Financial Markets Today: Quick Take – January 26, 2023

What is our trading focus?

Equities: US equity market holds up after a stumble

The market suffered a significant intraday drawdown yesterday, in part on mega-cap Microsoft gapping lower on the open after its earnings report after the close on Tuesday. But that stock and the broader market recovered to approximately unchanged by the close of the session, keeping the sense of suspense alive around the direction of this market, with a long-standing descending trend-line from the all-time top in play for the S&P 500 near recent highs above 4,000 and the price action criss-crossing the 200-day moving average. Today sees a further flurry of earnings reports, including from the two credit card giants Mastercard (to report before market open) and Visa (after market close).

Hong Kong’s Hang Seng (HIF3) surged on return from the Lunar New Year holiday

On the first trading day of returning from the Lunar New Year holiday while the mainland bourses remain closed, Hang Seng Index surged 2% and Hang Seng TECH Index jumped 3.6%. During the first four days of the Lunar New Year holiday from Saturday to Tuesday, China’s passenger trips by road, rail, air, and water waterways reached nearly 96 million in China, about 29% higher than in the same 4-day period in the Lunar New Year holiday last year. It added to the optimism that the initial Covid outbreak when pandemic containment measures were lifted has not stalled the rebound in mobility and economic activities. Xiaomi (01810:xhkg), surging 12%, was the best performer within the benchmark Hang Seng Index, following the leak of an EV blueprint design being considered as an indication of the mobile phone and electronic device maker is on track to launch its first EV in 2024.

FX: USD drops with resilient risk sentiment and as yields ease lower, perhaps in part on dovish Bank of Canada

The USD remains on the weak side, falling again after a brief rally yesterday as sentiment rebounded in equity markets. Another strong treasury auction (see more below) kept US yields under pressure, with the Bank of Canada’s signalling of a pause after yesterday’s hike reminding the market of the US Fed’s trajectory as it is seen pausing rate hikes soon. AUD was especially firm, rallying hard yesterday after a firmer-than-expected Q4 CPI print which is seen likely to drive the RBA to continue to hike for now. AUDUSD has held above 0.71, while AUDNZD rallied hard to 1.0950+, closing in on its 200-day moving average just above 1.1000. GBPUSD recoverd back toward 1.2400 as well while EURUSD is hovering near the YTD high of 1.0927 after a strong German Ifo report yesterday (read below) and hawkish rhetoric from the ECB continuing. USDJPY also back below 129.50 overnight in Asia.

Crude oil (CLG3 & LCOH3) prices range-bound

Crude oil trades near unchanged after holding tight ranges overnight the Asia session amid low liquidity as the Lunar New Year holiday continues.  EIA reported a 0.5mn barrel build in US crude stocks in the latest week, while Cushing inventories jumped by more than 4 mn barrels, the biggest since April 2020, to 35.6mn barrels, thereby supporting the current spread widening between WTI and Brent to near $6/bbl. Export was firm while total products demand to its lowest for this time of year since 2014. Meanwhile, a weaker dollar and sustained positive signals from China reopening underpinned prices. WTI continued to find bids at $79.50 while Brent was supported around $85.50 with eyes on the December high of $89.40.

Gold (XAUUSD) pushes to fresh cycle high near $1950

The weakness in the dollar amid expectations of a Fed downshift to a smaller rate hike next week continues to push gold prices higher. The yellow metal reached 1949.20 overnight, the highest levels since April 2022. A dovish hike by the Bank of Canada last night has set up the markets for a similar shift from the Fed next week. The US GDP release today will be of key interest to gauge whether the market expectations shifting in favor of a soft landing rather than a recession can continue to hold. The focus will then turn to the PCE data on Friday before we head into the Fed meeting week. Additional price momentum being provided by ETF’s where total holdings this week has jumped by 13 tons. Support at $1900 with resistance at 1963$, a Fibonacci level.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) yields fall, 5-year auction another strong one

US treasuries continued to rally and yields edged lower, keeping the 10-year US treasury benchmark yield below 3.50%. A 5-year auction saw very strong bidding metrics, if not quite as dramatic as those of the 2-year auction of the prior day. More impactful US macro data is up today, including the first Q4 GDP estimate and weekly jobless claims number, with December PCE inflation data up tomorrow.

What is going on?

