Financial Markets Today: Quick Take – May 11, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the rebound in US equities succeeded closing above the prior session’s close but met resistance above the 12,500 level in Nasdaq 100 futures. However, this morning Nasdaq 100 futures continue to rally trading around the 12,450-level attempting to break above the 12,500 level again which is needed to close Monday’s selloff range. Sentiment is still weak but a pause in the momentum in US 10-year interest rates is providing some support to US equities in the short-term. Q1 earnings results yesterday confirmed the slowdown in gaming and cryptocurrency trading activity.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I). China’s A shares surged with ChiNext rising 4.3% and CSI300 up 2%. Electric equipment, semiconductors, EV battery, consumer electronics, wind and solar names led the charge higher. EV battery maker, CATL (300750) rose 7.7%. Hong Kong’s Hang Seng Index rose 1.7% and Hang Seng TECH Index gained 4.6% by mid-day.  After reporting better than market expected earnings and margin expansion, Li Auto (2015) surged 11%. The COVID related disruption to logistics and production, plus food and daily necessities stockpiling by households seems to make their impact felt on general price levels. China’s April PPI came at +8.0% YoY and CPI at +2.1% YoY, both higher than market expectations.  

AUDUSD and USDCAD – the two key commodity currencies broke through key support against the US dollar this week, but so far the reaction to the development has been restrained and would likely take a further slide in risk sentiment, including in the commodity space for a notable extension lower. As the break levels remain nearby, the pairs deserve watching for the trend status and a possible reversal as well – resistance in AUDUSD is 0.7000-0.7050 and support in USDCAD comes in at 1.2900-50.

USDJPY and JPY pairs – global sovereign bond yields have tumbled from their highs at the start of the week and crude oil has corrected sharply lower, two developments that support the Japanese yen, as Japan relies so heavily on energy imports and BoJ yield-curve-control policy means that the currency absorbs weakness when the domestic bond market is not “allowed” to. And yet, the JPY bounce on supportive developments has proven surprisingly muted – an opportunity or indication of further weakness to come? Watching for the reactivity in JPY pairs around the US CPI release today and 10-year US T-note auction later today as USDJPY is often one of the more sensitive currencies to US treasury yields.

Gold (XAUUSD) dropped below $1850 support yesterday after several Fed officials backed multiple 50 basis point rate hikes. These comments helped drive fresh dollar strength and a continued rise in US real yields ahead of today’s US CPI print. Recent dollar strength, especially against the yuan and rupee has reduced demand from China and India, the world’s two biggest buyers of physical gold. With gold trading near a three-month low, demand for bullion backed ETFs has also ebbed with total holdings falling to a three-week low on Tuesday. Silver (XAGUSD) meanwhile slumped below previous support at $21.5, thereby adding an additional layer of weakness. From a technical perspective, the next key support level in gold is the 61.8% retracement of the March 2021 to March 2022 high at $1827.

Crude oil (OILUKJUL22 & OILUSJUN22) traded higher in Asia with Brent bouncing before reaching key support below $100 per barrel. Catalyst for the move ahead of today’s US CPI print was a decline in the Covid19 infections in China providing some cautious optimism about a pickup in demand from the world’s largest importer. The cost of fuel due to lack of refinery capacity and sanctions against Russia remains very elevated with retail gasoline in the US hitting a record. The EIA meanwhile lowered its forecast for US production in 2022 and 2023 while Saudi Arabia and the UAE oil ministers warned that spare capacity is decreasing in all energy sectors. Developments that may offset any slowdown in global consumption due to lower growth and punitive high inflation. Monthly oil market reports from OPEC and IEA on Thursday.

US Treasuries (TLT, IEF) – The US yield curve flattened sharply yesterday as hawkish talk from a couple of Fed members (see below) kept the shorter end of the yield curve elevated, while longer yields continued their sharp retreat ahead of a tone-setting 10-year T-note auction today, with the benchmark yield there trading just below 3.00%. The 3-year notes yesterday saw the strongest demand in over a year.

What is going on?

Fed officials continue to back rate hikes. Fed speakers are back on the wires backing multiple 50 basis point rate hikes, even as that might mean a bumpy ride for the economy and the markets. Cleveland Fed President Loretta Mester, in fact, also brought 75bps rate hikes back on the table for H2 if inflation doesn’t recede.

