Summary: The FOMC meeting saw Fed Chair Powell guiding for only 50 basis point hikes, seeming to take larger hikes off the table, which was seen as the first tilt away from a more hawkish stance in months and triggered a sharp rally in risk sentiment and sell-off in the US dollar. Long US treasury yields were not particularly impressed, arguably as a slower than feared pace of Fed tightening means greater inflation risks. Today, attention turns to the Bank of England as sterling is quickly losing altitude again, given its poor menu of options as the UK faces a stagflationary outlook.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities staged a big late relief rally post the FOMC decision pushing S&P 500 futures to the 4,300 level before retreating a bit and closing slightly below this big level. This morning in Europe, S&P 500 futures are losing their momentum trading lower suggesting sentiment will revert to being weak as inflation and the economic outlook are worsening. The first support level to watch today in S&P 500 futures is likely around the 4,265 level.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Shanghai and Shenzhen stock markets returned from a long national holiday with modest gains. CATL shares fell 7%, reacting to the disappointing Q1 results which were reported before the long market holiday. Hong Kong Hang Seng Index (HSI.I) gained 0.7% and Hang Seng TECH Index (HSTECH.I) rose 2% on another round or rhetoric from Chinese authorities to pledge support to the economy. The addition of 88 Chinese companies by the U.S. SEC to the list for potential delisting did not make much negative impact on these companies’ shares traded in Hong Kong this morning. Caixin China PMI Services fell to 36.2 in April (consensus 40.0, March 42.0), the lowest since February 2020.
Stoxx 50 (EU50.I) - moving in early trading hours post the FOMC decision last night in the US where the FOMC communication was interpreted as dovish relative to the sentiment that was priced into equities. However, the underlying environment is so volatile that we recommend investors to downplay yesterday’s late rally in US equities. US financial conditions rose by late April to the tightest conditions since the start of the pandemic and to levels seen during the 2020 pandemic, 2008 financial crisis, 2000 dot-com burst, the Southeast Asia crisis of 1998, and the S&L crisis of 1991. Stoxx 50 futures are trading around the 50-day moving average which recently was a key resistance level so if Stoxx 50 futures close above they could short-term push for 3,800 before being weighed down again by the tightening financial conditions.
EURUSD and USDJPY – the USD backed off sharply yesterday in the wake of the less hawkish than feared Fed, with the move more impressive in USD pairings with traditional pro-cyclical currencies like AUD, etc. But EURUSD and USDJPY also reacted, with EURUSD finding resistance near the old cycle low near 1.0640 from early 2020. The rally would need to threaten 1.0750-1.0800 to suggest a bullish reversal risk. USDJPY dipped sharply, but as longer US treasury yields failed to fall much post-FOMC, the pair has already rebounded well above 129.00, avoiding even a tactical pattern reversal lower so far. The EU boycott of Russian oil will hit the EU growth outlook, and fresh local highs in global crude oil benchmarks weigh on the JPY in addition to rising global yields of late as the BoJ caps Japanese yields out to 10 years.
EURGBP and GBPUSD – the Bank of England meeting is up later today (see preview below) The GBPUSD has poked below the psychologically key 1.2500 area of late and could be set for a run down to the huge 1.2000 are if the USD firms again after softening in the wake of a less-hawkish than feared FOMC meeting last night. A more “pure” read on the sterling is the status of EURGBP, which has managed to trade in the 0.8300-0.08500 range for the bulk of this year – with 0.8450-0.8500 the critical resistance area if the market decides that sterling will offer poorer real returns as it is beset with a stagflationary outlook.
Gold (XAUUSD) has returned to $1900 in response to higher oil prices and after the Fed signaled 0.75% rate hikes are currently not on the table. The dollar weakened and Treasury yields softened in response to Powell’s press conference comments which led the market to believe rate hikes will not be that severe. Holdings in gold-backed ETF’s rose for the first time in a week. With support now established at $1850 a break above $1920 is now needed to reignite further interest in the yellow metal.
Crude oil (OILUKJUL22 & OILUSJUN22) broke higher after the EU proposed phasing out Russia oil and products dependency. The price of diesel in U.S. and Europe meanwhile continued to climb after US East Coast inventories plunged to a record low. US Natgas (NATGASUSJUN22) extended its rally to a 13-year high on a Southern heatwave. The EU decision if carried out will leave the market short more than 1 million barrels per day by year-end according to JP Morgan, and only a reduction in demand through lower growth and restrictions can prevent this situation from unfolding. OPEC+ meets today and is likely to agree on a 430k barrels per day production hike, however, with many producers having struggled for months to increase, this hike will be as elusive as the previous. A Bloomberg production survey for April showed OPEC added just 10k barrels a day compared with a scheduled 274k. Having closed above its 100-day moving average, now support, at $108.50/b, the next upside level of interest can be found at $113/b.
Wheat prices in the US (WHEATUSJUL22) and Europe (EBMU2) rose on Wednesday after India, the third biggest grower behind China and Europe, and one of the few countries with the potential to ease a global shortage, considers restricting exports after extreme heat shriveled the local harvest. Just a month ago the government said exports could reach a record high of 15 million tons, more than double the previous year. That figure is now being sharply reduced after the government reduced this season's output by 6 million tons from record estimates of 111 million.
