Global Market Quick Take: Europe – May 11, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): equities liked the US April CPI report

Equity traders were cheering yesterday over the US April CPI report that showed inflation came in line with estimates suggesting inflation continues to cool although one could argue that the trajectory for the core inflation is still slow. S&P 500 futures gained 0.4% and the index futures are extending their gains this morning to the 4,164 level. The Fed Funds forward curve dipped further suggesting the market is bolstering its bets that the Fed will be cutting 100 basis points by the January FOMC meeting. The VIX Index declined closing below the 17 level suggesting a very relaxed options market.

Chinese equities (HK50.I & 02846:xhkg): market indices trade weak while EV extend gains

Hang Sang Index shed around 0.5% and the CSI300 Index was nearly unchanged in the early Asian afternoon. Inflation in China softened further in April, with headline CPI growth slowed to 0.1% Y/Y (vs consensus 0.3%; March: 0.7%). Weakness was in both food prices and non-food items. Core CPI remained at 0.7% Y/Y in April, the same as in the previous month. PPI decelerated further to a year-on-year decline of 3.6% (Consensus: 3.3%; -2.5% in March). Investors have concerns about the sluggish performance in the inflation number as an indication of a lack of momentum in aggregate demand after the surge of pent-up demand for in-person services petered out. Bucking the decline today were EV names, led by a 15% surge in Li Auto (02015:xhkg) on an earning beat.

FX: US yield drop post-CPI drives JPY gains

As a softer US CPI print brought sharp decline in Treasury yields, that benefitted the Japanese yen with USDJPY sliding below 134 overnight before rebounding above that level. Elsewhere, the weaker USD reaction to the US inflation data was somewhat mixed, with no conclusion yet drawn by this market as both NZDUSD and AUDUSD initially rejected new cycle highs, although bouncing back overnight, particularly the kiwi, as AUDNZD eyes the lows for the year below 1.0600 (testing below 1.0630 overnight). GBPUSD is quiet ahead of the BOE meeting today and EURGBP trades near 0.8700 after hitting new lows for the year this week ahead of today’s Bank of England meeting (more below).

Crude oil rangebound, with an upside move lurking

Crude oil edged higher overnight following another bumpy day on Wednesday that saw resistance being challenged, supported by drop in supplies from Canada and Northern Iraq, and after an in-line CPI print supported the general level of risk sentiment, only to fall back after the EIA reported the first stock build in four weeks. However, the near 3-million-barrel build was being offset by a big 7.3m barrel drop in gasoline and distillates stocks. Also supporting prices were a big 25% jump in jet fuel implied demand, while gasoline implied demand also edged higher. Both Brent and WTI remains stuck in two-dollar ranges with resistance at around $77.50 and $73.80 respectively. Apart from US PPI the market will focus on OPEC’s Monthly Oil Market Report.

Gold (XAUUSD) looks for the next catalyst

Gold jumped to near resistance in the $2050 area after the US inflation report supported the market’s view of a Fed pause. However, the fact it fuelled further rate cut bets during the second half, currently around 80 bps, may end up being gold’s biggest short-term challenge. With core inflation unchanged at 5.5%, there is still a lot of work to be done before the FOMC can declare victory, unless a) they adjust higher their inflation target, currently at 2%, b) the US run into a recession that forces them to refocus their attention, or c) an economic shock of some kind hits the economy. Overall, we maintain our bullish outlook for gold, but just like the FOMC, traders will need to watch incoming data for the next catalyst. Support at $2007 followed the $1986 while resistance remains firm above $2050.

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) drop after US CPI

The slightly softer year-on-year CPI figure saw US treasury yields consolidating back lower as treasuries found support. The 2-year benchmark fell back 10 basis points to 3.92% this morning and the 10-year benchmark trades near 3.43%. The SOFR interest rate futures jumped (rates down) by around 15bps in the 2024 contract months, pricing in more aggressive rate cuts next year. The SOFR Jun-Dec 2023 spread widened 8bps to -82.5, adding to rate cut expectations for the second half of 2023 as well.  An auction of 10-year US treasuries provided little drama, with a slight improvement on the prior month’s weak bidding metrics. A 30-year T-bond auction is up later today.

What is going on?

Trump calls for US debt default. House Republican Santos arrested

The House GOP spending bill that recently passed and would lift the debt ceiling only by gutting many of President Biden’s recent initiatives only passed by a vote of 217-215 with the help of George Santos, a newly arrived Republican in the House who was widely accused of a string of lies about his background and of misappropriation of campaign funds. The Department of Justice yesterday arrested Santos on related charges, including money laundering. Santos posted bail after his arrest and refuses to resign. Elsewhere, former president Donald Trump urged Republican lawmakers allow a default on US debt unless Democrats were to agree on massive spending cuts.

