Russia and Ukraine are nearing a peace deal. Meanwhile, Ukrainian forces managed to take up the offensive in areas around Kyiv over the weekend, while fighting continues to rage in the besieged port city of Mariupol.

Japanese energy firms continue to face threat of potential supply disruptions from Russia. Hiroshima Gas Co. is considering purchasing LNG from Malaysia and other producers, while Osaka Gas Co. plans to bring forward gas procurement from the US or Australia. Efforts are also in place to allow Japanese utility firms to share some of their reserves in the event of a supply disruption of Russian gas. Alternative sources of energy, possibly coal, oil-powered generators or even nuclear power, may also be explored. Concerns emanate not just from supply disruptions but also Putin seeking payment in rubles.

Russian ships “going dark” to avoid detection, and potentially sanctions. For the week ending Friday, there were 33 instances of Russian tankers carrying oil and other products turning off systems designed to announce the ships’ location, more than double the level of the last year, according to maritime risk consultancy company Windward. This could allow cargo transfers to obscure the origins of the ships’ cargo.

Global container rates continue to fall as the surging cost of everything raises concerns about the outlook for economic growth and with that demand for key commodities. The danger is currently most acute in Europe, where energy bills have soared due to the overreliance on Russian supplies. With natural gas six times higher than a year ago, and electricity costs almost five times more, several heavy energy consuming industries have been forced to reduce production while consumers also hurt by surging cost of food are cutting back on spending. The result can be seen in the cost of shipping containers between Shanghai and Rotterdam. Last week it dropped to $11,190 for a 40 ft box, a nine-month low and down 25% from the October peak.

German IFO for March hits lowest level since January 2021. Tuesday’s purchasing manager indexes presented a rather optimistic picture. But as we have mentioned, these indicators have not been very reliable since the start of the outbreak to assess the economic situation. The IFO Index now stands at 90.8 from 98.5 in February. The expectations component, which is certainly more important, saw an even sharper decline than at the start of the pandemic in March 2022, falling to 85.1 from 99.2 the previous month. It seems that German businesses consider the Ukraine war (and all its consequences) will have a much deeper impact on the economy than Covid in the long run. Germany looks at risk of ‘stagflation’, with weak growth and high inflation.

Worrying picture for UK consumer confidence. The GfK index falls below -30 in March – this threshold has presaged recession on 4 out of 5 occasions since 1974. This follows a very sharp growth downgrade by the Office for Budget Responsibility for 2022 and 2023. Household future financial confidence falls to a record low. The next 6-12 months will be very challenging for the UK economy, in our view.

Shanghai goes in partial lockdown. Shanghai imposed lockdown on the districts east to Huangpu River for 4 days, from today to 1 April 5am and then the districts west to Huangpu River for another 4 days from 1 April at 5am. Tesla’s Shanghai factory is suspended for four days.

What are we watching next?

Steep rise in US treasury yields set to continue? This, at some point, is a dangerous moment for markets, as a steep back-up in treasury yields preceded every major bear market or market correct in recent decades, most infamously ahead of the 1987 crash, but also into early 2000, 2007 and 2018. The US 10-year Treasury benchmark yield crossed above the 2.50% level for the first time since May of 2019 and has risen nearly 100 basis points year-to-date. The five-year Treasury yield crossed above the 30-year yield for the first time since early 2006, which is likely to be followed by an inversion of the “classic” 2-10 year yield, which often starts the countdown to an economic recession, if with a significant lag.

PMI releases in Asia to support reopening trade. China PMIs may be headed south due to the increasing Covid restrictions, but PMIs for the rest of the Asian economies could potentially see improvements. Japan’s Tankan index is expected to see a decline in sentiment due to the highly uncertain geopolitical situation. While North Asian economies may continue to face threats of supply disruptions, India and Southeast Asia PMIs will focus on reopening of the economies. Singapore will ease restrictions substantially from Tuesday, and Singapore Airlines (SIAL) and Sats (SATS) will be a key focus. Casino stocks in Singapore (Genting, 36T) and Malaysia (Genting, GMALY) may also see interest.

Earnings Watch. This week’s earnings will concentrate on Chinese earnings with the country’s major banks reporting their Q4 earnings likely showing a further deterioration in credit quality and potential write-downs related to the weakness in the real estate sector. On Wednesday, Ganfeng Lithium, which is the world’s most valuable standalone lithium miner, will reported earnings with expectations of rapid top and bottom-line growth as lithium prices have soared. In terms of US earnings this week, the key focus will be on Micron Technology and Lululemon Atheletica on Wednesday.

  • Monday: Nongfu Spring, CITIC Securities
  • Tuesday: China Construction Bank, Bank of China, BYD, Kuaishou Technology, BOC Hong Kong, Great Wall Motor, Micron Technology, Lululemon Athletica, McCormick
  • Wednesday: Kweichow Moutai, ICBC, Agricultural Bank of China, CNOOC, COSCO, SD Holding, Haier Smart Home, China Vanke, Ganfeng Lithium, China Longyuan Power Group, BOE Technology, Paychex, BioNTech
  • Thursday: PetroChina, China Overseas Land & Investment, China Resources Land, CITIC Ltd., Walgreens Boots Alliance

Economic calendar highlights for today (times GMT)

  • 1100 – UK Bank of England Governor Bailey to speak on UK economy
  • 1200 – Canada Nanos Economic Mood Survey
  • 1230 – US Feb. Advance Goods Trade Balance
  • 1340 – UK Chancellor Sunak to testify
  • 1430 – US Mar. Dallas Fed Manufacturing Survey
  • 0030 – Australia Feb. Retail Sales

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US Close – Stocks Crumble, Oil lower on demand concerns, Gold holding up, Bitcoin lower | Oanda

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