Summary: Global risk sentiment soured further yesterday, with the FOMC minutes from the latest meeting not providing any cause for cheer, as the Fed discussed severe quantitative tightening plans at the meeting, which will bring a general tightening of global liquidity when phased in after the May 4 FOMC meeting. The USD is also higher versus commodity and EM currencies as commodities prices, and especially oil prices, fell sharply.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - Brainard’s comments and FOMC Minutes were digested yesterday by investors sending equities lower with the S&P 500 futures closing below the 200-day moving average. S&P 500 futures are lower again this morning in early European trading with the 4,448 level being the key level to watch on the downside. The expected tightening of financial conditions will likely put pressure on US equities over the coming months, and thus we maintain our defensive stance on equities.
Hang Seng (HK50.I) and China’s CSI300 - Hong Kong and mainland China equity markets continued its consolidation after the impressive rally two weeks ago. Following the sell-off in overseas markets and the hawkish FOMC minutes, Hang Seng Index fell 1.2% and CSI300 was down 1%. Yesterday, Chinese Premier Li Keqiang reiterated in a State Council meeting that appropriate and timely monetary policies would be implemented to support the real economy. This in in line with the recent narrative from the Chinese authorities that it will use available tools, including monetary policy to stabilize the economy.
Stoxx 50 (EU50.I) – European equities sold off heavily yesterday as rising interest rates risk economic slowdown at a time when Europe is at edge due to rising living costs and penalizing prices on natural gas and electricity. Stoxx 50 futures pushed below key support levels yesterday but are rebounding this morning trading around the 3,749 level with yesterday’s low at 3,711 as the key level to watch on the downside should risk-off resume.
USDJPY and JPY crosses – in the wake of Vice Chair Brainard comments in a speech on Tuesday and the severe quantitative tightening scenarios outlined in last night’s FOMC minutes (see below), longer US yields remain elevated as QT is thought to generally raise longer yields by increasing the supply of treasuries, especially when the US treasury will continue to run sizable deficits, although yesterday’s risk aversion halted the rise in yields this week. At some point, treasuries might find a stronger bid if the Fed is finally seen as “catching up with the curve” in showing a determination to continue to tighten policy until inflation comes down. Lower long yields are the most likely source of the JPY finding support as long as the Bank of Japan maintains its cap on yields. A secondary source of near-term support would be a correction in global energy prices, as Japan is reliant on imports. On that note, the dip to new multi-week lows in crude oil yesterday is JPY-supportive. Watching the 125.00 high in USDJPY and 121.28 pivot low for next steps.
AUDUSD and USD/commodity FX – The Australian dollar breakout is failing its latest breakout test after the post-RBA meeting surge above key resistance near 0.7550 has now been wiped away and then some by Fed hawkishness this week, as the Fed flexes its muscles to impress the market with its quantitative tightening plans (more below). Arguably, if we zoom out, the local up-trend remains intact as long as the pair holds the line above perhaps 0.7300-50, but the severity of this week's pump-and-dump reversal has the bulls on the defensive, with risk sentiment likely the key coincident indicator, together with price swings in commodities, as currencies like NOK and CAD are suddenly on the defensive after the deepening correction in the oil price this week, particularly yesterday.
Gold (XAUUSD) remains stuck between $1890 and $1950 with the latest hawkish FOMC minutes being offset by a weaker dollar and continued volatility in bonds and equity markets supporting investment flows into ETFs from asset managers looking for protection against inflation, slowing growth and policy mistakes.
Crude oil (OILUKJUN22 & OILUSMAY22) suffered another setback yesterday on the back of multiple non-oil friendly price news; The IEA said member countries would release 60 million barrels from stockpiles on top of the 180 million-barrel announced by the US last week, worsening covid outbreaks in China impacting mobility and demand for fuel. In addition, US stocks and production both rose last week according while increased urgency by the Fed to combat inflation could see growth being negatively impacted. Brent trading below key trendline support at $103.70 potentially signaling additional short-term weakness.
What is going on?
