Global Market Quick Take: Europe – April 28, 2023

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US equities (US500.I and USNAS100.I): Q1 earnings lift sentiment

US equities bounced back yesterday with S&P 500 futures increasing 1.9% almost erasing the prior two sessions of losses. The positive mood was driven by strong earnings from Meta suggesting advertising spending is turning around and several earnings from consumer-oriented companies such as P&G and Mastercard suggested the US consumer remains robust. Today’s key earnings are from Exxon Mobil and Chevron, both reporting before the opening bell, which will good insight into global growth outlooks given their products are used across the household and corporate sectors. S&P 500 futures are trading around the 4,153 level this morning with key resistance levels at 4,180.

Chinese equities (HK50.I & 02846:xhkg): rally for straight three days

Hong Kong and mainland Chinese stocks climbed for the third day in a row. The Hang Seng Index advanced 0.6%, driven by energy, consumer, and industrial stocks. Likewise, CSI300 gained 0.6% with online gaming, media, and AI generative content names leading the charge. A large number of Chinese companies are reporting later today, including ICBC, China Construction Bank, and Agricultural Bank of China.

FX: JPY tanks after Bank of Japan meeting. USD steady on weekly claims, GDP

The JPY traded sharply lower overnight on the Bank of Japan meeting’s intent to conduct a very leisurely policy review of up to eighteen months (more below). As yields generally bounced back sharply yesterday, this added pressure to the yen sell-off, which has USDJPY threatening 135.00 this morning, close to the pivot highs this month, with the focus to the upside on the pivot highs of the year and the 200-day moving average in the 137.00+ area. Elsewhere, the dollar was slightly firmer in the wake of GDP and jobless claims data that was read as benign and encouraged the view that the Fed will move ahead next week with another 25-basis point rate hike.

Crude oil finding its footing following week of long liquidation

Crude oil is heading for a sixth straight, albeit relatively small monthly loss, with the longest run of losses in eight years being driven by global growth concerns as central banks attempt to lower inflation and a recovery in China which so far has not been as commodity intensive compared with previous government supported growth sprints. China’s top refiner Sinopec did however say that the nations rebound will boost demand growth for refined products by 10% this year. Following a week of steep losses on falling refinery margins driving technical short selling as well as long liquidation, a rebound has now been brought closer as the weight of selling begins to ease. However, in the short term a break above $80.50 in Brent and $76.50 in WTI is needed to signal a return to stability. Focus on US PCE and its impact on risk sentiment.

Gold trades softer ahead of PCE on reduced rate cut expectations following hike

Gold prices dropped on Thursday amid higher Treasury yields and a stronger dollar following solid earnings from technology companies and the Q1 GDP report showing higher-than-expected inflation raising the risk of a rate hike next week to 90% (see below) while the subsequent pace of cuts before yearend eased 10 bps to 66 bps. Gold briefly dipped below trendline support, today at $1982 before rebounding later in the session in the wake of banking sector concerns, with the Fed’s emergency lending rising again for the week ending April 26. Focus today will be on March US PCE data and how the result may impact future rate cut expectations. A close below $1974 may signal a move towards the key $1955-60 support arear. Silver meanwhile managed to bounce from key support at $24.50 area, thereby supporting a small drop in the XAUXAG ratio to 79.50.

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) rise again, focus on PCE today

U.S. Treasury yields climbed most in the front end with 2-year yield finishing 12bps higher at 4.07% while the 10-year yield rose 7bps to 3.52%. A combination in a 3.7% growth in consumption and an acceleration to 4.9% Y/Y increase in the quarterly core PCE in the Q1 GDP report (see below for details) started the selloff in Treasuries (rise in yields). The strong gains in equities and rallies in regional bank share prices added fuel to the selling in Treasuries. The USD35 billion 7-year auction was weak, awarded at 1.3bps higher than level at the time of auction and a below average participation from non-primary dealers. The SOFR interest rate futures repriced to trim implied rate cuts, seeing the March 2024 (SR3H4) contracts falling most (interest rate higher) by 20bps.

