Global Market Quick Take: Europe – April 20, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I) chop aimlessly

US equity markets are firmly bottled up within the range and showing no momentum, as the Nasdaq 100 index posting another choppy, low volatility session and only dropped some 50 points into this morning despite the heavy drop in Tesla shares after hours. That index and the equally low volatility S&P 500 index, may be awaiting the next move in the treasury yields or the earnings reports in the coming two weeks from the handful of market cap giants like Apple, that have driven the bulk of returns for the large-cap indices this year.

Chinese equities (HK50.I & 02846:xhkg) ticked modestly lower

CSI300 shed 0.7% and Hang Seng Index slid 0.1% in the early Asia afternoon as China property developers, EV makers, and mining stocks weighed on the indices while semiconductors and telco equipment stocks gained. Macao casino operators were among the top gainers as investors positioned for a potential surge in the arrival of mainland patrons during the upcoming May 1 golden week holiday. 

FX: USD firms slightly, NZD sharply lower after soft Q1 CPI

The US dollar stabilized and edged back higher in the Asian session overnight, particularly against the JPY as USDJPY challenged 135.00 at on point overnight and against a very weak New Zealand dollar after NZ Q1 CPI came in softer than expected, putting the May rate hike from the RBNZ in doubt. NZDUSD slipped below range lows and to its lowest in a month, while AUDNZD popped higher to 1.0880, near 6-week highs. GBPUSD was choppy with gains on the back of a strong CPI print yesterday remaining less than convincing, as the pair traded near 1.2425 in early European hours after a high of 1.2474 yesterday. EURUSD also still not able to make another move towards 1.10. USDCAD rallied hard yesterday on the slump in oil prices and confirming the rejection of the attempt below the 1.3400-10 area support and 200-day moving average.

Crude oil continues lower as long-liquidation weighs

Crude oil prices trade lower for a third day driving by demand concerns and a technical downside break in both WTI and Brent raising the prospect of deeper short-term losses. The recent weakness in diesel margins across all major trading hubs, a resumption of oil exports from Northern Iraq and recent hawkish Fed comments reducing rate cut expectations while supporting the dollar, are all developments that are now squeezing positions that we bought following the April 2 OPEC+ production cuts – the bulk around $84.50 in Brent and $80 in WTI - in the belief it would drive prices higher. EIA’s weekly stock report was broadly bullish but not strong enough to reverse the current negative sentiment, which is partly driven by a fresh attempt to close the gaps, in Brent to $80 and $75.70 in WTI.

Gold and silver drops as rate cut expectations fade

Precious metals traded lower on Tuesday before recovering the bulk of their losses later in the day. The current correlation between Gold and the December SOFR futures contract tracking end of year rates was an elevated 0.7 highlighting where traders currently seek short-term directional guidance. Apart from the need to consolidate following the recent strong gains, gold and silver have been weighed down by the outlook for smaller than previously priced rate cuts this year, currently down from 75bps and potentially pushing towards 25 bps only. The short-term risk of a deeper correction towards $1957 - the 38.2% retracement of the banking-crisis-led runup in prices – remains. Focus on short end rate developments and Friday’s US PMI.

Platinum’s discount to gold drops 100 dollars in a matter of days

The best performing metal during the latest correction has been platinum which has seen its discount to gold narrow by around 100 dollars from a recent peak above 1000 dollars and it is currently challenging resistance in the $1100 area, the January high. The white metal demand is driven by catalytic converters, green hydrogen technologies, jewellery and investment demand via ETF’s. The bulk of the supply is limited to South Africa currently facing frequent power disruptions, and Russia. The metal is under-owned according to the World Platinum Investment Council, and if ETF demand as recent data shows is starting to pick up, it may help push the market into supply deficit. Since March the net long held by funds rose 9k lots to a small 5.6k net long while gold length in the same period surged higher by 114k lots to 138k. The wide gap explaining part of platinum's resilience during the current correction phase. 

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): short yields slightly higher on UK CPI

Selling of treasuries emerged in London hours yesterday, prompted by a 10bp selloff in U.K. Gilts after a hotter-than-expected U.K. CPI report. Traders repriced the Fed rate path higher by adding to the probability of a June rate hike and shedding the odds for rate cuts in the second half of 2023. The SOFR Jun-Dec 2023 spread narrowed by 5bps to -54bps. The 2-year yield rose 5bps to 4.25%. The long end of the curve, however, managed to pare losses following a solid 20-year auction. The 10-year yield edged up 2bps to 3.59% and the 30-year yield finished the day unchanged.

What is going on?

Tesla Q1 in line but company sees risks driven by economic uncertainty

Tesla Q1 revenue and EPS were in line with estimates but the average selling price (ASP), due to recent price cuts, lowered revenue q/q despite deliveries increasing q/q. The operating margin was down 7.8 %-points y/y due to higher costs and a lower ASP. The underutilization of its factories is also leading to higher costs but should improve over time. The demand outlook was kept unchanged but economic uncertainty and higher interest rates were mentioned as key risks. Gross margins may suffer considerably in the short-term because lower ASP filters through more quickly through to the margin than lower costs on batteries from falling lithium carbonate prices. Tesla shares were down 6% in extended trading.

