Summary: Market sentiment bounced yesterday on little news, with sentiment steady in Asia overnight. Long US treasury yields dipped, and short yields were steady ahead of today's FOMC minutes release from the November 2 meeting, taking the US yield curve inversion to a multi-decade low of -75 basis points. The focus in Europe today will be on preliminary November PMI for a sense of how badly the EU is tilting into recession.
S&P 500 futures rallied 1.3% yesterday closing at the 4,010 level, the highest close since 9 September, suggesting bulls are in control as bears are already sitting on strong profits for the year and therefore has little incentive to take bigger positions before yearend. The next big level on the upside is the 200-day moving average at around the 4,060 level. Today’s key events are preliminary US PMI figures for November and later this evening the FOMC Minutes which could provide more clues into the thinking of policymakers.
Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg)
According to Reuters, the Chinese regulators may be close to a decision to impose a fine of over $1 billion on Jack Ma’s Ant Group. Since its IPO was halted by the Chinese authorities in 2020, the group has been under regulatory overhaul. While the amount of the fine is substantial, initial reactions from the investment community to the news were positive as the fine could set the stage for the conclusion of the regulatory overhaul. Alibaba (09988:xhkg) jumped more than 4% on the news. China internet stocks gained, led by Kuaishou Technology (01024:xhkg) as the social media platform company surged 6.2% on better-than-expected Q3 results. After rising 25.5% yesterday, China Aluminum (02068:xhkg) continued its advance, rising 18% on Wednesday. Overall market sentiment remains cautious as the number of new cases reached 28,883 on Tuesday, just a touch below the April high of 29,317 cases. Hang Seng Index gained 1.2% and CSI 300 climbed 0.5%. In mainland A shares, infrastructure names surged while pharmaceutical and biotech stocks retreated.
Softer long US treasury yields also pushed the US dollar lower as the US yield curve inverted to a new cycle low. Still, the big dollar has done very little after the huge, but brief sell-off move on the October CPI release nearly two full weeks ago, with today’s large data dump and FOMC minutes the last hope this week for providing a spark of volatility in either direction ahead of the long holiday weekend (tomorrow, US markets are closed, with most workers also out Friday). The FOMC minutes late today are not highly anticipated, but could surprise if there is more consensus on a hawkish stance than anticipated. EURUSD has carved out a 1.0222-1.0479 range now.
Crude oil closed higher on Tuesday supported by a general recovery in risk appetite as the dollar softened and recent short sales in response to false production hike rumor were paired back. Crude oil prices have traded lower this month in response to a drop in demand from China as Covid cases surge to near a record with restrictions of movements currently impacting 48 cities. Ahead of today’s weekly EIA report, the API reported a 4.8 million barrel drop in US crude stocks. The data also showed that gasoline inventories declined by about 0.4m barrels last week, and distillate stocks increased by 1.1M barrels. EU diplomats will discuss and potentially approve a price cap on Russian seaborne oil sales today (see below), and if implemented Russia may retaliate by refusing to sell its crude to nations that adopt the cap. WTI resistance at $82.25 followed by $84.50
Gold trades nervously around the $1735 support level for a second day as the market awaits the release of FOMC minutes. The yellow metal managed a small bounce on Tuesday as the dollar softened after Fed officials indicated they were open to implementing less aggressive hikes going forward. In the short-term the direction will be determined by fund activity and whether they need to make further reductions in recently established, and now under water, long positions. An extension of the recent rally likely requires further declines in yields and the US dollar driving fresh demand for ETFs or some other catalyst that sees a run to safety.
US treasury yields were steady at the short end and dipped at the long end yesterday, driving a new extreme in the 2-10 yield curve inversion of –75 basis points. Traders are awaiting incoming US data today and the FOMC minutes for next steps, although more heavy hitting data awaits next week with Wednesday’s November PCE inflation data and next Friday’s November US jobs report. The key upside swing area for the 10-year treasury yield is near 4.00%, while the major downside focus beyond the 3.67% pivot low is the 3.50% cycle high from June.
The market was divided on whether the bank would go with the larger rate hike after a string of 50 basis points moves prior to the meeting overnight. NZ two-year yields jumped back toward the cycle highs overnight as the market participants raised the anticipated peak in the policy rate by mid-year next year to almost 5.50%, up about 30 basis points after the decision.
As investors continue to try and gauge the path of Federal Reserve rate hikes, Cleveland Fed President Loretta Mester reiterated on Tuesday that lowering inflation remains critical for the central bank, a day after supporting a smaller rate hike in December. Kansas City President Esther George said the central bank may need to boost interest rates to a higher level and hold them there for longer in order to temper consumer demand and cool inflation.
