Summary: Yesterday, US stocks suffered their worst day since the Covid outbreak panic of more than two years ago. A second large US retailer in two days, this time Target, suffered a massive loss after reporting weak margins and a weak outlook due to inflation. US treasuries rallied sharply as a safe-haven and the yield curve flattened sharply, suggesting a darkening of the economic outlook. The USD and JPY both rallied yesterday on wobbly sentiment, but eased lower overnight.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities experienced their worst selloff since June 2020 with Nasdaq 100 futures declining 5% erasing this week’s gains taking the technology index back to the lows for the current cycle. This morning Nasdaq 100 futures are trading below 12,000 at around the 11,890 level with the big support level to watch at around 11,700. The VIX Index increased to 30.96, which is still not a steep enough inversion of the VIX forward curve to conclude that this is capitulation. Initial jobless claims today are very important as we 8 weeks into a rising trend from the lows in March. If initial jobless claims rise even further, then we might have evidence that the US labour market is beginning to hurt.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Following the overnight US equity market sell-off which is the worst since June 2020, Hang Seng Index (HSI.I) slumped as much as 3.5% intraday and Hang Seng Tech Index (HSTECH.I) fell almost 4%. Tencent fell 8% after reporting Q1 results below market expectations dampened sentiment further. Tencent’s Q2 revenue and EPS outlook came out at flat and -23% YoY respectively and both were 4% below consensus estimates. Online games revenues (PC + mobile) declined 2% YoY and online advertising revenue dropped 18% YoY. Investors were also troubled the management’s remarks saying support initiatives from the Chinese Government to the tech industry takes time and will not benefit the company much in the near term.
Stoxx 50 (EU50.I) - Stoxx 50 futures closed below its 50-day moving average, failing to sustain momentum above the average for the fourth time in six weeks with the futures trading around the 3,639 level this morning. European equities are showing less impact from the US session as European equities have less aggressive equity valuations and as such are less sensitive to rising financial conditions. The key level to watch on the downside in the Stoxx 50 futures is the 3,600 level.
AUDUSD – an odd session for AUDUSD as for JPY crosses noted below, in that the pressure from risk sentiment on USD pairs is there, but seems to be easing relative to recent history, perhaps as US yields are backing off this time on the safe haven appeal of US treasuries, rather than serving as a driver of weaker risk sentiment. Overnight, AUDUSD suddenly rebounded above 0.7000 in a delayed reaction to a solid Australian employment report – are we seeing signs of a USD rally exhaustion or is this just a one-off head-scratcher. It is somewhat remarkable that the worst day for US equities in over two years only saw approximately 75 pips of AUDUSD selling, most of which was erased overnight even as sentiment remained downbeat in Asia.
USDJPY and JPY pairs – the JPY rallied sharply yesterday as risk deleveraging drove safe haven sovereign bonds to rally sharply – taking USDJPY back toward 128.00 at one point, just ahead of the spike lows to 127.50 from a week ago. But the pair failed to stick lower and rose most of the way back toward 129.00 overnight, with many crosses even more aggressively erasing their losses yesterday. The scale of the overnight comeback is confusing relative to the JPY-supportive backdrop. Will have to reserve judgment for now, but lower yields and lower energy prices are JPY positive if that’s what we see more of I the near term, with 127.50 the major downside trigger area for the USDJPY chart.
Gold (XAUUSD) closed a tad higher on Wednesday while other asset classes, including most commodities, traded lower following another troubled day in the stock markets where a nosediving retail sector raises fresh concerns about the direction of the US economy. Lower ten-year US real yields also provided some support after breaking the uptrend from March. The strong dollar-led weakness this past month has sapped investor demand with total holdings in bullion-backed ETFs seeing reductions in all but one of the last 18 sessions. Weaker economic activity and high inflation are the main reasons why investors look to gold but in the short term, a break above $1838, the 200-day moving average is needed to attract fresh interest.