US earnings recap. The big negative surprise was Coinbase reporting Q1 revenue of $1.17bn vs est. $1.48bn and a dark Q2 outlook expecting lower trading activity. Unity was in line with Q1 estimates but puts out a very low Q2 revenue figure of $290-295mn vs est. $360mn, but the fiscal year guidance is closer to consensus suggesting timing issues. Electronic Arts surprised investors given the weakness in gaming results recently guiding fiscal year 2023 (the company is not following the traditional calendar year) revenue a bit above consensus. Staying with gaming results, Roblox reported a slowdown in user activity (bookings) as so many other gaming companies have done in Q1.

Philip Morris to buy Swedish Match for SEK 106 per share. This is one of Europe’s largest transactions this year worth $16bn in an all-cash deal translating into a premium of 40%. Philip Morris is acquiring Swedish Match to get assets that are less about visual cigarettes to better cope with increasing regulation around the world against cigarettes.

Declining Covid-19 cases in China helped boost sentiment across battered stock markets in Shanghai and Hong Kong overnight. The industrial metal sector has seen a sharp correction during the lockdown with the Bloomberg Industrial Metal Index currently up just 5% on the year after hitting a 39% gain on March 7. As lockdowns start to ease the focus across the sector is likely to return to tight global inventories and the prospect of a revival in demand with the Chinese government likely to initiate projects to support an economic revival. Six major mining companies who derive more than 60% of their revenue from copper have slumped between 25% and 50% from peaks achieved during the past year.

What are we watching next?

US CPI and 10-year T-note auction today. The 3-year T-note auction yesterday showed the strongest demand for 3-year US paper since early 2021. A 10-year T-note auction is set for today, with yields having retreated to near 3.00% from the highs earlier this week near the 2018 cycle high of 3.25%. Liquidity in the US treasury market is at its weakest levels since the pandemic-outbreak panic moment even before the Fed is set to begin reducing its balance sheet (requiring the market to absorb more treasury issuance). Reactivity in the US treasury market and the US dollar is also worth close observation today on the release of the April CPI data, expected to show the headline rising at only +0.2% MoM, but the core rising +0.4% MoM. The YoY expectations are +8.1%/+6.0% vs. +8.5%/+6.5% in March.

EU gas prices jumped on Tuesday and may rise further today after Ukraine’s network operator warned Ukraine won’t accept gas at Sokhranivka, one of two cross-border points handling Russian flows, from today after occupying forces disrupted operation at the compressor station. It’s still possible for gas to be rerouted to the second entry point, Sudzha, allowing European contracts to be fulfilled, it said. How Gazprom reacts to these changes will set the tone in today’s trading. Dutch TTF benchmark gas briefly traded below its 200-day moving average support line at €89/MWh yesterday before ending the day near €100/MWH on the Ukraine news. 

Earnings Watch. In Europe this morning the focus is on earnings from E.ON and Siemens Energy given the energy crisis in Europe. Genmab is also important to watch being one of Europe’s largest pure plays within the biotechnology industry. Later in the US session the focus is on Walt Disney given the latest weak results from Netflix and more reopening post the pandemic benefitting Disney’s physical entertainment assets. We will also watch Coupang, the largest e-commerce company in South Korea, given the bad Q1 results from most e-commerce companies.

• Today: Genmab, E.ON, Siemens Energy, Continental, Toyota, SoftBank, Takeda Pharmaceuticals, Delhaize, Mowi, Swedish Match, Walt Disney, Coupang
• Thursday: Verbund, KBC Group, Brookfield, Fortum, Siemens, Allianz, Merck, Hapag-Lloyd, RWE, Atlantia, Snam, NTT, SoftBank Group, Aegon, Naturgy Energy, Motorola Solutions
• Friday: Deutsche Telekom, KDDI, Honda Motor, Alibaba

Economic calendar highlights for today (times GMT)

• 0715 – ECB's Nagel to speak
• 0800 – ECB President Lagarde to speak
• 0800 – ECB’s Vasle to speak
• 0830 – ECB's Makhlouf to speak
• 0850 – ECB's Knot to speak
• 1220 – ECB's Schnabel to speak
• 1230 – US Apr. CPI
• 1230 – US Apr. Real Average Hourly Earnings
• 1600 – US Fed’s Bostic (non-voter) to speak
• 1800 – US 10-year T-Note auction
• 2301 – UK Apr. RICS House Price Balance

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