Summary: US equity markets closed at the lows for the cycle on Friday in a very ugly session after an early rally failed to hold. China is on holiday until Thursday after a sharp rally last week on stimulus hopes, but the offshore yuan continued to drop sharply versus the US dollar today. A pivotal FOMC meeting lies ahead this Wednesday as US treasury yields are poised at the highs of the cycle all along the curve and the market awaits Fed guidance on its tightening plans from here, together with the first 50-basis point hike in 22 years.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - it was an ugly Friday in US equities due to the much worse than expected outlook from Amazon. This morning US equity futures are trying to muster a rebound with the S&P 500 futures trading around the 4,145 level with Friday’s low at 4,119 being the key level to watch on the downside should risk-off sentiment continue. On the upside, the 4,200 level in S&P 500 futures is the important level to recapture fast if this rebound has any strength.
Stoxx 50 (EU50.I) - Stoxx 50 futures are still flat, staying around its 3,685 level in early European trading hours trying to digest a lot of risk sources from potential natural gas cutoff from Russia and EU oil ban against Russia which could potentially aggravating the pressure on European households. Stoxx 50 futures are likely to remain weak going forward with the 3,600 level being the downside level to watch and the declining 50-day moving average at 3,786 on the upside.
AUDUSD – the Friday risk-off episode showed the US dollar generally serving as a safe haven currency, though the degree of relative strength varied considerably and the stress in EM currencies has been remarkably muted through this bout of risk aversion relative to previous cycles. Still, one USD of considerable interest here is AUDUSD, which is nearing the huge 0.7000 level, one with technical implications stretching back to pre-pandemic days as a major line in the sand. Some of the weakness in AUD that has materialized across the board over the last couple of weeks (outside of AUDNZD as the kiwi is in poor shape as well) may be linked to not only risk aversion, but also China’s significant devaluation move (see below). The RBA meets tonight as well, with the market divided on the prospect of a rate hike.
USDCNH and CNHJPY – Chinese markets are closed until Thursday, but the offshore yuan continues to trade and dropped to a new low overnight, losing more than half a percent versus the US dollar from Friday’ close, with USDCNH trading near 6.68, the highest level since late 2020, barring a spike intraday high last week. The move from below 6.40 just some two weeks ago has raised speculation that the yuan weakening move signals policy easing to stimulate the economy, but also came after an aggravated USD strengthening move that had taken the USDJPY rate to new 20-year highs, and the CNHJPY rate in the crosses to the highest levels since 2015 near 20.00, a time frame that saw China making a major shift in its exchange rate regime away from its tight link to the US dollar.
Gold (XAUUSD) failed in its attempt on Friday to break above the $1915 to $1920 band of resistance with dollar strength and 10-year real yields rising to zero percent sapping demand. Instead, the price has reversed lower to challenge support around the 100-day MA at $1880/oz with FOMC jitters ahead of Wednesday’s expected aggressive rate hike also weighing. Last week saw the first albeit small weekly reduction in ETF holdings since January while hedge funds in the week to February 26 cut their net long by 20%. In addition to Wednesday’s FOMC, today’s US ISM Manufacturing PMI and Friday’s job report are key economic risk catalysts for gold.
Crude oil (OILUKJUN22 & OILUSJUN22) - China growth concerns, EU moves on Russian oil imports and FOMC are likely to be key drivers this week. This is on top of the general risk sentiment and the dollar which has started the week on a firm footing thereby supporting some additional price weakness following Friday’s failed attempt to break above $110 resistance. The EU look set to propose a ban on Russian imports by the end of the year, but Hungary is likely to veto any sanctions on Russian energy, while Chinse cities maintain lockdown rules despite falling cases. Demand destruction from high fuel prices is already being felt after NY ULSD and ICE diesel closed at record and 14-year highs respectively on Friday. The OPEC+ meets virtually on Thursday and will likely rubberstamp another illusive production hike in order to avoid a political riff with Russia.
