Global Market Quick Take: Europe – May 8, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): will the market twist Fed’s arm?

US equity benchmarks rose on Friday with some stability in the banking sentiment as KRE regional banking ETF rose 6% and PacWest surged 82%. US nonfarm payroll report surprised to the upside for April and added to sentiment. The market’s interpretation of labor data has changed, where last several months of hot data meant Fed could hike further, and that spooked equity markets, but the latest data has been a relief that economic momentum will continue to hold. The market continues to be dovish pricing in 75-100bps of rate cuts by the December FOMC meeting. Nasdaq 100 was up over 2% with Apple (AAPL) surging just shy of 5% after a strong earnings report, particularly driven by iPhone sales, in addition to a fresh $90bn buyback programme. S&P500 was up 1.9% led by gains in led by gains in banks stocks.

FX: JPY weakens as Japan returns from Golden Week

Dollar’s spike following the hot NFP report on Friday was short-lived as Fed pricing continued to see no hike in June with cuts still priced through year-end amid the short-term banking uncertainty. USDJPY however rose back above 135 briefly in early Asian hours as Japan traders returned from a 5-day Golden Week holiday in which time JPY gained considerable strength on the back of banking sector risks. BOJ meeting minutes from the March meeting, which was Kuroda’s last meeting, continued to signal a dovish bent. NZDUSD supported at 0.63 after last week’s strength driven by the Q1 jobs data, while AUDUSD is also strong at 0.6750 following the surprise RBA rate hike last week and as AUD responded, together with CAD (more below on Macklem speech last Thursday) and the Scandie currencies, to the shift in sentiment and, to a degree, the rally in commodity prices, especially crude.

Crude oil: firming up after heavy selling last week

Oil has opened the week firmer, extending Friday’s gains after the strong US job report helped ease concerns of an imminent recession, furthermore an oversold market condition combined with Brent and WTI both managing to find support ahead of their March lows forced recently established short sellers to seek cover, potentially highlighting that the recent selloff was overdone. EIA’s Short-term Energy Outlook on Tuesday as well as OPEC’s monthly report on Thursday should shed some further light on the current demand and supply outlook. Earnings from Saudi Aramco will also be on watch. Speculators responded to the recent weakness by cutting their net long in Brent and WTI by one-quarter to 295k lots while the ICE gasoil (diesel) short hit a fresh +7 year high.

Gold (XAUUSD) holds above key support with incoming data in focus

After hitting a fresh record high last Thursday, gold dropped back to $2k after Friday’s strong jobs report pushed Treasury yields higher, before making a steady recovery towards the current level around $2020. In our latest update we highlighted that gold’s biggest short-term challenge remains elevated rate cut expectations, leaving the market exposed to a correction should incoming data not support these projections. Friday’s strong job report lowered the end of year rate cut expectation by a 25bps to around 75bps. The World Gold Council said bullion demand from central banks slowed purchases sharply in the first quarter. China stood out as an active buyer, adding to its gold reserves for a sixth straight month in April. ETF investors have maintained an unchanged position for the past two weeks around 93.5million ounces while hedge funds have increased length to a fresh one-year high at 14.80 million.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) sell off on strong US data

US yields rebounded Friday, especially after the release of a strong April nonfarm payrolls growth (although this was partially spoiled by a significant negative revision of the March data) but also as regional banks recovered sharply Friday. The recovery in yields took the 2-year and 10-year benchmark yields comfortably back into the range, trading this morning at 3.93% and 3.43%, respectively.

What is going on?

Delayed reaction to Bank of Canada governor Macklem’s speech

The Canadian dollar rallied sharply on Friday in what appears a delayed reaction to a speech last Thursday from Bank of Canada Governor Macklem, who admitted that the Bank of Canada may need to tighten policy further and generally indicating more uncertainty on the path to returning inflation to 2%. "If we start to see signs that inflation is likely to get stuck materially above our 2% target, we are prepared to raise rates further”. The same speech also fretted the risk of uncertain financial conditions, so the reaction was limited Thursday, but when financial conditions/risk sentiment cleared dramatically on Friday, CAD was the strongest among G10 currencies Friday, rallying more than 1% against the US dollar as USDCAD returned below its 200-day moving average and below 1.3400. The next level of note is the April pivot low of 1.3302.

Warren Buffett cautious of US slowdown and US-China tensions

In the annual shareholder meeting over the weekend, Warren Buffett’s Berkshire Hathaway disclosed that it has sold shares worth $13.3bn in the first quarter and bought stocks for a fraction of that figure. The company’s cash pile has risen by $2bn since the start of this year to $130.6bn, its highest level since the end of 2021. Buffet was somewhat cautious about the economic momentum in the US, and said he expected earnings to decline in most of its businesses this year. On Apple, he said it was one of the better businesses they own, and also disclosed that they won’t be making an offer for full control of Occidental Petroleum suggesting potential second thoughts on the oil industry. Meanwhile, Buffett continued to highlight opportunities in Japan, while being cautious of US-China tensions. Berkshire revealed last month it had increased its stakes in Itochu Corp, Marubeni Corp, Mitsubishi Corp, Mitsui & Co and Sumitomo Corp to 7.4%, and Buffett said his company might buy more but the stakes won’t go above 9%.

Hedge funds exodus from commodities gathers momentum

For a second consecutive week, money managers were heavy sellers of commodities in the week to May 2. Overall, the net long across the 24 major commodity futures markets we track in our weekly update was cut by one-third to just 700k lots, the lowest since June 2020. The reduction being driven by heavy long liquidation of energy, as the crude oil roller coaster continued to wrongfoot momentum following traders, as well as the grains sector where speculators turned net short the sector for the first time since August 2020. The hardest hit last week was Brent and WTI crude oil and gasoil, as well as soybeans, corn and sugar. The major exceptions being gold and silver, both seeing continued demand.

What are we watching next?

US April CPI is up Wednesday

The next macro calendar event risk of note is this Wednesday’s US April CPI release, with the consensus expectations looking for +0.4%/5.0% for the headline and +0.3%/+5.5% for the core, Ex Food and Energy, reading. The low core YoY reading for the cycle was the 5.4% registered back in February.

Earnings to watch

The conclusion on the Q1 earnings season continues to be that falling operating margins causing operating profit to slightly decline q/q and y/y with Nasdaq 100 earnings showing the best relative performance. This week the pace of earnings will slow down from the previous three weeks, but there are still plenty of interesting earnings releases to watch. Our focus this week is on earnings KKR (today), Airbnb (Tuesday), Vestas Wind Systems (Wednesday), Disney (Wednesday), Toyota (Wednesday), and Richemont (Friday).

• Monday: Westpac Banking, PayPal, KKR, Devon Energy, BioNTech, Palantir Technologies
  
  
• Tuesday: Suncor Energy, Daimler Truck, Nintendo, Amadeus IT, Endesa, Alcon, Airbnb, Duke Energy, Occidental Petroleum, Electronic Arts, Coupang, Rivian Automotive
  
  
• Wednesday: Nutrien, Vestas Wind Systems, Genmab, Credit Agricole, Siemens Healthineers, E.ON, Toyota, SoftBank, Panasonic, Compass, Disney, Trade Desk, Li Auto, Roblox
  
  
• 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)

1400 – ECB Chief Economist Philip Lane to speak

1800 – US Fed releases Senior Loan Officer Survey

2000 – US Fed releases May Financial Stability Report

2045 – US Fed’s Kashkari (Voter 2023) to speak