What is going on?

Bank of Japan removes guidance, calls for long-term policy review

The Bank of Japan is gearing up for a change of its policy, but is not rushing into things, as the first Bank of Japan meeting with Governor Kazuo Ueda produced, as expected, no changes to the current –0.10% policy rate or yield-curve control policy, under which 10-year Japanese Government Bond yields are capped at +0.5%. But in its statement released today, it did remove references to Covid and removed language indicating that interest rates would stay at current or lower levels, while also raising its inflation forecasts. The statement reaffirmed the BoJ’s ongoing commitment to yield-curve-control policy as a tool in bringing back sustained 2% inflation, but said it would conduct a policy review. But the timeline of 1-1.5 years for that review was much longer than what the market expected. The JPY was sharply weaker across the board on this dovish outcome, with the move slightly intensified by a backup in global bond yields yesterday.

Amazon disappoints in its cloud business

Q1 results were better than expected on both revenue and operating income with shares initially reacting positively to these figures, but the Q2 guidance came in weaker than estimates and the slowdown in cloud growth spooked investors. AWS (cloud business) revenue growth slowed to 16% y/y and April growth slowed further. If we compare that with Microsoft’s Azure business growth expected at around 26-27% this quarter, it seems that Amazon is losing a bit of ground in the cloud industry. Shares were down 2% in extended trading.

Intel shares rally 5% on strong Q1 and higher Q2 outlook

Q1 results were stronger than expected in Q1 and the Q2 guidance on was a bit above estimates but with lower-than-expected gross margin. Intel is expected to see end markets to bounce back from current levels with gross margin also improving again as factory loadings increase. Shares were up 5% in extended trading.

Other US earnings: Procter & Gamble, Mastercard, and Caterpillar

Another organic revenue growth beat by a consumer company as Procter & Gamble reported 7% organic revenue growth vs 4% expected. P&G is lifting its FY organic growth rate to 6% from previously 4% and is increasing its buybacks. P&G said that it had raised prices in the US and Europe in February and March and expected volume to decline. Mastercard Q1 results beat on both revenue and earnings with cross-border volume exceeding estimates. On the conference call Mastercard executives said that travel and restaurant activity was very strong in Q1. Caterpillar Q1 results beat on revenue and operating income driven by both higher volume and pricing effects with the latter being the key driver of the strong results. Caterpillar CEO says that 2023 is going to be better than expected, despite China remaining below normal levels of 5-10%. In addition, infrastructure projects are beginning to offset declining activity in other construction projects.

US GDP report brings the probability of May rate hike to 90%

Advanced GDP in the US missed expectations at 1.1% (exp. 2.0%) and reflected a stark slowdown from growth of 2.6% in Q4. While the headline may have reflected concerns of a recession, the details were patchy with consumer spending holding up strong for both goods and services. Personal consumption was up a strong 3.7% led by durable goods consumption coming in at a solid 16.9% growth. Business activity seems to be getting hurt by high interest rates, with declines seen in private inventory investment and residential fixed investment.

While growth side remained mixed, price data was still hot with core Q1 PCE coming in above expectations at 4.9% from 4.4% previously. This brought the possibility of a 25bps rate hike from the Fed in May higher to 90% from sub-80% previously. The March PCE indicator will be on tap today and it is expected to stay steady at 4.6% YoY. If a higher print is seen, that will mean the Q1 print could be revised further higher in the subsequent prints, keeping the pressure on Fed to hike rates further. Meanwhile, initial jobless claims also sent out a hawkish signal, rising to 230k in the latest week, not as much as the expected 248k and a move back lower from the prior week's 246k increase.