Fed speakers increase May rate hike chorus, Beige Book hints at stable economic activity

New York Fed President Williams, a permanent voter at the FOMC, reiterated that inflation is still to high and Fed will act to lower prices. He did see some tighter credit conditions, but said that banking conditions have stabilized, while inflation is likely to take two years to get back to 2% levels. He continued to see imbalances in the labor market and expects unemployment rate to rise to 4-4.5% over the next year from 3.5% currently. Chicago Fed President Austin Goolsbee was still neutral and continued to watch the credit side. Meanwhile, April Beige book hinted at some tightening of lending standards but overall little change in economic conditions, suggesting the impact of banking stress could remain limited to weaker parts of the market.

NZ Q1 CPI slows more than expected despite the cyclone effect

New Zealand CPI came in softer than expected at 6.7% YoY for Q1 from 7.2% YoY previously and weaker than expectations of a drop to 6.9% YoY with the QoQ figure also cooler at 1.2% vs. 1.4% last month and 1.5%V expected. The Q1 print was also weaker than the RBNZ’s own forecast of 7.3% in its Feb monetary policy statement. Inflation remains supported due to high food and utility prices, but softer crude oil prices cooled transportation costs. Today’s print adds to the case of RBNZ pause at the May 24 meeting, despite current market pricing suggesting 71% chance of another rate hike. This makes NZD vulnerable to potentially more downside as even hawkish rhetoric would make the markets expect a RBNZ policy error.

RBA shake up; RBA to likely create a new board, and meet less frequently

Following an independent review of the RBA, which was ordered by the Australian government, 51 sweeping recommendations were handed down today. Among these are that the RBA should create a new monetary policy board and meet less frequently (eight meetings per year, down from eleven), in better alignment with international counterparts. These were just some of the recommendations and were welcomed by the RBA. Australia’s Treasurer, Jim Chalmers ordered the review in July 2022 after the RBA’s inflation forecasts failed to detect a surge in price pressures. The report criticised the RBA’s board composition, which includes one economist and six independent directors who are mainly from business. The powers of the Governor would be diluted as more economist expertise would be brought onto the board. The changes could start from July 2024 and see the RBA governor speaking at a press conference after policy meetings. Current Governor Lowe’s term expires in September.

Ugly inflation figures in the UK

The United Kingdom perfectly epitomizes the challenges of the current cycle. While lower growth is desirable to fight inflation, this is politically sensitive. It results in policymakers restraining themselves from tightening enough. At the end of the day, this can cause much more damage to the economy than expected with inflation remaining uncomfortably high for a prolonged period of time. This is currently happening in the United Kingdom. The Bank of England has been very hesitant in the past months to tighten monetary policy given growth and financial fragility concerns. The result of that test has been pretty clear and largely expected: inflation is now entrenched with the headline at double digits and core inflation around 6% for a full year. Inflation is especially driven by profit (as it is the case in the eurozone as well) but also by Brexit consequences and a strong labor market. After yesterday’s inflation figures, it is now clear the Bank of England will have to send a clear signal to the market about its determination to fight inflation. A new rate hike is on the table for the May meeting.

What are we watching next?

Watching Philly Fed today after Monday’s strong Empire Manufacturing

Monday saw the first of the regional US manufacturing surveys for April, the NY Fed’s Empire Manufacturing survey, which came in at a stunning +10.8 versus expectations for –18 and –24.6 in March. It is only one regional survey, but the scale of the surprise should have us on watch for more surprises that might indicate something is afoot in the US manufacturing sector and whether that something is the beginning of a turnaround due to huge announced investments in manufacturing that have been encouraged by the most sweeping US industrial policy initiatives since the second World War, including the Inflation Reduction Act and the CHIPS and Science Act. The setup for today’s April Philadelphia Fed survey is similar, with expectations for a reading of –19.3 after –23.2 in March. If the number comes in as weak as expected, then there is no corroboration of the Empire survey number, but if it swings into positive territory after the deepening negative prints in the last several months, it may point to a major reversal in the outlook for US manufacturing.

Earnings to watch

A wide variety of companies reporting today, including credit card company American Express, which should have its finger on the pulse of andy changes it is seeing in consumer behaviour in its earnings report. CATL, the largest EV battery market is meant to report today and traded down around 3% overnight as of this writing, even as it unveiled a new battery overnight that claims far higher power density than anything currently on the market and potentially making battery-powered flight possible. Also reporting are rail freight transportation giant Union Pacific, which rose sharply yesterday, perhaps on announcing that it will raise prices to offset higher costs from weather disruptions and higher wages. It reports before the US open.

• Thursday: CATL, Tryg, Nokia, Sartorius, Volvo, Philip Morris, AT&T, Union Pacific, American Express, Blackstone, CSX, DR Horton
• Friday: Jinko Solar, SAP, Sandvik, Investor, Procter & Gamble, Schlumberger, Freeport-McMoRan

For an extended overview of all earnings releases check out the earnings calendar in our trading platform.

Economic calendar highlights for today (times GMT)

0900 – Eurozone Feb. Trade Balance
1230 – US Weekly Initial Jobless Claims
1400 – US Mar. Existing Home Sales
1400 – Eurozone Apr. Flash Consumer Confidence
1430 – EIA's Weekly Natural Gas Storage Change
1530 – Bank of Canada’s Macklem and Rogers to epsak
1600 – US Fed’s Waller (Voter) to speak
1620 – US Fed’s Mester (Non-voter) to speak
1900 – US Fed’s Bowman and Logan (both voters) in Fed Listens event
2015 – ECB's Schnabel to speak
2301 – UK Mar. GfK Consumer Confidence
2330 – Japan National CPI
2345 – US Fed’s Harker (Voter 2023) to speak on economic outlook