US Treasuries (TLT, IEF) – US treasury yields closed near the highs for the cycle, with risk sentiment failing to boost treasuries – or with the rise in yields possibly even a partial driver of the weak sentiment after the in-line March PCE inflation data release on Friday. Obviously, a pivotal week as the Wednesday FOMC meeting will see the first-rate hike of 50 basis points in over twenty years and as the Fed is set to guide on its balance sheet tightening plans.
What is going on?
US Mar. PCE inflation largely in-line with expectations, US yield rise close to cycle-highs. The US March PCE inflation data was one of the last data points to be published ahead of the FOMC meeting this Wednesday and came in largely in line with expectations, with the headline at +0.9% MoM and +6.6% YoY vs. +0.9%/6.7% expected, and the Core at +0.3%/+5.2% vs. +0.3%/+5.3% expected. The latter was 0.1% lower than the February cycle high of 5.3%.
Painful Euro zone CPI figures. Euro zone CPI was up to 7.5 % year-on-year in April according to the flash estimate. This is a fresh all-time high. Energy prices were on the rise (+38.0 %) but also food and services (respectively, +6.4 % and +3.3 %). The core CPI reached a record high too, at 3.5 % year-on-year. There are signs of a strong catch-up in wage growth. But this won’t be enough to avoid an income squeeze this year, in our view. Consumption will be hit hard. In addition, the key market gauge of long-term Euro zone inflation expectations (the 5y-5y forward) rose above 2.50 % on Friday. This is the highest level since 2012. The situation is getting extremely complicated for the European Central Bank. We don’t see how it could avoid increasing rates in the coming months, perhaps as early as in July.
France’s GDP stagnated in Q1 this year. It is very unlikely that the French economy will go through a golden decade. The 0.0% QoQ growth mostly reflects a fall in domestic demand (subtracting 0.6 points from GDP growth). Household consumption fell 1.3%. The biggest issue is the cost of living and high inflation. This was the strong focus of the presidential campaign. Expect growth to remain stagnant in the coming quarters. We would not be surprised if France faces massive demonstrations after the summer break (similar to the 2018 Yellow Vest Movement).
Speculators wiped out their remaining long positions in High Grade Copper futures. In the week to April 26 the net length was cut by 92% to a near two-year low at just 2k contracts. China lockdown related growth concerns, the recent weakening of the renminbi and rising global rates to combat inflation and a deteriorating risk sentiment in stocks have driven selling from funds, some using copper as a proxy for macroeconomic developments. In the short-term draconian lockdown measures in China will hurt growth and demand from the world’s top consumer, thereby offsetting underwhelming production updates from some of the world’s biggest producers of metals, including Chile’s Codelco in Chile which reported a 6% decline in production during the first quarter.
Mohawk (MHK) surged up 7.8%, becoming Friday’s best US performing stock in the S&P500, on delivering better than expected quarterly earnings, and a Q2 outlook. Mohawk boosted clay inventory (used for ceramic tiles) ahead of Ukraine’s clay supply being cut off. So this supported Mohawk’s stronger results and outlook. Net sales rose 13% y/y to $3.03 billion (vs $2.86b expected), boosted by home renovation demand with employment being elevated. 10 sell side analysts have Mohawk as a BUY, 4 have buys, 3 have sells.
Australian bond yields hit their highest levels since 2014 ahead of Australia’s official intertest rates rising on Tuesday. Reserve Bank of Australia (RBA) is expected to rise rates for the first since 2020, given inflation surged to a 20-year high and inflation there is likely to get worse. Rates expected are rise from by 0.15% to 0.25% followed by a suite of interest rate hikes. If rates hike more than expected, expect Australian tech stocks and property stocks to see further selling, and expect banking stocks to rise.
What are we watching next?
