Summary: US equities posted a weak session yesterday as economic data weighed and as speculative favorite Tesla fell nearly 10% on the session. The concern level on the US debt ceiling issues is rising quickly after US House Republicans proposed an unrealistic spending plan, and weak US tax revenue inflows could mean that pinch time may be arriving already in early June. Still, the US dollar maintains a steady course, while the JPY rallied on yields falling yesterday.
US equites tilted lower yesterday, with the S&P 500 losing a bit more than 0.5% and the Nasdaq 100 index a bit more than that as the Philly Fed survey came in far lower than expected while the weekly jobless claims ticked a bit higher than expected. Tesla’s earnings report and clear guidance that it intends to grow market share through price cuts also weighed as its shares dipped nearly 10% yesterday. The concern level on the US debt ceiling issue is also rising and may be playing a part in weaker sentiment – more below. The next two weeks are the busiest and most impactful of this quarter’s earnings season.
The pledge from the Ministry of Industry and Information Technology (MIIT) to boost consumption and the People’s Bank of China’s positive remarks on credit availability to the real estate sector met with muted responses from investors. CSI300 tumbled more than 1% on Friday, extending a straight 3-day retreat. Electronics, computing, and media names led the decline. In Hong Kong, Hang Seng Index slid around 0.6%, dragged by technology stocks. Hang Seng TECH Index dropped by nearly 2%, driven by Alibaba (09988:xhkg), down 3%, SMIC (00981:xhkg), down 5.7%, and Sensetime (00020:xhkg), falling 7%. Consumer stocks outperformed. Sportswear maker Li Ning(02331:xhg) surged over 3% and was the best-performing stock within the Hang Seng Index.
The US dollar remains bottled up in a tight range in most places, although a very weak Philadelphia Fed manufacturing survey yesterday (after the surprisingly strong Empire Manufacturing survey on Monday) saw treasury yields easing back lower, which offered the JPY broad support, as USDJPY trades this morning back below 134.00 after nearly touching 135.00 yesterday and EURJPY has dipped below 147.00 after nearly touching 148.00 in recent days, though for the JPY to get more traction, we’ll likely need to see a more significant global bond rally and for yesterday’s dip in risk sentiment to deepen.
Crude oil prices are heading for their first weekly loss this month, and in the process, most of the gains that followed the OPEC+ production cut announcement on April 2 has now been wiped out. The renewed weakness being driven by a combination of lower gasoline and diesel margins pointing to softer fundamentals and traders forced to reduce longs that was bought following the cuts, the bulk around $84.50 in Brent and $80 in WTI. All developments that have seen technical traders attempt to close the gaps, in Brent to $80 and $75.70 in WTI. A process that potentially could see this technical selling and long liquidation phase drive prices lower than what is currently justified based on current supply and demand. Focus on US data with PMI due later today.
Precious metals remain in consolidation mode after failing to mount a fresh upside push in response to weaker than expected US data, not least the Philadelphia Fed Business Outlook which posted the worst reading in this cycle. Together with a larger-than-expected rise in initial jobless claims it drove short-term interest rate futures higher, thereby adding to 2H23 rate cut expectations. In gold the risk remains of a a deeper correction towards $1957 - the 38.2% retracement of the banking-crisis-led runup in prices. Platinum meanwhile continues to challenge resistance in the $1100 area, supported by supply concerns, and the biggest weekly jump in total ETF holdings in three years to 3.2 million ounces, an eight-month high. Very low participation from speculators has shielded the metal from the correction seen in gold and it has supported a +100-dollar narrowing of the discount to gold.
The 2-year yield dropped by 10bps to 4.14% following a larger-than-expected rise in initial jobless claims and a big decline in the Philadelphia Fed Business Outlook headline. The 10-year yield finished 6bps lower. The 2-10-year yield curve steepened around 5bps to -61bps. The USD21 billion 5-year TIPS auction was uneventful. Muted response to Fedspeak from Mester, Logan, and Bowman that did not add much new information to the Fed’s rate path. The 13-15 bps rally in the 2024 SOFR 3-month interest rate futures (higher futures price, lower rates) were largely in response to the weaker economic data. The SOFR Jun-Dec 2023 spread widened 7bps to -61bps, adding back some rate cut expectations for 2H 2023.
