Global Market Quick Take: Europe – March 16, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Another day of volatility ahead

S&P 500 futures are bouncing higher this morning trading around the 3,935 level responding to measurements taken by the Swiss National Bank to shore up confidence in Credit Suisse. The US 2-year yield is also jumping 12 basis points this morning on this attempt to muster a broader risk-on rally. The VIX Index remains high around the ~26 level with the VIX forward curve flat suggesting less stress in the US equity options market. US mega caps remain a safe-haven trade in the market holding up US equities a bit more than what you would expect given the tighter financial conditions.

European equities (EU50.I): Credit Suisse taps central bank funding

The Swiss National Bank (SNB) has offered a funding lifeline worth $54bn to Credit Suisse and the Swiss investment bank has offered to repurchase debt in a move to restore confidence. Credit Suisse’s 5-year senior CDS price hit 970 yesterday, a new all-time high, reflecting the nervousness in market. The measures from SNB are helping on sentiment with Credit Suisse indicated up 18% in pre-market trading. STOXX 50 futures are also attempting to rally on this news trading 1.6% above yesterday’s close with the key level to watch on the downside being the 4,025 level and 4,125 on the upside. We expect another nervous trading session today with high volatility and focus on banks.

Chinese equities (HK50.I and 02846:xhkg): Retreat on a risk-off session

HSBC (00005:xhkg), AIA (01299:xhkg), and energy stocks weighed on the benchmark Hang Seng Index, seeing the benchmark index down 1.7%. While the saga in the U.S. regional banks and Credit Suisse has stabilized somewhat, market sentiment remains fragile and investors opt for risk-off, towards financial and cyclical names. In A-shares, however, banks are well bid and are among the top gainers on Thursday. In February, 55 out of the top 70 Chinese cities surveyed registered new home price increases from January. CSI300 shed 1%, as coal, petrochemical, non-ferrous metal, and electric equipment leading the decline.

FX: Dollar recovery takes hold, but JPY’s safe-haven status at play

The US dollar charged higher as the Swiss Franc and Euro slumped amid rising concerns on European banks (read below). US data failed to take the limelight away but softer February PPI and downward revisions in the previous print again lowered the probability of a Fed rate hike next week (currently at slightly better than 50/50 odds for a 25 basis point hike). USDCHF surged back above 0.93 overnight after touching lows of 0.91 earlier this week on CHF’s safe-haven demand which has come under question due to concerns on Credit Suisse and the Swiss banking sector (more below). EURUSD plunged over 200bps to 1.0550 ahead of the ECB decision today where a 50bps rate hike may look too bold now and guidance will be critical (more below). The Yen’s perceived safe-haven status getting plenty of focus yesterday amid the banking crisis and collapse in global short yields, as USDJPY slumped below 133 from 135. AUDUSD surged to 0.6637 from sub-0.66 levels overnight as the AU jobs report came in better than expectations with unemployment rate down to 3.5% (vs. 3.6% expected and 3.7% prev.)

Crude oil climbs from 15-month low

Crude oil prices slumped to a December 2021 low on Wednesday as the banking crisis continued to roil risk appetite and the general economic outlook. The Interntional Energy Agency in its monthly oil market report warned that higher-than-expected Russia exports will keep the market in surplus for the first half of the year. With the short-term demand outlook increasingly being challenged by the current banking crisis the three-day rout accelerated yesterday as hedge funds scrambled to reduce what up until last week had been an elevated long position. The direction in the coming days will apart from the liquidity crisis depend how much more selling, if any, they need to carry out. Following the latest slump, the market will now be looking out for OPEC+ production comments and whether the US government will start refilling its SPR. Brent as a minimum needs a close above $75 to signal some emerging stability.

Copper trades below $3.95 despite positive China signals

Copper extended losses as the risk-off tone across market triggered further selling. The banking crisis appeared to be spreading to Europe sparking global growth concerns. This was despite positive signs in China in the Jan-Feb activity data. Growth in fixed asset investment picked up as projects commenced in the New Year following policy support. Property investment also rose more than expected in the first two months of the year. Copper prices broke below the key $3.95 mark thereby bringing the 200DMA at $375.75 into focus.