Australia RBA Rate Announcement tonight – the market is divided on the prospect of a rate hike at tonight’s RBA meeting, as some expect for the central bank to wait for the most recent wage data from Q1 on May 18 before hiking in June, while others suggest that the recent upgrades in hawkish rhetoric (with added pressure now from the AUD suddenly falling so rapidly) could pull the decision forward to tonight. The market expects a 50 basis point hike in June.
FOMC meeting this Wednesday. This Wednesday’s meeting is expected to deliver the first 50 basis-point rate hike in twenty years, and at least the following two meetings are expected to deliver additional half-percent rate moves, which would be the first time the Fed has done more than one move of this magnitude at consecutive meetings since 1994. This year is priced for the Fed to end with a policy rate of 2.75-3.00%. The Fed will also guide on its intention to shrink its balance sheet, perhaps at a pace near $100 billion per month. So far, the US economy has shown few signs of slowing dramatically, despite multi-decade highs in inflation, as private balance sheets are in very good shape after pandemic-relative stimulus kept incomes high. A booming and extremely tight labor market is seeing workers able to bid up wages. We will get a look at both the ISM Manufacturing (today) and ISM Services surveys (Wed.) ahead of the FOMC meeting late Wednesday. Both surveys are expected in the high 50’s, indicating a robust pace of expansion, and the preliminary S&P Global PMI surveys for the US were quite strong, at 59.7 for Manufacturing and 54.7 for Services.
Amazon’s ripple effects. Amazon shares fell 14% on Friday taking the e-commerce retailer to levels not seen since June 2020. The operating losses in its global e-commerce business is suggesting mounting pressures from inflation and could have wide sentiment implications for the equity market as the company is the third largest constituent in the S&P 500 Index.
Full Beijing Covid lock-down on the way? The spread of Covid in China’s capital Beijing has seen new limitations on activity there, including the closing of cinemas, gyms, and dining in at restaurants. If Covid cases do not quickly disappear, this could be a prelude to a full lock-down akin to what was seen in Shanghai recently, where activity restrictions linger in some districts. The global impact of such a lockdown would be more limited as Beijing is less associated with international trade supply chains, but is still a concern for the domestic economy as well as whether another region may see a similar breakout.
Earnings Watch. With galloping fertilizers prices due to high natural gas prices and competition for phosphate from increasing demand of iron-phosphate batteries used in electric vehicles there is more focus on the global agricultural sector. Nutrien, a large Canadian producer of potash, nitrogen, and phosphate products, reports Q1 earnings tonight after the market close with revenue expected to grow 64% y/y. NXP Semiconductors also reports tonight and is one of the largest suppliers of semiconductors to the global car industry.
- Monday: Nutrien, Moody’s, NXP Semiconductors, Global Payments, Devon Energy
- Tuesday: Thomson Reuters, BNP Paribas, Deutsche Post, BP, Universal Music Group, Pfizer, AMD, S&P Global, Airbnb, Estee Lauder, Starbucks, Marathon Petroleum
- Wednesday: ANZB, Barrick Gold, A.P. Moller – Maersk, Vestas Wind Systems, Pandora, Sampo, Airbus, EDF, Volkswagen, Siemens Healthineers, Enel, Equinor, CVS Health, Booking, Regeneron Pharmaceuticals, Uber, Marriott International, Moderna, Fortinet, Ferrari, eBay, Albemarle
- Thursday: National Bank of Australia, Anheuser-Busch InBev, Shopify, BCE, Coloplast, Credit Agricole, Societe Generale, BMW, Zalando, UniCredit, Shell, ArcelorMittal, ConocoPhillips, Zoetis, EOG Resources, Block, MercadoLibre, Illumina, Lucid Group
- Friday: Macquarie Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, ING Groep, Cigna
Economic calendar highlights for today (times GMT)
- 0715-0800 – Euro zone final Apr. Manufacturing PMI
- 0900 – Euro zone Apr. Confidence surveys
- 1400 – US Apr. ISM Manufacturing
- 2300 – South Korea Apr. CPI
- 0430 – Australia RBA Cash Target
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