We are only two weeks away from the ECB meeting. Yesterday, the minutes of the ECB’s March meeting suggested there is a growing divide within the governing council about the scope of the next hike. We believe a 50-basis point hike is still on the table next month. But a minority of members pointed out that the lag of the transmission of monetary policy is perhaps longer and therefore they seemed to worry about tightening too much. This minority will be inclined to vote in favor of a 25-basis point hike. We consider the debate about the short-term pace of monetary policy in the eurozone will certainly intensify in June. For now, there are not enough reasons to slow the pace of tightening.
Fed officials backed another interest-rate hike while also hinting at the need to pause sometime thereafter. Cleveland Fed chief Loretta Mester, a hawk, reiterated her support for getting rates above 5% while noting prudence is needed amid tighter credit conditions. Raphael Bostic supported the case for pausing after one more hike, and Patrick Harker said rates are "pretty close" to where they need to be. (Bloomberg)
In the week through to April 19, banks increased their lending from the Fed’s new emergency BTFP lending facility set up in the wake of the Silicon Valley Bank demise in March by over $4 billion to $143.9 billion. It was the first increase in five weeks.
The iron ore futures price (SCOc1) fell as much as 5.4% overnight, and it has now lost around 15% from the March peak with technical indicators flashing warning signals. The fresh price pressures have come after Rio Tinto, the world’s second biggest iron ore producer, announced it exporting a record amount of iron ore, and it will continue to ramp up production. This is in the face of some Chinese steel mills struggling to remain profitable, with some curbing output, and now operating in maintenance. Steel producers in China have been grappling with volatile steel prices, while paying more to buy iron ore, with the price of the key steel ingredient up 50% from October last year.
Mining companies’ quarterly results are continuing, and they highlight that global tightness in the copper market will continue at a time when copper consumption continues to rise. BHP reported Copper production rose 12% for its nine-month reporting period, but BHP kept its production guidance for the year unchanged. Rio’s cut its outlook for copper production due to technical problems at two mines. And Chilean copper company, Codelco reported first-quarter output being at the lower end of annual guidance and expects output to stay at similar levels through next year. That said, the copper price has fallen for the third day on fears of a possible recession. This is despite the
Today sees preliminary Eurozone, UK and US Manufacturing and Services PMI. The Eurozone surveys have been fairly steady on the services side, with improving to a few points above 50 in the March round and with expectations of similar today. On the manufacturing side, the story has been far weaker, particularly for the vital German economy, which posted a low for the cycle since the pandemic at 44.7 in March and is only expected to see a slightly “improved” number today (anything below 50 still suggests contraction). The story is similar for the UK PMI’s, while for the US, the market has been reluctant to react much to the S&P Global PMI data, which is at odds with the ISM figures. While the S&P Global numbers are on an improving trajectory, the ISM surveys show an accelerating contraction in Manufacturing for several months now, while the ISM services dipped to 51.5. The
The US debt ceiling issue, which requires that Congress raise the ceiling if the US treasury is to continue servicing US debt and avoid default, is becoming ever more pressing after US House Republicans proposed an unrealistic spending bill that will never pass the Democratic controlled Senate, much less Biden’s desk. Democrats are calling for an unconditional lifting of the debt ceiling. The cost of insuring US debt against default rose to a new high and 1-month US treasury bills (which would mature before the feared earliest time frame of possible pinch time for the issue) saw their yields plunging as low as 3.22%, down 50 basis points from the prior day despite a Fed policy rate of 4.875% and possibly 5.125% after the May 3 FOMC meeting.
The week in earnings is winding down today, but still some hefty names reporting, including German business software giant SAP, US consumer products behemoth Procter & Gamble, the largest US oil services company Schlumberger and US-based international miner Freeport McMoran.
The heart of earnings season lies in the two weeks ahead, with Visa, Alphabet, Microsoft, Boeing, Intel, Caterpillar, Mastercard, McDonalds, Exxon Mobil, Chevron, Berkshire Hathaway and other companies reporting.
For an extended overview of all earnings releases check out the earnings calendar in our trading platform.
Economic calendar highlights for today (times GMT)
0715-0800 Eurozone preliminary Apr. Manufacuring and Services PMI
0830 – UK preliminary Apr. Manufacturing and Services PMI
1230 – Canada Feb. Retail Sales
1345 – US preliminary Apr. S&P Global Manufacturing and Services PMI
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Chief Investment Strategist
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Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy