Global Market Quick Take: Europe – April 27, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Can Meta’s Q1 results restart positive sentiment?

US equities extended their decline yesterday with S&P 500 futures closing at 4,076, but this morning the index futures are attempting to rebound following stronger than expected Q1 results from Meta as advertising spending is recovering. With advertising spending being a leading indicator, the question is whether Meta’s Q1 results can restore the positive sentiment. First Republic Bank, which came back into focus on Tuesday when the stock responded to its Q1 earnings release declining 49%, extended its decline yesterday down another 30% as the bank is working on plans to survive. Judging from how other banking stocks are reacting it looks increasingly like the recent banking crisis is isolated into idiosyncratic cases.

Chinese equities (HK50.I & 02846:xhkg): Insurance stocks led the advance

Hong Kong and mainland Chinese benchmark indices advanced, driven by surging share prices of insurance companies, which were boosted by solid Q1 results from Ping An Insurance Group (02318:xhkg), up 7.5%. Hang Seng Index climbed 0.5% and CSI300 gained nearly 1% as of writing. In March, China’s industrial revenues grew 0.6% (vs a decline of 1.3% in Jan-Feb) and industrial profits fell 19.2% y/y (vs -22.9% y/y in Jan-Feb).

FX: USD on its back foot, JPY eyes first BoJ with Ueda

EURUSD surged and USJPY sold off yesterday on the announcement from House speaker McCarthy that he had the votes to pass the altered version of the GOP bill, which further pressurizes the debt ceiling risks (more below) and has market expectations wobblingly slightly for next week’s 25-basis point Fed rate hike. Alas, the new highs failed to sustain, although EURUSD remains near the former highs for the cycle above 1.1050 this morning. USDJPY rebounded as traders await the first Bank of Japan meeting tonight with new governor Kazuo Ueda at the helm. Short-dated implied options volatility suggests that this is the least anticipated meeting, in terms of volatility risks, in the last 12 months as Ueda is expected to maintain course for now. SEK received a jolt lower yesterday from dovish Riksbank guidance despite the 50-basis point hike and as two of six voters dissented dovish. EURSEK rallied within sight of the 11.45+ cycle post-pandemic highs.

Crude oil market sends a message to OPEC

Never make any major production cut announcement on a weekend if it's driven by demand concerns. That is the message the market is sending to OPEC+ after prices on Wednesday slumped below levels that prevailed ahead of the April 2 surprise production cut announcement. The initial jump left a major gap that for weeks acted as a magnet for short sellers. In addition, having forced short covering and fresh longs to enter around $85 in Brent and $80 in WTI, the subsequent selloff has involved long liquidation from those ‘buying’ OPEC’s signal. The technical break below $80 in Brent may attract additional short selling from momentum focused traders, with weak risk sentiment spreading from the banking sector. On top of this the recovery in China remains underwhelming, while falling refinery margins may lead to runs being cut thereby reducing demand for crude oil further. WTI resistance at $76.50 and Brent at $80.50.

Gold supported by fresh signs of banking sector stress

Gold continues to bounce of trendline support, currently at $1980, thereby keeping it well above key support in the $1955-60 area. Current support is being provided by fresh banking sector concerns after First Republic Bank plunged about 64% in just two days. Bond yields trade softer while the dollar in broad terms remains unchanged in the week. Total holdings in ETFs backed by bullion have seen a two-day jump of 8.7 tons to 2911.7 tons, and highest since January 10. Ahead of the May FOMC meeting the market has priced in 75 bps cuts before yearend, and any signal from the Fed that goes against this assumption may act as a short-term drag on prices. Resistance in gold at $2012 and $2018 while silver maintains support in the $24.50 area, having so far retraced less than one-quarter of the recent strong gains.

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) rebound slightly

US treasury yields rebounded slightly, even as the Republican controlled House passed its dead-on-arrival bill that won’t pass the Senate or Biden’s desk and ups the pressure on the debt ceiling situation (more on that below). The market maintains approximately 80% probability of a 25-basis point rate hike next Wednesday. 2-year yields have risen about 10 basis points from yesterday’s lows, trading near 3.97% this morning, similar to the performance of the 10-year benchmark, with trades 50 basis points lower. A 5-year Treasury auction saw strong demand, with a 7-year auction to follow today.

What is going on?

House passes GOP debt ceiling bill, ups pressure on Biden

The House of Representatives, led by speaker Kevin McCarthy, narrowly passed a bill that would raise the debt ceiling, slash federal spending and repeal President Biden's programs to combat climate change and reduce student debt, defying Democratic objections. The Democrat-led Senate and President Biden signalled they remain unwilling to yield to GOP demands, with Biden saying that he refuses to negotiate on the debt ceiling, saying it needs to be lifted with no conditions. Elsewhere, stronger than expected tax revenues over the last week may push the debt ceiling crunch time out until July (as further tax revenues usually arrive in mid-June.)

Meta shares jump 11.7% in aft-mkt trading on Q2 outlook

As we highlighted in yesterday’s equity note, the results from Alphabet were boding well for Meta earnings and last night’s Q1 earnings release confirmed that online advertising growth is coming back. Q1 advertising revenue was $28.7bn vs est. $27.7bn and EPS hit $2.20 vs est. $2.01. In addition, the company guided Q2 total revenue of $29.5-32bn vs est. $29.5bn and lowered its cost expectations at the high end of the guided range by $2bn. One disappointing aspect of the Q1 earnings release was Meta’s insistence on investing in the Metaverse saying it expects operating losses from this division to keep growing. Meta also said that the current AI technology such as ChatGPT would be implemented across all its products.

