Global Market Quick Take: Europe – March 28, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Crisis fears ease with energy and banks gaining

S&P 500 futures held steady yesterday with positive sentiment coming from energy, transportation, and banking stocks indicating that the market is still relaxed about a potential incoming recession driven by tighter credit conditions. The index futures are trading around the 4,019 level this morning with the 50-day moving average at 4,029 and the 4,050 being the next big level to watch on the upside should momentum continue. We expect another quiet session with focus on the Conference Board Consumer Survey for March out at 14:00 GMT as the potential market moving event.

Chinese equities (HK50.I) and (02846:xhkg): gains led by Tencent and financials

Hang Seng IndexHong Kong’s Hang Seng Index climbed 0.7% as of writing, led by Tencent (00700:xhkg) up nearly 4% and a rally in financials. HSBC (00005:xhkg) and Standard Chartered (02888:xhkg) climbed more than 1.5%. Leading instant noodle maker Tingyi (0322:xhg) reported a 31% Y/Y decline in net income, seeing its share price plummeting over 11% and added to investors’ concern about the much-anticipated consumption recovery.  CSI300 remains range-bounded and nearly flat. Petrochemicals were the top gainers while semiconductors and ecommerce stocks lagged.

FX: JPY jumps as life insurer signals domestic investment focus, USD softens

USDJPY dipped sharply overnight, perhaps in part on a large Japanese life insurer Dai-ichi Life Holdings incoming president indicating a domestic investment focus in very long Japanese Government Bonds for the company’s $260 billion in funds, saying that buying US treasuries was still too expensive due to the costs of hedging FX (as higher US rates transmit directly into the cost of the hedge, offsetting the yield gain). After USDJPY traded above 131.50 yesterday, the price action was taken as low as 130.50 overnight, dragging the USD down broadly, even as US treasury yields revived yesterday (often a JPY-negative). AUD traders will focus on the February CPI release tonight (although it is a single headline data point and not the full quarterly release that has the various core measures, etc.)

Crude oil recovers half the March loss supported by supply risks and easing banking fears

Crude oil retraced half the March losses on Monday with Brent finding resistance at $78.45 ahead of $79.35, the 21-DMA. WTI meanwhile popped above $72.70 with its 21-DMA offering some resistance at $73.50. Supported by optimism that the recent banking crisis is fading together with a legal dispute between Iraq, its semi-autonomous region of Kurdistan and Turkey halting around 400,000 barrels a day of seaborne exports from the Turkish port of Ceyhan. In a two-week period to March 21, speculators increased gross short positions in WTI and Brent by 106 million while cutting longs by 127 million barrels, and those decisions are now being challenged as prices recover.

Gold continues to consolidate after failing above $2000 with focus on inflation

Gold prices trades flat following a two-day correction after Treasury yields rose as banking sector concerns eased, however sustained dollar weakness provided an offset. The recent recovery in equities also trimmed safe-haven buying, and gold reversed lower to $1944/oz after making three failed attempts at $2000 last week. Support at $1933, the 38.2% retracement of the recent rally, may be tested if inflation data this week from US PCE to flash March CPI in Eurozone may bring the focus back on price pressure, but overall, the outlook for gold and silver remains supportive, buoyed by falling yields and safe-haven demand.

Treasury yields rebounded yesterday on easing pressure on bank stocks.

Fears of contagion across U.S. regional banks eased after First Citizen Bank acquired large parts of the failed Silicon Valley Bank in an auction. The odds priced in for a 25bp hike for the May FOMC increased to 50% and the implied terminal rate increased to 4.95%. The USD42 billion 2-year auction went relatively poorly, stopping at 2.8bps cheaper than the market level at the time of auction and a below-average bid-to-cover ratio of 2.44. The 2-year yield surged 23bps to 4% and the 10-year yield climbed 15bps to 3.53%. The 2-10 year curve bear flattened 7bps to -47bps. A 5-year Treasury auction is up later today.

What is going on?

ECB still worried about inflation; flash March CPI due this week

ECB’s Schnabel noted that it is not easy to say how restrictive rates are, noting that there is no sign of weakening in the labour market, whilst also saying there are no real concerns about financial stability risks although the situation remains fragile. He had pushed to include guidance for a further rate hike at the last ECB meeting. Meanwhile, ECB's Nagel said QT should be accelerated from the summer and inflation is still too high. Focus will be on regional and Euro-wide inflation prints in Europe this week to see if inflation cools beyond the impact of energy on the headline.