US Treasuries (TLT, IEF) – the significant reaction to the FOMC meeting was less significant in US treasuries. While the shorter end of the curve adjusted considerably lower on the less hawkish than feared message from Powell at the press conference (the 2-year yield dropped to near 2.65% this morning after 2.80+ yesterday), the longer end of the curve was far less impacted, perhaps as a slower pace of Fed tightening is seen as keeping inflation risks elevated for longer.
What is going on?
FOMC meeting sees expected 50 basis point hike, but future hikes of 75 basis points seemingly taken off table. Fed Chair Powell began the press conference with a short address directly to the “American people” on the Fed’s intent to get inflation under control. But the remarks at the conference and in Q&A suggest that the potential for 75 basis point moves in coming meetings, which were partially priced in, are off the table. The quantitative tightening plans from the Fed were largely as expected, but saw the Fed perhaps not taking the most hawkish option as it will not begin reducing its balance sheet until June 1 and will only ramp up to the full pace of $95 billion/month in reductions after three months. After a string of hawkish surprises from the Fed, this is the first time that the Fed has undershot market expectations notably since last November, when Chair Powell and Vice Chair Brainard’s acceptance speeches for nomination made it clear that the Fed was set to ramp up its tightening regime.
CATL shares drop 7% on Q1 results. The world’s biggest battery maker for electric vehicles reported net income of CNY 1.5bn down 24% y/y driven by an extremely volatile operating environment with rapidly rising input costs. Revenue was strong at CNY 48.7bn up 154% y/y but declining q/q which fit with the EV delivery slowdown among many EV-makers in the Q1.
European pre-market earnings. BMW is Q1 estimates for EBIT but the German carmaker is still not seeing any easing in chip supply bottlenecks until 2H at the earliest. ArcelorMittal reports Q1 EBITDA of $5.1bn vs est. $4.6bn and revenue of $21.8bn vs est. $20.9bn, and the European steelmaker is cutting its forecast for global steel consumption.
China Caixin Apr. Services PMI hits stunning 36.2, a sign of the severity of the activity slump in China, as this is the worst single month in the record of the survey save for February of 2020 (26.50) as China continues to pursue its “zero Covid” policy.
Higher lithium prices ahead. Two of the world’s biggest lithium companies Albemarle (ALB) and Livent (LTHM) reported better than expected results and outlooks on Wednesday, citing lithium prices will hit higher levels this year. Albemarle shares rose 16% post-market, and its peer Livent jumped 30% in normal trading hours after it almost doubled its 2022 earnings guidance. These higher lithium prices not only support higher prices for Albemarle (ALB) and Livent (LTHM), but also support most lithium stocks. SQM (SQM) is the next lithium company to watch, with their 1Q earnings out on 18 May, and expected to be quite positive.
The French historical energy provider EDF is in a tough position. At a press conference in Paris yesterday, EDF CFO, Xavier Girre, indicated the company is facing many challenges in the short term. To date, three nuclear reactors have major corrosion issues and investigations are ongoing in nine other reactors. This could severely reduce France’s nuclear energy supply. For the moment, the company refuses to give earnings guidance for this year. This is a negative signal. The stock is down 13.3 % YTD at the Paris stock exchange. On top of that, there are growing rumors of a potential nationalization. This has been confirmed by Girre. It could be organized by law or via a public offer. The French state is currently EDF’s main shareholder, owning 83.88 % of the share.
French parliamentary elections update. A new poll by Harris Interactive shows that far-left leader Jean Luc Mélenchon is unlikely to become prime minister. He is trying to assemble a Popular Union of all the left-wing parties (ongoing negotiations are happening with the Socialist Party). But this won’t be enough to win a majority in Parliament. Emmanuel Macron’s centrist party and its allies are likely to scoop up well over 300 of the 577 seats in the new National Assembly. According to Harris Interactive, several factors will prevent the Popular union from winning: Mélenchon’s anti-EU and anti-NATO stance, and tactical voting by the Right in the second round scheduled for 19 June to keep out the hard Left far away from power. Clearly, we don’t think that the parliamentary elections will have any major market impact.
What are we watching next?
A Bank of England meeting up today is expected to deliver a 25 basis point rate hike and thus take the policy rate to 1.00%, a level at which the Bank of England has preannounced that it will also begin to reduce its balance sheet (quantitative tightening). The BoE feels that the outlook for real growth in the UK is very poor, driven by a drop in real incomes on cost of living increases, and that it is tightening its policy as a necessity linked to intolerably high inflation, even as it dreads the medium-term economic outlook. A cliff in fiscal spending this year and oil and petrol price rises from the latest boycott of Russian oil risk aggravating the outlook, with a weak sterling no particular help either. The market is pricing the BoE more or less to hike 25 basis points at every meeting for the remainder of this year – with an implied rate of 2.25% by year-end, compared to 2.75+% for the US Fed.
Norway’s Norges Bank rate setting meeting - while the Norges Bank was the first DM central bank out of the gates with a rate hike last year, the slow pace of subsequent hikes has been notable relative to the hawkish adjustments elsewhere. The bank is expected to keep rates at 0.75% today, but guidance on whether it will maintain its steady pace of hikes or lift them more bears watching.
Earnings Watch. Today’s focus in Europe is BMW which is playing catchup with Tesla and Volkswagen on electric vehicles. Zalando is also worth watching due to the weakness of e-commerce stocks this year. In the US, the important earnings to watch are Block, MercadoLibre, and Lucid Group.
Economic calendar highlights for today (times GMT)
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