Summary: U.S. and European stock futures held steady in early trading Monday supported by an overnight rally in Hong Kong following China’s move to ease a dispute with the U.S. over audits. The dollar is unchanged with treasury yields rising and the yield curve flattening as the market prices in a rapid succession of FOMC interest-rate hikes to fight inflation. Renewed focus on stiffer sanctions against Russia following reports that withdrawing Russian troops had murdered unarmed civilians. Crude oil still digesting last week's unprecedented release of strategic reserves with gold drifting as yields rise.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures showed more weakness on Friday despite strong Nonfarm payrolls data and better than expected ISM Manufacturing figures for March. S&P 500 futures are attempting to push higher today trading around the 4,550 level in early trading hours with the 4,512 level to watch on the downside and the 4,600 level on the upside. There are no key US macro events today, so we expect a quiet session unless we get negative headlines from the war in Ukraine.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - The Shanghai and Shenzhen exchanges are closed for national holiday today and tomorrow. Last Friday, Chinese ADRs rallied sharply following reports that Chinese authorities were preparing to give US regulators “full” access to auditing reports of most of the 200-plus companies listed in the US. The NASDAQ Golden Dragon China Index rose 4.7%. Hang Seng Index and Hang Seng TECH Index (HSTECH.I) were more than 1% and 3% higher, respectively.
Stoxx 50 (EU50.I) – sentiment turned increasingly more positive on Friday and Stoxx 50 futures are extending their gains in early trading Monday morning. The 50-day moving average is coming lower sitting at the 3,926 and could soon be the key indicator to watch as Stoxx 50 futures have not been above this indicator since the war broke out in Ukraine. The 3,800 level is the level to watch on the downside.
USDJPY and JPY crosses – USDJPY is on the rise again tracking the US 10-year yield which is also moving higher. It seems that any rebalancing flows into US Treasuries have not done much to dent the momentum in either US yields or USDJPY which is trading at 122.65 this morning. Friday’s high in USDJPY at 123.03 is a key level to watch on the upside should momentum extend.
Crude oil (OILUKJUN22 & OILUSMAY22) trades steady after overnight weakness in response to last week’s US announcement of an aggressive release of oil from U.S. strategic reserves. A potential 180-million-barrel release could be topped up by an additional 30-50 million barrels from allies in the IEA. In addition, the short-term demand outlook in China remains challenged as the government continue to battle covid outbreaks with tough lockdown measures. The supply side, however, looks equally challenged with Russian supply falling while OPEC according to Bloomberg only managed to increase production by 90k b/d last month, well below the level it is allowed under the current OPEC+ quota arrangement. Brent’s weakness may extend on a break below key support at $102.40, trendline from the December low and 50-day moving average.
Gold (XAUUSD) remains stuck in a major $1890 to $1950 range with headwinds from rising bond yields amid the prospects for more aggressive monetary policy tightening being offset by investors worried about the growth outlook, inflation, and current stock and bond market volatility. During a three-week period to March 29, speculators cut futures length by 4.6 million ounces while holdings in bullion-backed ETFs rose by 3 million, both reflecting the current short versus long-term battle
US Treasuries (IEF, TLT). US Treasuries suffered from the biggest quarterly losses since at least 1973, when the Bloomberg Barclays Index started to track their performance. The yield curve now is inverted from two-year to thirty-year, and Friday payrolls numbers show that the Fed is way behind the curve, making the case for more aggressive monetary policies. We expect the yield curve to continue to bear flatten with 2-year yields finding strong resistance around 2.7% and 10-year yields at 2.65%. Real yields continue to be a big focus, as they ended the week close to their two year high at -0.42%. As real yields accelerate their rise, we can expect the credit and equity market to correct.
What is going on?
U.S. March job report was very good. There were strong increases everywhere: payrolls +431k, private +426k including +60k in goods and +366k in services, and government +5k. The month of February was revised upward (+95k). The unemployment is now at 3.6 % versus prior 3,8 %. Wages are up as well: +0,4 % month-over-month and +5,6% year-over-year. What draws our attention is that the rate of wage growth among the lowest-wage workers keeps increasing at a steady pace. For instance, hourly earnings for nonsupervisory leisure and hospitality workers, where earnings are comparatively lower, were up 1.4 % in March alone. All of this opens the door to a strong interest rate hike by the U.S. Federal Reserve in May (perhaps of 50 basis points according to the market consensus).