US regulators sue Binance and its CEO for illegally selling crypto derivatives to US retail investors

The price of Bitcoin fell sharply on Monday after the US Commodity Futures Trading Commission (CTFC) sued Binance and its CEO Changpeng Zhao, alleging that the major crypto exchange illegally sold crypto derivatives, a leveraged bet on whether the price will rise or fall—for currencies including bitcoin, ethereum, litecoin, tether, and binance USD— to retail investors. The lawsuit accuses Binance employees of explicitly encouraging certain customers to use illegal VPNs for trades, while directing customers designated as important to set up shell companies in places like the British Virgin Islands and the Netherlands to avoid US trading restrictions.

Carnival Q1 earnings top estimates

Cruise operator Carnival reported first-quarter fiscal 2023 results, with earnings and revenues beating estimates. The company reported adjusted loss per share of $0.55, narrower than -$1.66 in the same period last year. Revenue jumped 173%, improving to 95% of 2019 levels due to strong bookings in the quarter for the North America and Australia and Europe segments. However, the outlook was conservative, and that saw the stock turn lower after over 18% gains YTD. The strong earnings performance of Carnival is reflective of a pickup in travel demand and bodes well for Saxo’s Travel and APAC Tourism equity theme baskets.

Three EV companies report this week, including China’s giant BYD

The EV sector has generated a lot of noise of late; from intensifying price wars among EV makers who are cutting prices, likely in part on a large drop in lithium prices, to EV purchase subsidies expiring in China last year, and new EV entrants in the market. As mentioned in our Week Ahead, this week’s earnings from China’s BYD’s, China’s Great Wall and America’s Canoo, as well as China’s lithium giant Genfeng, will set the scene for what investors can expect from the EV sector in 2023. Given BYD is the leading Chinese EV company, its Q4 results and outlook are the most heavily anticipated. Investors will get a gauge on how increased competition has affected sales, and if price drops have spurred increased sales. We will also get a gauge on how falling commodity prices (with lithium prices down 11%-47%), have potentially helped EV makers balance sheets. China’s BYD is expected to report annual net income of 17 billion yuan ($2.5 billion), a 450% jump from the prior year.

What are we watching next?

US March Consumer Confidence ahead – watching expectations/present situation spread

The March Conference Board Consumer Confidence survey is out today, after the February headline of the survey dipped a few points to 102.90. That level is not remarkable relative to the high of 109.00 and low of 95.3 over the last 12 months, with the low posted in the context of wild spikes in gas prices last summer. However the expectations-present situation spread is very remarkable, as the February spread of –83.1 was the lowest since a brief episode back in early 2001 of a few months, as the Expectations component of the survey has deteriorated badly in recent months while the Present Situation component has held up well. A further deterioration in expectations would suggest the risk that consumers may tighten their belts

Earnings to watch

The memory and data storage chipmaker, Micron Technology, has outperformed the Nasdaq 100, and is up 21% this year, ahead of its quarterly results today scheduled for after the market close. Its outlook will be watched closely following the memory chipmaker’s cost-cutting efforts, from headcount reductions to executive compensation cuts, which take hold this quarter. That said, consensus expects further y/y declines in both EPS and revenue. Drug store giant, Walgreens Boots, reports before the open and could see restructuring and capital plans scrutinized, while investors could also react to the drugstore halting the sale of abortion-pills in several US states. Walgreens shares are down 14% this year. Lululemon is another key consumer stock reporting today after the close with analysts expecting revenue growth of 27% y/y and EBITDA of $836mn up from $654mn a year ago as the company continues to take market share and expanding into new categories such as shoes.

• Tuesday: BYD, Nongfu Spring, Micron Technology, Lululemon Athletica, Walgreens Boots Alliance
• Wednesday: Constellation Software, Cintas, Paychex
• Thursday: Kweichow Moutai, Great Wall Motor, H&M

Economic calendar highlights for today (times GMT)

0845 – UK Bank of England’s Bailey to testify on Silicon Valley Bank

1230 – US Feb. Advance Goods Trade Balance

1300 – US S&P CoreLogic Home Price Index

1300 – Norway Norges Bank’s Governor Bache to speak

1400 – US Fed’s Barr (Voter) to testify before Senate panel

1400 – US Mar. Consumer Confidence

1700 – US Treasury to auction 5-year notes

2130 – API's Weekly Crude and Fuel Stock Report

0030 – Australia Feb. CPI