FOMC minutes flag rapid quantitative tightening pace. In the minutes, Fed members “generally agreed” that a pace of balance sheet reduction of $60 billion per month for treasury securities and $35 billion per month for MBS would be appropriate, nearly double the maximum pace of quantitative tightening during the 2017-19 tightening cycle. Some members were in favour of not “capping” balance sheet reduction if the amount of securities expiring in a given month exceeded these figures. The minutes also revealed that “many” officials were in favour of a 50-basis point hike at the March 16 meeting but chose to vote for the smaller 25-basis point move due to the Russian invasion of Ukraine.
Samsung’s preliminary earnings have topped estimates. Samsung has reported a 50% jump in quarterly operating earnings to post its highest first-quarter profit since 2018. The guidance beat market expectations, probably due to memory chip shipments and prices being better than expected. Samsung is due to release detailed earnings on April 28, when investors will be interested to hear any comments on its M&A plans, how it plans to operate its memory chip business to boost profitability, and chip demand outlook.
Three simultaneous shocks are hitting Asia: 1) Tightening of financial conditions, 2) China zero Covid (demand shock), and 3) Supply shocks. With Asian growth still in a nascent stage of recovery, it will be tough for most Asian central banks to follow the Fed in hiking rates. This means policy divergence and likely weaker Asian asset prices. Singapore likely to outperform the region with Monetary Authority of Singapore (MAS) set to tighten in the week ahead. The MAS first steepened the slope of the SGD NEER policy band to 1% last October, and later to 2% at an unscheduled meeting on 25 January. This is likely to be increased further to 3%, and a re-centering higher is also likely within the year.
Industrial metals traded lower after the Fed minutes (see above) raised concerns that a more restrictive policy to combat inflation could tip the US economy into a sharp slowdown. In addition, surging covid cases and lockdowns in China continue to negatively impact the short-term outlook for demand with Bloomberg reporting problems for everything from the shipment of raw materials to smelters to the delivery of final products. Copper touched a $4.6725/lb low in Asia after hitting $4.86/lb on Tuesday. Overall, however, continued outflow from exchange monitored warehouses point to an increasingly tight market with slowing output from Chile, accelerating European renewables demand and Russian sanctions risk to supply all adding support.
Shell announces $4-5bn write-downs on Russian assets. The write-downs are impairments on non-current assets, trade receivables, and credit losses and is around 2.5% of Shell’s equity.
What are we watching next?
French Presidential election first round this Sunday. This event bears close watching as a major event risk for the EU, even if probabilities lean heavily for Macron to emerge victorious again. The situation has become far more interesting for the second-round run-off scenarios (set for April 24,) because these have tightened at a breathtaking pace in recent days as the polls have shown a surge in favour of Marine Le Pen and a bad fade for sitting president Emmanuel Macron, with a 54-46 split for Macron over Le Pen seen by Politico, based on recent polling data. Macron is guaranteed to get a weak mandate at best, and if the first round brings notable surprises that suggest Le Pen has a fighting chance in the run-off, it could be gray swan time for Europe.
Reserve Bank of India meets tomorrow. While inflation has been running above the central bank’s target of 6% for a couple of months, there is still a chance that the RBI will stand pat on Friday. Downside risks to growth continue to be the biggest concern, but maintaining the accommodative stance will mean divergence to the increasingly hawkish Fed. Still, pressure on the Indian rupee may remain limited due to a massive foreign reserve chest, the possible IPO of LIC and the likely inclusion on Indian bonds in the government bond index.
Earnings Watch. Today's US earnings focus is Conagra Brands reporting FY22 Q3 (ending 28 Feb) at 11:30 GMT with analysts expecting revenue growth of 2.7% y/y and EPS of $0.57 down 3% y/y. The company is a big manufacturer of packaged food to retail outlets and restaurants, and thus is experiencing rising input costs, which will be interesting to see if it can pass on. Industruvärden is an investment company in Sweden owning several Nordic industrial companies and thus is a good barometer of the economy.
Economic calendar highlights for today (times GMT)
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