UK regulator blocks Microsoft’s Activision acquisition

Microsoft’s $45 billion acquisition of Activision looks likely to fail as the UK’s Competition and Market Authority announced that it would block the deal on concerns that Microsoft would use the acquisition a part of a strategy to gain monopolistic control of cloud gaming. Specifically, the regulator says the incentives are too high for Microsoft to give Activision games exclusively access to Microsoft’s cloud service which would lock out competing distribution channels such as the PlayStation.

Samsung missed Q1 earnings, expects H2 rebound

Samsung Electronics reported its worst quarterly profit in 14 years, as global economic woes dented demand for consumer electronics and a chip glut battered its core business. Q1 operating profit was down 95% from a year ago with sales down 18%. Earlier this month, Samsung said it was cutting memory production "to a meaningful level," in a sharp departure from its previous position that it would not artificially reduce output as part of efforts to gain a bigger market share. However, it guided for a rebound in H2 pinning hopes on a China recovery and an expected uptick in order as prices are cut. These could be somewhat risky bets, but a greater reliance on the mobile business may help to offset some of the pressures.

Lithium: small gains after heavy losses

After falling to their lowest level in 18 months in April and shedding some 70% from peak prices in November last year, lithium prices in China gained for the first time this year on signs demand growth may be finally gathering pace as battery demand picks up. A report released Wednesday by the International Energy Agency (IEA) shows electric cars sales up 55% in 2022 compared to 2021. Lithium carbonate rose nearly 1.5% amid thinning inventories across the supply chain. Destocking was the main cause of the 70% fall in prices since mid-November.

Xi calls Zelenskiy

Chinese President Xi Jinping spoke to Ukraine's Volodymyr Zelenskiy on Wednesday for the first time since Russia's invasion of Ukraine, fulfilling a longstanding goal of Kyiv which had publicly sought such talks for months. Zelenskiy, describing the hour-long phone call as "long and meaningful", signalled the importance of the chance to open closer relations with Russia's most powerful friend, naming a former cabinet minister as Ukraine's new ambassador to Beijing. Xi told Zelenskiy that China would send special representatives to Ukraine and hold talks with all parties seeking peace, Chinese state media reported. Zelenskiy said in an evening video address that there was "an opportunity to use China's political power to reinforce the principles and rules that peace should be built upon." (Reuters)

What are we watching next?

US first Q1 GDP estimate, weekly jobless claims up today

The US will report its latest weekly initial jobless claims numbers today. The recent range of the last seven weeks has been 228-247k, with 248k expected today. The US dollar may prove most sensitive to a surprisingly high number, given wobbling expectations for a Fed rate hike next week, as the debt ceiling issue could give them an excuse to pause for now if a few other data points are pointing to a less tight labour market and easing inflation risks (a claims number today well above 250k together with in-line or lower GDP and GDP price index data and perhaps a slight downside surprise in tomorrow’s PCE inflation data might be enough to do the trick). The first estimate of Q1 GDP today is expected to show that the US economy grew at an annualized 1.9% rate, although PErsonal Consumption is expected to show +4.0% annualized growth and the GDP Price Index is expected to drop to a nine-quarter low of 3.7% annualized versus 3.9% annualized in Q4. Note that these GDP numbers are often heavily revised in subsequent revisions.

Earnings to watch

Today’s key US earnings are Amazon, Eli Lilly, and Mastercard. Analysts expect Amazon to report Q1 revenue growth of 7% y/y and operating income of $19.4bn vs $14.8bn a year ago as cost cutting is working itself through to the bottom line. Logistics costs are coming down for Amazon which should be a meaningful driver of margin expansion. Eli Lilly is expected to report a weak Q1 result with operating income declining from a year ago and investors will focus a lot on any news related to its expectations of its upcoming competing drug to Novo Nordisk’s Wegovy on obesity treatment. Mastercard is expected to see revenue growth of 9% y/y in Q1 down from 24% y/y a year ago, but rising interest rates should provide a positive tailwind for the outlook.

• Thursday: DSV, TotalEnergies, Sanofi, STMicroelectronics, BASF, Deutsche Bank, China Life Insurance, Sinopec, BYD, Keyence, Hitachi, AstraZeneca, Barclays, DNB Bank, BBVA, Repsol, Atlas Copco, Nordea Bank, Amazon, Eli Lilly, Mastercard, Merck, AbbVie, Linde, Honeywell, Amgen, Intel, Caterpillar, Mondelez, Valero Energy, L3Harris Technologies, Newmont, Rockwell Automation, First Solar, Cloudflare, Pinterest, Snap
  
  
• Friday: Imperial Oil, Danske Bank, Neste, Mercedes-Benz, PetroChina, China Shenhua Energy, Eni, Sony, Norsk Hydro, Yara International, Hexagon, Exxon Mobil, Chevron, Colgate-Palmolive

Economic calendar highlights for today (times GMT)

0900 – Eurozone Apr. Confidence Surveys

1230 – US Weekly Initial Jobless Claims

1230 – US Q1 GDP First Estimate

1430 – EIA's Weekly Natural Gas Storage Change

1500 – US Apr. Kansas City Fed Manufacturing Activity Survey

1700 – US Treasury to auction 7-year notes

2330 – Japan Mar. Jobless Rate

Bank of Japan meeting