Precious metals clear winners following a week of extreme uncertainty

One week on from the SVB news and we have seen precious metals respond positively with silver up around 8% and gold around 5%. Yesterday's turbulence triggered by turmoil at Credit Suisse triggered another rush of safe haven buying which briefly saw gold trade $1937 before profit taking emerged as the Swiss National Bank stepped in to provide a lifeline (see below). Gold and silver have been supported by fresh buying from hedge funds which during the February correction had cut their gold long by 64% to 40k lots while the silver position was flipped to a net short. Key focus remains the outlook for US Fed funds and whether we have seen a peak already, bond yields and today’s ECB meeting given its potential impact on the dollar. Support at $1890 followed by 1877.

Treasuries surge again with yields on the 2-year plummeting to 3.89%

US treasury yields plunged yesterday on the negative focus on banks in Europe, centering on Credit Suisse. The 2-year yield plummeted to as low as 3.71%, before bouncing to finish the session at 3.89% and then trading as high as 4.0% this morning after the announcement of an SNB lifeline to Credit Suisse. Markets were extremely volatile. The September SOFR contracts once soared 100bps and triggered a 2-minute trading halt. At the close of trading, markets are pricing in a terminal Fed Fund rate of around 4.8% at the FOMC next week before falling to around 3.9% by the end of this year. Yields on the 10-year dropped 23bps to 3.46%. The 2-10-year curve bull steepened 12bps to -43bps.

What is going on?

Credit Suisse receives a lifeline from the Swiss National Bank

The Swiss National Bank will lend troubled Swiss bank Credit Suisse up to CHF 50 billion to extend a lifeline and prevent liquidity concerns from resulting in a possible collapse of the lender as counterparties flee. Credit Suisse will use a portion of the funds to buy back some $3 billion of senior debt that has collapsed in price recently. The move came after the recent turmoil in global banks saw Credit Suisse’s share price nosediving steeply after a long period of struggling. Shares traded as low as CHF 1.55 yesterday versus 2.67 last week just before the Silicon Valley Bank collapse touched off a negative focus on global banks. The ECB was out polling banks yesterday on their exposure to Credit Suisse. As market fears linger, Saxo provides a range of options on how to protect your portfolios and reduce overall risk exposure, which could mean including short-term bonds or holding cash as well as including some exposure to safe-havens. Several such ways are discussed here in this piece.

Adobe earnings: Figma transaction on track for 2023 closure

The US software maker reported earnings last night after the close with FY23 Q1 (ending 3 Mar) revenue at $4.66bn beating est. of $4.63bn and EPS of $3.80 vs est. $3.67. The outlook for revenue and EPS in the current quarter is slightly above estimates. In addition, Adobe said that the Figma acquisition is on track to close by the end of 2023. Shares were up 5% in extended trading.

UK budget: projects no recession and inflation halved in 2023

Chancellor of the Exchequer Jeremy Hunt set out major changes to the UK tax and benefit system to encourage businesses to invest, entice people back into work and to pull the economy out of stagnation. Overall, a significant fiscal easing was delivered alongside improved borrowing, and Hunt said the economy would only contract by 0.2% in 2023, compared to the OBR’s previous forecast of shrinking by 1.4%. The OBR also sees inflation falling to 2.9% by end-2023 from current over 10% levels.

US PPI and retail sales comes in cooler than expected

February PPI and retail sales came in softer-than-expected after the in-line CPI report a day before, and a marked revision lower in the January PPI print added to the relief. Headline PPI fell 0.1% MoM (vs. +0.3% exp) while the January figure was revised lower from +0.7% to +0.3%. The YoY print also fell to 4.6% from the downwardly revised 5.7% for January (initially 6.0%), well beneath the expected 5.4%. Core PPI was flat (vs. exp. +0.4%; prev. revised to +0.1% from +0.5%), with the YoY falling to 4.4% (exp. +5.2%; prev. revised to +5.0% from +5.4%).