The Wall Street Journal is reporting that Western countries are set to agree on Russian oil price cap around $60 per barrel. However, it could be as high as $70 per barrel on oil loaded after the December 5 start date. The sanctions that the G7, EU and Australia will set, will ban the provisions of maritime services for shipments of Russian oil unless the oil sells below the cap price. The aim is to reduce petroleum revenues for Russia's war machine while maintaining flows of its oil to global markets and preventing price spikes. Russian Urals crude oil already trades at around a 25-dollar discount to Brent, so the impact on Russia’s revenues at current international prices would be limited.
The Swiss bank is stating in a press release this morning that it could lose $1.6bn in Q4 driven by losses in its investment banks. In addition, the bank says that it has seen net outflows of 6% relative to AUM in Q3. To improve profitability the bank is one-third of all investment banking employees in its Chinese subsidiary following a recent staff expansion in the country.
The technology company reported Q4 results yesterday in line with estimates but its FY2023 (ending 31 October 2023) outlook was below estimates with adj. EPS guidance of $3.20-3.60 vs est. $3.61. Over the next two years the company expects to reduce staff level by 6,000 to improve profitability.
Yesterday, the OECD published its latest Economic Outlook. There is not much surprise. Global growth is expected to slow down significantly in 2023 to 2.2 % and to rebound modestly in 2024 at 2.7 %. This will be a long and painful economic crisis. Asia will remain the main engine of growth in the short-term. But the zero Covid policy in China will likely limit the country’s contribution to global GDP growth. Before Covid, China represented about 30 % of global growth impulse. It is now down to roughly 10 %. The OECD warns that the fight against inflation will take time. But several countries are successful. For example, in Brazil, the central bank moved swiftly, and inflation has started to come down in recent months. In the United States, the latest data also seem to suggest some progress in the fight against inflation. Nevertheless, a pause in monetary policy is unlikely in most countries in the short-term. Read the full report here.
Until today, European banks’ outstanding borrowings from the ECB’s Targeted Long-term Refinancing Operations III (TLTRO III). LTRO III has been funded at as low as 50bps below the average of the ECB’s Depository Facility Rate (DFR) over the entire life of those borrowings. The DFR, which is currently 1.5%, has been kept at minus 50bps from Sept 2019 to July 2022. It has been a large subsidy from the ECB in the form of below-market funding costs to European banks. Some banks are depositing these monies back into the ECB and arbitraging the interest rate differential. Last month, the ECB announced to change the calculation of the applicable DFR index with effect from Nov 23 to over the current period as opposed to the whole life of the borrowings. The move will reduce European banks’ net interest income and withdraw liquidity from the banking system. Currently, the TLTRO III balance is EUR 2.1 trillion.
JD.COM cut senior management pays while increasing benefits for all employees
JD.Com announced that the company is slashing the pay for about 2,000 managers by 10-20% and using some of the savings from the move to fund planned increases in staff benefits, including health and housing benefits, for all employees including hundreds of thousands of delivery staff. Founder Richard Liu will also donate 100 million yuan of his own money towards staff benefits. Under the quest for “common prosperity” of the top government leadership, Chinese tycoons are mindful of doing their share in redistributing income.
What are we watching next?
The S&P flash PMIs for the US, EU and UK will be released in the week, and will likely test the soft-landing rhetoric that has been gaining traction. We will likely see further broad-based easing in the metrics from the October prints, as consumer spending remains constrained amid high inflation and a rise in interest rates. While expectations for December remain tilted towards a downshift in rate hikes for the Fed, ECB and the BOE, the upcoming data point will be more key in determining the terminal rate pricing. Markets are now back at pricing 5% levels for the Fed, but the ECB’s pricing for the terminal rate is still sub-3% while UK’s is 4.7% with fiscal austerity being delayed.
At the FT Commodities Asia Summit in Singapore, Jeremy Weir, the CEO of Trafigura said demand for copper is shifting away from cooling building activities in China to energy transition demand, especially in Europe and the US. Weir said demand for copper has remained strong despite recent global headwinds. “We’re seeing for example very strong copper demand in Europe through electrification and even through the pandemic,” he said. “Even the current crisis and conflict in Ukraine is not reducing the demand for copper.” Following a recent rally, that got rejected ahead of key resistance at $4 per pound, HG copper has dropped back and currently trades near the middle of its established range around $3.55
The FOMC minutes from the November 2 meeting are scheduled to be released on Wednesday, just ahead of the Thanksgiving holiday. The key message delivered by Powell at this meeting was that the pace of rate hikes will slow down as needed, and that will likely remain the highlight of the minutes as well. However, Powell managed to deliver this hawkish message at the press conference, but the risk from the minutes remains tilted to the dovish side. There is likely to be little consensus about whether the rates are in restrictive territory or there’s still room for that, and the divide within the committee remains key to watch as investors remain on the edge to expect a Fed pivot sometime in 2023.
Today’s US earnings focus is Deere, the US manufacturer of agricultural and forestry equipment, with analysts expecting FY22 Q4 (ending 31 October) revenue growth of 18% y/y and EPS of $7.09 up 72% as momentum and pricing power remain strong due to high commodity prices on agricultural products.
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