Crude oil (OILUKJUL22 & OILUSJUN22) once again failed to break higher yesterday after slumping stocks led by the US retail sector raised concerns about growth and with that demand for fuels. On the ground, however, this worry has yet to be reflected with inventories of crude oil and gasoline still falling while US implied gasoline demand, despite record prices, remains robust. Earlier this week, the Fed officials reaffirmed their quest to quell inflation by tightening monetary policy aggressively. Meanwhile, in China the easing of lockdowns is not going well with fresh outbreaks slowing the pace towards normalisation. Until then the market is likely to focus on the general level of risk appetite which is currently challenged.
US Treasuries (TLT, IEF) - US 10-year yields fell sharply on safe-haven seeking and likely as an expression of concern for the economic outlook, flattening the yield curve sharply as 2-year yields remain in a tight range above 250 basis points. The local pivot low in 10-year yields is 2.81%, with 2.50% the major chart focus if a proper consolidation move swings into motion after the persistent rise from well below 2.00% that started in early March. The US Treasury will auction 20-year T-notes today.
What is going on?
Larger foreign currency outflows in China. Offshore investors’ bond selling and smaller inflow of foreign currency from trade settlement might have contributed to the depreciating pressure on the renminbi. Offshore investors were net sellers in onshore RMB bonds for the third consecutive month. In April, foreign investors sold RMB 88bn worth of onshore RMB bonds. Net trade settlement was only 42% of China’s trade surplus in April, below the 2021 average of 58%. The key driver for the low net inflows seems to be coming from higher than usual demand from importers to buy foreign currencies, staying at an escalated level of 65.1% versus 2021 average of 55.8%. Exporters repatriated 60.8% of the total goods exports in April. It was down from March’s 65.8% but still well above the 2021 average of 54.6%.
Target shares plunge 25%. The inflationary environment is getting tough for retailers and in the US, we have seen many retailers struggling with profitability including Amazon. Target delivered adj EPS $2.19 vs est. $3.06 as operating margins are under severe pressure from multiple cost pressures as the CEO said on the conference call. Target also said they expect cost pressures to persist in the coming quarters.
Solid Australia Apr. Employment report, despite weak headline number. Australian unemployment fell to its lowest levels since 1979 at 3.9%, which was expected. Payrolls rose only 4k at the headline, but the good news was a massive jump in full time payrolls of +92.4k, while part-time positions fell –88.4k. The strong employment data gives the RBA more ammunition to raise rates, although wage growth in Q1 somewhat underwhelmed in the data released yesterday.
Cisco issues a very weak outlook. The communication equipment maker says it expects revenue growth in the current quarter of –1 to –5.5% y/y vs est. +5.7% y/y due to the lockdowns in China constraining available supply. Cisco says that they are not seeing a demand destruction but rather a supply issue.
Tesla (TSLA) shares slide 7% as S&P 500 boots it out of ESG Index, at a time when market anticipates earnings growth to fall and costs to rise. S&P explained why it kicked Tesla out of its ESG index saying Tesla’s “lack of a low-carbon strategy” and “codes of business conduct,” along with racism and poor working conditions reported at Tesla’s factory in Fremont, California, affected the score. Separately, new research suggests battery cell prices will surge 22% from 2023 to 2026 amid the scarcity in raw materials needed to make EV batteries.
What are we watching next?
US equities and whether a capitulation is near as cycle lows are in the market’s sights. The negative momentum in equity markets resumed with a vengeance yesterday, taking the major US indices back toward the lows for the cycle in both the Nasdaq 100 and the S&P 500. For perspective on how far the US markets have come since the ever-so-brief pandemic outbreak wipeout, consider that the pre-pandemic 2020 high for the S&P 500 was 3,393, still some 13% below yesterday’s close, while the respective Nasdaq 100 high was 9,736, some 18% below yesterday’s close. Major points of focus on the way down are 3,815 in the S&P 500 (38.2% retracement of the rally off the pandemic outbreak lows) and in the Nasdaq 100, the 10,700 area, which is the 61.8% retracement off the pandemic outbreak lows.
Earnings Watch. Today’s focus is Xiaomi in China which is expected to report after the close. Given the recent lockdowns which have impacted production and physical stores the market will nervously be watching Xiaomi’s outlook and result for Q1. Palo Alto Networks is the key earnings focus today in the US and with many factors adding tailwind for cyber security companies we expect a strong outlook from the company.
Economic calendar highlights for today (times GMT)
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