Global Market Quick Take: Europe – March 3, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): can S&P 500 futures climb above 4,000?

US equities rallied yesterday on no real news, so we expect it to be mainly flow driven rather than driven by changes to fundamentals. S&P 500 futures closed at the 3,985 level still failing to push above the 4,000 level, and if the US 10-year yield remains above the 4% our view is that US equity futures will struggle to maintain momentum into the close before the weekend. The upside risk to that view is of course the ISM February report out later today which could send another bullish signal on the US economy extending the rebound in economic activity we saw in January.

Hong Kong’s Hang Seng Index (HSI.I) and China’s CSI300 (000300.I) rallied ahead of the Two Sessions

Hang Seng Index advanced over 1% and CSI 300 climbed 0.3% ahead of the Two Sessions, which are the annual meetings of China’s legislature and top political advisory body, commencing this weekend. Caixin Services PMI rose to 55 in February from 52.9 in January, echoing the strength of the recovery in the official NBS PMI survey earlier in the week. Hang Seng TECH Index gained 2.8%, with China internet names leading the charge higher. BiliBili (09626:xhkg) surged 11.2% following the online entertainment firm reporting a smaller net loss in Q4. In A shares, shipping, semiconductor, and lodging stocks gained.

FX: USD firm on higher US treasury yields

The US dollar rose sharply yesterday on a surge in US treasury yields after another firm weekly jobless claims print & upward revision in Unit Labor Costs for Q4 (see below), but perhaps as well on the 4.00% psychological resistance in the US 10-year benchmark treasury yield falling. The greenback’s strength faded in late trading as risk sentiment managed to stage a comeback, with US equities avoiding a meltdown after testing below key support. The February ISM Survey is in focus today, but as we emphasize below, trust in this survey may be weak.

Crude oil rises on China demand optimism

Crude oil prices are heading for a weekly gain but overall remain stuck within a narrowing range as China demand optimism is being offset by concerns about US monetary policy as the battle against inflation remains a key focus. Overall, however, with the dollar trading down on the week and prompt spreads indicating a tightening market, prices have managed to recover. Brent trading above its 21-DMA for a third day may add some technical support with the next level of resistance being the February high at $86.90. Focus on China where the annual National People’s Congress kicks off this weekend (see below).

Gold supported by China comeback and sticky inflation

Gold is heading for its best week since mid-January following a week that saw a hot EU inflation print and strong economic data from China, a top buyer of gold. The result being a softer dollar and gold has moved higher to challenge the 21-DMA, currently at $1844 for the first time since February 3. Atlanta Fed’s Bostic saying rates could rise to 5.25% and stay there well into 2024 has been shrugged off as the market is already pricing a terminal rate around 5.5%. It is also worth noting that this week's 10 basis point jump in US 10-year bond yields has primarily been driven by rising breakeven rates (inflation) leaving real yields close to unchanged. For the current recovery to attract support from technical buyers, prices as a minimum need to break $1864, and silver $22 to signal an end to the current corrections.

US natural gas rally pauses after weekly stock report

US natural gas prices fell on Thursday following a six-day rally which lifted the front month futures price by 29% in response to signs of lower production and rising exports. In addition, a current cold spell through mid-March has also supported the short-term demand outlook. The small correction seen yesterday came after the EIA reported an 81 bcf drop in stocks compared with a five-year average decline of 134 bcf for this week. The smaller than normal draw lifted total stocks to 2,114 bcf, some 19.3% above the 5yr avg. for this time of year, and highest surplus since May 2020. A mild winter suppressing not only demand but also producers’ willingness to maintain record production levels has created a very volatile market in recent months.

US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) sold off on ISM Price Paid Index

The 10-year US Treasury yield surged above the psychologically important 4.00% that appeared to be supporting the treasury market of late, rising as high as 4.09% before retreating overnight to 4.03% in early European trading this morning. The sharp rise in EU yields has lead global yields higher this week on a series of hot inflation numbers across the bloc, capped by a further acceleration in the EU core CPI yesterday. But short yields in Europe retreated several basis points from new cycle highs yesterday, as did the US 2-year yield, which trades this morning at 4.87% after as high as 4.94% in the immediate wake of yesterday’s US data. The Treasury Department announced the auction of $40 billion of 3-yr notes, $32 billion of 10-year notes, and $18 billion of 30-year bonds next week.

What is going on?

Worrying inflation prints in the eurozone

Eurozone core inflation rose to 5.60 % year-over-year in February with both core goods (6.8 %) and services (4.8 %) reaching new record highs. This is much higher than expected (5.3 %). We pay more attention to core inflation as it can show how entrenched inflation is, and it appears the inflation headache will remain an issue for most of the year. All the country prints which were released earlier this week came in above expectations, topped by Germany’s 9.3% vs 9.0%. In these circumstances, talks about a potential monetary policy pause are ill-timed, and from a monetary policy perspective, we think the ECB is unlikely to slow the pace of tightening until we see the first signs of underlying inflation peaking. Expect at least two more 50 basis point hikes in March and in May (there is no meeting in April). Depending on the trajectory of inflation, the market consensus forecasts that another 25-basis point hike could happen in June.