Tesla reports strong profits, forecasts 37% jump in sales this year

The company beat consensus estimates in reporting $1.19 of earnings per share and said that it would increase its output “as quickly as possible” after having previously forecasted that it would average 50% annual growth in coming years. The coming year’s forecast production increase was for a rise of about 37%, and questions loom about the company’s margins after it cut prices sharply earlier this month. The company warned on economic uncertainty and claimed to be accelerating its “cost reduction roadmap.” Tesla stock has rallied over 40% from the cycle lows of a few weeks ago and was up marginally in late trading yesterday after the earnings release.

Bank of Canada’s dovish hike

The Bank of Canada raised interest rates by 25bps to 4.50%, the highest level in 15 years. It plans to hold going forward, but Governor Tiff Macklem said he's "prepared" to hike again if needed. The decision was slightly dovish with a clear pause being signalled, despite the caveat to hike again. The MPR saw the bank lower its 2022 and 2023 inflation forecast but sees 2024 inflation at 2.3% (prev. 2.2%), the same year it expects it to reach its target. Growth forecasts were raised in 2022 and 2023, but lowered in 2024. Markets are taking this as a positive signal in the hope that the Fed could take a similar turn next week.

Improving German business outlook further lowers recession risk

Germany business confidence survey signalled that the worst may be over for the economy and a slowdown may be ahead, but a deep recession appears to be unlikely at this point. The threat of an immediate energy crunch has receded due to the less harsh winter, and supply-chain constraints are also easing with China’s reopening. The expectation index of the Ifo survey rose for the fourth successive month to 86.4 in January from 83.2 previously but remained historically subdued amid elevated inflation curbing purchasing power. The current assessment slightly deteriorated.

Bad time for small caps on Euronext Paris

With tightened financial conditions, it is getting increasingly complicated for several small companies to get access to affordable financing. In less than two days, two small caps listed on Euronext Paris have faced severe financial difficulties. A court ordered the liquidation of Deinove – a French biotechnology company pioneering the exploration of a new domain of life, unexplored at 99.9 %: the microbial dark matter. The company, based in the South of France, failed to secure a new round of financing. Yesterday, Lysogène went into receivership. This is another French biotechnology company focusing on lead programs in neurodegenerative lysosomal. The stock is down 85 % on a yearly basis. Expect other small listed companies to experience the same fate as access to financing is getting much more complicated in a high-interest environment. The biotechnological sector is certainly one of the most vulnerable, along with other high-tech segments (such as artificial intelligence).

What are we watching next?

US GDP on the radar today, along with jobless claims

An advance print of the Q4 GDP will be released in the US today, and some deceleration is expected from last quarter’s 3.2% YoY. But consensus still expects a strong growth of 2.7% YoY as spending on services was sustained. The big concern will be if we see consumers pulling back, as was signalled by a slump in retail sales this month. That could raise concerns on whether a soft landing is possible. However, judging from the recent labour market strength, it may be too soon to count the consumer out. Initial jobless claims for last week will also be on watch after the previous figure dipped to sub-200k levels signalling a still-tight labour market.

Earnings to watch

Today’s key earnings focus in Europe is on the largest company on the continent by market value, LVMH, which continues to ride high on strong sales, and with special focus on how the company guides on the anticipation of a reopening China. It reports after the European market close today. A number of other prominent European names are reporting, including SAP (results already out this morning, with upbeat revenue guidance relative to forecast). In the US, the focus is on the two credit card giants Mastercard, which will report before the open and Visa, which reports after the market close. US chip giant Intel will also report after the market close, as that beleaguered company continues to try righting the ship after touching eight-year lows last year, and with slumping PC demand a prominent concern.

• Today: Tryg, Novozymes, Kone, Nokia, LVMH, Christian Dior, STMicroelectronics, SAP, Diageo, Atlas Copco, Volvo, SEB, Visa, Mastercard, Comcast, Intel, Blackstone, Valero Energy, Archer-Daniels-Midland, Dow, Nucor, L3Harris Technologies, Southwest Airlines, American Airlines
• Friday: Fanuc, Chevron, American Express, Colgate-Palmolive

Economic calendar highlights for today (times GMT)

• 1330 – US Dec. Chicago Fed National Activity Index
• 1330 – US Q4 GDP Estimate
• 1330 – US Weekly Initial Jobless Claims
• 1500 – US Dec. New Home Sales
• 1530 – US Weekly Natural Gas Inventory report
• 1600 – US Jan. Kansas City Fed Manufacturing Activity
• 2330 – Japan Jan. Tokyo CPI
• 0000 – New Zealand ANZ Business Confidence/Activity Outlook
• 0030 – Australia Q4 PPI