China is considering giving “full” access for US auditing firms. On Saturday, China Securities Regulatory Commission (CSRC) jointly with other relevant regulators in China, issued a consultation document to gather opinions from the public about proposed revision of the Chinese law to allow foreign regulatory entities’ access to audit work papers and conduct relevant instigations under some relaxed conditions. If the US and China can find common ground on auditing of financial statements of Chinese companies listed in the US, it will allow these Chinese companies to remain listed in the US and have access to US capital markets.
Tesla’s Shanghai giga-factory remains shut. Shanghai’s total daily number of Covid-19 cases rose to over 9,000. Tesla’s Shanghai giga-factory has not resumed production as previously planned and has remained shut since last Monday. In February, Tesla’s Shanghai giga-factory produced 57K vehicles, of which 23K for the China market and 33K for export.
Ukraine accused Russia of massacring people in Bucha with pressure growing on the international community to intensify sanctions against Russia and its leadership. The weekend press was full of horrendous videos and photos showing the trail of destruction and killings in aftermath of Russian troops’ withdrawal from Bucha, a Kyiv suburb last week. War crimes including the rape, murder, and torture of civilians are prohibited under the 1949 Geneva Conventions, which apply to both Russia and Ukraine.
A landslide victory for Hungary’s Viktor Orban in Sunday’s election. The authoritarian leader and longtime Russian ally won a landslide victory in Sunday's election after his message, supported by pro-government media outlets that he has transformed into the EU’s biggest propaganda machine, was that joining a rush by fellow EU and NATO members to aid Ukraine with weapons would drag Hungary into the war. That resonated with voters, while the opposition suggested that the ballot was a choice between East and West.
French presidential election update. Nothing has changed. According to the latest IPSOS poll released on 1 April, French President Emmanuel Macron is still ahead of the crowd (around 27 % of voting intentions in the first round). Far-right leader Marine Le Pen is behind at 20 %. The extreme-left Jean Luc Mélenchon is once again the third man of the presidential election, at 15.5 %. Unless a last-minute surprise, both Macron and Le Pen are likely to be qualified for the second round scheduled for 24 April. According to all the polls, Macron would be re-elected for a second five-year mandate. But Le Pen is closing the gap. She is running a smart and non-polemical campaign focusing on what matters most for the French voters: purchasing power. She appears better qualified in economic matters than in 2017 too. There is a very tiny chance she could win the election, in our view.
What are we watching next?
RUB payments for natural gas is still a major sentiment risk to watch. Russia’s demand for payment in RUB for its natural gas exports to Europe is still the biggest risk for equity markets as it could severely disrupt markets and potentially result in no gas deliveries to Europe should the European countries refrain from paying in RUB. In this case, Europe’s economy would plunge into recession.
ECB comments on inflation. Following last week’s worse than expected inflation figures in Europe, the probability has gone up that the ECB might signal a faster rate liftoff and any comments this week are key to monitoring EURUSD and European equities.
The RBA is tipped to map out rate hikes sooner than expected. Inflation is un-sustainably higher than the RBA’s target of 2-3% price growth, fuelled by oil price growth. This means the Australian central bank could now be forced to bring forward its interest rate hikes. Currently the market is pricing in almost 7 interest rate hikes and for rate to first hike in June, with rates to peak at 1.75% at the year end. The Aussie dollar is likely to pull back if the RBA is more aggressive/hawkish and says rates could rise sooner than June.
The “battle of Donbass” is the next frontier in the war in Ukraine. With Russian troops retreating over the border across the entire northern frontline from Kyiv to Sumy, it looks like Russia is increasingly preparing for offensives and a bigger battle for Donbass which is a key military objective for Russia. Internal Russian communication intercepted suggests that 9 May (Victory Day, in which when Russia defeated Germany during WWII) is a key deadline to get concrete results in Ukraine. So, the next month is a key period for the war in Ukraine and will determine if peace is possible or the war will prolong and get uglier.
Sri Lanka is barometer on the potential fallout from the unfolding food and energy crisis. Sri Lanka equities are down 57% in USD terms from the peak earlier this year taking the local equity market to its lowest levels since 2009 erasing a decade worth of wealth creation. The unfolding food and energy crisis is beginning to bite awfully in developing countries and Sri Lanka is the canary in the coal mine.
Earnings Watch. Last earnings week before US companies kick off the Q1 earnings season starting with US financials. The Q1 earnings season will be a real test of operating margins as inflationary pressures are intensifying. We have reached a point where it could be increasingly difficult for some industries to continue passing on rising input costs.
Economic calendar highlights for today (times GMT)
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Chief Investment Strategist
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Head of Fixed Income Strategy
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Head of Commodity Strategy