Fed officials hinting at a higher dot plot

The biggest headlines today are referring to Fed member Bostic’s (non-voter) comments as dovish, while he said he is firmly in favour of a 25bps hike path (to reduce the possibility of a hard outcome) and even said we could be in a position to pause by mid-to-late summer which appears to be exactly in-line with current market expectations. If his comments suggest 25bps rate hikes each at the March, May and June meetings, we still may end up in the 5.25-5.50% terminal rate which is higher than what the December dot plot suggested. Waller (voter) also hinted at an upwards shift in the dot plot, more clearly so, saying that Fed may need to raise rates beyond December's central tendency view of 5.1-5.4% if the incoming job and inflation data does not pull back from strong readings for January.

US claims and unit labor cost data feed the inflation narrative

US initial jobless claims fell by 2k to 190k last week from 192k prior and 195k expected, continuing to signal a tight US labor market. Unit labor costs were revised sharply higher to an annualized 3.2% in the fourth quarter, versus the initial 1.1% read. Increased labor costs keep concerns of a wage-price spiral alive and will likely keep the Fed on its toes in tightening policy.

Japan’s Tokyo CPI for February hinting at sticky prices

Japan’s Tokyo-CPI for February came in at 3.4% YoY for the headline, softer than last month’s 4.4% but still hotter than the 3.3% expected. The slower print is partially a result of PM Kishida’s latest stimulus announcement to support utilities prices which included a 20% discount on household electricity rates. Core CPI at 3.3% YoY matched estimates while the core-core measure (ex-fresh food and energy) was a notch higher at 3.2% YoY vs. 3.1% expected. Inflation continues to be sticky and above the BOJ’s 2% target although the incoming Governor Ueda is unlikely to rush into any monetary policy moves at this point.

India’s Adani Group gets foreign interest as prices drop

After a drop of over +$150 billion in market value to $83 billion, the Adani group stocks got a respite with US boutique investment firm GQG Partners purchasing shares worth $1.87 billion in four Adani group companies. The deal shows investor interest may be returning to Adani after record drops in its share prices, and any further interest from foreign investors could potentially put a floor to near-term pressures for the conglomerate. This week, the group told bondholders it had secured a $3bn credit line from investors including a sovereign wealth fund. Four days of gain this week has seen the total market capital across the ten companies in the group rise to $103 billion.

What are we watching next?

February US ISM Services in focus today after erratic readings in Dec. and Jan.

The US ISM services survey for February will be on watch later today and is expected to ease to 54.5 from a big jump to 55.2 last month but remain comfortably in expansion. The last two months of this data series have shown erratic moves, with a bizarre collapse in the survey December to 49.2 after 55.5 in November and then the January survey resurgent at 55.2. Can we trust this data series? Attention will also be on the prices paid component after a similar component from the ISM manufacturing survey this week created jitters and services prices are likely to be stickier.

China’s “two sessions” in focus

Following on from Wednesday’s stronger than expected PMI which supported the view that China’s economy is picking up steam, focus now turns to the Chinese government and what they will do to further help along a post-lockdown economic recovery. The first session of the 14th National Committee of the Chinese People's Political Consultative Conference (CPPCC) will begin on March 4 and followed up the following day by the 14th National People’s Congress (NPC. During what is collectively known as the “two sessions”, Chinese officials will release a set of social and economic development goals and various policy measures to achieve them.

Earnings to watch

There are no important earnings releases today. We have highlighted next week’s most important earnings releases below with the most market attention going earnings from Adidas, CATL, and JD.com. Adidas has a huge inventory of Yeezy sneakers following the abrupt end to the partnership with Ye that caused a massive writedown in the previous quarter and investors have generally lost short-term trust in Adidas following a string of bad results. Analysts expect Adidas to report Q4 revenue of €5.2bn up 1% y/y and EBITDA of €-419mn. CATL is the world’s largest battery maker and is firing on all cylinders with analysts expecting Q4 revenue growth of 87% y/y and EPS of CNY 2.65 down 11% y/y as the company has not passed on all input costs to its EV customers after a significant surge in lithium carbonate prices last year.

• Monday: Trip.com
• Tuesday: Ashtead Group, Sea Ltd, Ferguson, Crowdstrike
• Wednesday: Ping An Bank, Thales, Adidas, Geberit
• Thursday: CATL, Deutsche Post, JD.com
• Friday: Daimer Truck, AIA Group, Oracle, DiDi Global

Economic calendar highlights for today (times GMT)

0815-0900 – Eurozone Final Feb. Services PMI

0930 – UK Feb. Final Services PMI

1000 – Eurozone Jan. PPI

1330 – Canada Jan. Building Permits

1445 – US Feb Final Services PMI

1500 – US Feb. ISM Services

1600 – US Fed’s Logan (Voter 2023) to speak

1700 – ECB's Wunsch to speak

2000 – US Fed’s Bowman (Voter) to speak