US earnings: Disney, Robinhood, Sonos

Disney reported FY23 Q2 (ending 31 March) revenue and earnings in line with estimates, but the Disney+ subscriber figures were only 157.8mn vs est. 163.1mn. On the positive side Disney+ losses came in better than expected at $-659mn but would widen again in Q3 q/q, and management said on the conference call that the company is on track to deliver $5.5bn cost reductions. Disney is reducing its capital expenditures to $5.6bn from previously $6bn suggesting Disney is under pressure. Shares were down 5% in extended trading. Robinhood reported Q1 net revenue of $441mn vs est. $423mn and adjusted EBITDA at $115mn vs est. $94mn suggesting the retail trading business is stabilising after a tough period for cryptocurrencies. Robinhood shares were up 3% in extended trading. Sonos, the maker of wireless home sound systems, spooked the market guiding FY23 revenue of $1.63-1.68bn vs est. $1.7-1.8bn suggesting consumer electronics continue to be the weakest part of consumer markets. Sonos shares were down 24% in extended trading.

China inflation slows more than expected

China reported April inflation overnight, with the CPI reported at +0.1% YoY vs. +0.3% expected (yes, year-on-year) and +0.7% in March, while the April PPI dropped –3.6% YoY vs. -3.3% expected and –2.5% YoY in March.

US CPI cools, reinforcing market’s view of a Fed pause

The April CPI was broadly in line with the consensus. The headline was slightly below expectations at 4.9 % year-over-year. This is the first time it has been below 5 % in two years. But this is too early to declare victory over inflation. Indeed, the core CPI – which better shows underlying inflationary pressures – was at 0.41 % month-over-month and 5.5 % year-over-year. This is still too hot. However, this is unlikely to force the U.S. Federal Reserve to hike in June. Expect the monetary pause to last, perhaps even beyond the timeframe forecasted by the market. Obviously, today’s figures do not in any way corroborate the possibility of rate cuts this year. On a yearly basis, the main drivers of inflation are: transportation (+11 %), food away from home (+8.6 %) and electricity (+8.4 %).

EU gas prices continue their month-long decline

The Dutch TTF gas contract, the European benchmark, settled below €35 for the first time since July 2021 on Wednesday. Down more than 50% year-to-date, the price trades near the five-year average with the risk of further losses amid slowing demand and a record amount of LNG waiting at sea to offloaded. The volume of liquefied natural gas on the water for more than 20 days worldwide this week jumped to the highest seasonal level since at least 2017, data compiled by Bloomberg show. With the 2023/24 winter contract still stuck around €55 in anticipation of strong demand, the storage arbitrage is wide open, thereby supporting a speedy refilling of storage sites with relatively cheap gas that can be stored and sold at higher prices during winter.

What are we watching next?

Uranium in an uptrend

Our Technical Analyst has confirmed that Uranium, both physical and Uranium producing companies are on the move after Physical Uranium has confirmed technical uptrend with U308 at a one-year high around $53/lb. Some nuclear companies could benefit too. Canada's Cameco trades up 12.2% during the past month while the URA ETF has gained 7.7% and the Sprott Physical Uranium Trust some 9.6%. Nuclear remains one of the key long-term solutions to the energy shortage issues. For inspiration, Saxo’s Nuclear Power equity theme basket is worth a consideration.

Bank of England meeting on tap with guidance eyed

Some of the sterling outperformance over the last week has been on reports from at least one private recruiting firm that wage inflation has reached 10%, although the official figures have flattened out below 7% YoY in recent months. Still, UK economic data has positively surprised on balance for months and UK yields at the front of the curve have outperformed EU counterparts by more than 20 basis points over the last several weeks and sterling over the last week has traded at new highs for the year versus both the US dollar and the euro  The Bank of England is expected to hike rates 25 basis points to bring the policy rate to 4.50% and another 40+ basis points of further tightening are priced through the November meeting, in contrast to the US Federal Reserve, which is fully priced for a rate cut by the September FOMC.

Earnings to watch

Today’s US key earnings to watch is JD.com reporting Q1 earnings before the US market open. JD.com, which is one of China’s largest e-commerce retailers, is expected to report Q1 revenue growth of 0.4% y/y and EBITDA of $7.8bn unchanged compared to a year ago. With the latest signs that the Chinese reopening is progressing much slower than anticipated JD.com earnings will be watched closely for clues about the outlook for the Chinese consumer.

• Thursday: Verbund, Coloplast, Engie, Deutsche Telekom, Merck, Bayer, Hapag-Lloyd, RWE, Takeda Pharmaceuticals, Honda Motor, 3i Group, ING Groep, JD.com
  
  
• Friday: Societe Generale, Allianz, Richemont

Economic calendar highlights for today (times GMT)

1100 – UK Bank of England Bank Rate Announcement

1230 – US Weekly Initial Jobless Claims

1230 – US Apr. PPI

1245 – US Fed’s Kashkari (Voter 2023) speaking

During the day: OPEC’s Monthly Oil Market Report

1415 – US Fed’s Waller (Voter) to discuss financial stability and climate.

1430 – EIA's Natural Gas Storage Change

1700 – US Treasury to auction 30-year T-bonds

0300 – New Zealand Q2 Inflation Expectations