February retail sales data was dovish as well, declining 0.4% MoM, worse than the expected -0.3% MoM. But the January print was revised higher to 3.2% MoM from 3.0% previously. Still, the control group measure, which is a signal on consumer spending, rose 0.5%, a big surprise against the -0.3% forecast, while the January reading was also revised up to 2.3% from 1.7%. The report may signal that the consumer and growth are holding up well, but the story has turned since the banking crisis unfolded and little conclusions can be drawn from any backward-looking data.

China to cut steel output, sending jitters to iron ore prices, and major miners shares

China, the worlds’ biggest steel producer is cutting its steel production output for the third year, in a bid to hit its green goals by 2030. Steel production emission account for 15% of China’s emissions, behind electricity generation. China is also said to be banning new steelmaking capacity, but that report was an allegation. The news reverberated through metal prices, sending the price of the key steel ingredient, iron ore (SCOA) down 2.2%, to $129.25. China’s production hit a record in 2020, of 1.053 billion tons. Since, production declined each year, remaining just above 1 billion tons. Shares in some of the world’s biggest miners fell sharply with BHP, Rio and Fortescue Metals shares down 3-4%, while Vale shares in Brazil fell 3%

What are we watching next?

ECB faces a tough communication task today after bank turmoil and recent hawkishness

ECB expectations have suffered a profound mark-down now that the turmoil in banks has spread across The Pond to Europe, particularly jarring given the popularity among investors of buying European bank stocks on the hope that a widening interest rate margin was set to improve profitability. The ECB pre-committed to a 50 basis point hike today at its prior meeting and more hawkish members had been talking up multiple 50-basis points moves before the turmoil of this week, while a couple of former prominent ECB governing council members have weighed in against further tightening. Market expectations are priced at +28 basis points, suggesting many see a smaller hike or no hike from President Lagarde and company today due to market conditions.  Focus will be on the guidance for the path of interest rates from here, as well as on the comments around the risks of a financial contagion spreading from the SVB collapse and turmoil in banks. Recent data such as an upside surprise in core inflation had prompted the market to price the ECB to shift to a terminal rate of 4% by July, but this has been marked down to hardly more than 3.0%. The latest inflation forecasts will also be key, with core inflation expectations likely to be revised higher for 2023 after strong reads in January and February. Read our full preview here.

Fed expectations for next week in the spotlight post-ECB

Expectations of a Fed rate hike next week have dropped back to 25bps with the concerns now seen in European banks after the recent turmoil in US banks on the SVB collapse, but the Fed may need to preserve its inflation-fighting credibility and can still go for a 25bps rate hike if no further market disorders are seen.

Earnings to watch

Rheinmetall earnings are key to watch today in Europe with analysts expecting Q4 revenue growth of 29% y/y and EBITDA of $494mn reflecting the highest growth rate in more than two decades and a strong improvement in profitability as orders are surging for the German weapons manufacturer. Today’s US earnings focus is FedEx with analysts expecting -4% y/y revenue growth in FY23 Q3 (ending 28 Feb) and EBITDA of $2.03bn down from $2.45bn a year ago. The global logistics market is seeing pricing pressure as volumes relative to available capacity is now more in balance than during the pandemic. The key outlook driver to watch in FedEx earnings is whether the Chinese reopening is lifting demand.

• Thursday: Verbund, Rheinmetall, KE Holdings, Enel, FedEx, Dollar General
• Friday: Vonovia

Economic calendar highlights for today (times GMT)

0900 – Norway Feb. Regions Survey

1230 – US Weekly Initial Jobless Claims

1230 – US Feb. Housing Starts and Building Permits

1230 – US Mar. Philly Fed Survey

1315 – ECB Rate Announcement

1330 – ECB Press Conference

1430 – DOE's Weekly Natural Gas Storage Change