Wheat prices slump to a new cycle low

Wheat prices in Paris and Chicago has sunk to fresh cycle lows, thereby extending their longest run of losses since 2021, amid ample supply and optimism over the outlook for crop production in the major production regions spanning from US and Canada to Europe and Russia. Failure to extend the Ukraine Grain corridor deal which Russia on several occasions have threatened to quit may add some support but for now ships are still leaving Ukraine ports. Chicago wheat futures fell for a seventh straight session on Thursday and touched a 21-month low at $6.25 a bushel while in Paris the most active Milling wheat contract closed down 2.5% at €237.75 a ton.

What are we watching next?

US PCE inflation up today, and big week ahead as FOMC and ECB on tap

Today, the US reports the Fed’s favored price gauge, PCE and core PCE inflation. Consensus expectations are for a reading of +0.3% MoM and +4.6% YoY (vs. 4.6% in Feb.) for the core readings, where any surprises will have the most impact. The headline numbers are expected at +0.1% MoM/+4.1% YoY, vs. +5.0% YoY in Feb. The Fed is expected to hike 25 basis points next Wednesday, with the suspense for the market centering on how willing the Fed is to confirm market expectations that this will be the last rate hike for the cycle, or at least for now. Indeed, despite Fed pushback, the market continues to price that the economy will weaken sufficiently in the coming six months to see the Fed cutting rates as soon as September, with more than 50 basis points of easing priced through the December FOMC meeting. The ECB, meanwhile, is priced to hike 25-basis points with a small minority looking for a 50-basis point hike and the forward curve pricing about three rate hikes through the September meeting this year. Meanwhile, next week brings the usual flurry of first-week-of-the-month US data, including the April ISM Manufacturing survey Monday and ISM Services survey Wednesday, with the April jobs report up on Friday.

Earnings to watch

Today’s key US earnings are Exxon Mobil and Chevron with analysts expecting growth to have slowed with Exxon Mobil expected to report Q1 revenue growth of-4% y/y and Chevron is expected to show revenue growth of –9% y/y.

• Friday: Imperial Oil, Danske Bank, Neste, Mercedes-Benz, PetroChina, China Shenhua Energy, Eni, Sony, Norsk Hydro, Yara International, Hexagon, Exxon Mobil, Chevron, Colgate-Palmolive

Next week’s earnings releases:

• Monday: Berkshire Hathaway, Stryker, Vertex Pharmaceuticals, NXP Semiconductors
  
  
• Tuesday: Thomson Reuters, HSBC, BP, DBS Group, Geberit, Pfizer, AMD, Starbucks, Uber Technologies, Marathon Petroleum, Ford Motor
  
  
• Wednesday: Barrick Gold, Orsted, Airbus, BNP Paribas, Deutsche Post, Enel, UniCredit, Lloyds Banking Group, Qualcomm, CVS Healthm Estee Lauder, MercadoLibre, Kraft Heinz
  
  
• Thursday: National Australia Bank, Anheuser-Busch InBev, Shopify, Novo Nordisk, Maersk, Volkswagen, BMW, Infineon Technologies, Uniper, Rheinmetall, Zalando, Shell, ArcelorMittal, Equinor, Apple, ConocoPhillips, Booking, Regeneron Pharmaceuticals, Zoetis, Becton Dickinson, EOG Resources, Ferrari, Fortinet
  
  
• Friday: ANZ, Macquire Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, CaixaBank, Cigna Group

Economic calendar highlights for today (times GMT)

0645 – France Flash Apr. CPI

0700 – Spain Flash Apr. CPI

0755 – Germany Apr. Unemployment Change/Rate

0800 – Germany Q1 GDP

0800 – Italy Q1 GDP

0800 – Poland Flash Apr. CPI

0900 – Eurozone Q1 GDP

0945 – ECB President Lagarde to speak

1200 – Germany Flash Apr. CPI

1230 – Canada Feb. GDP

1230 – US Mar. PCE Inflation

1400 – US Apr. Final University of Michigan Sentiment