Summary: US equities rallied strongly yesterday, likely in part due to a sharp correction in crude oil prices, as the major grades fell as much as six dollars per barrel intraday. The mood has soured a bit again overnight after former growth darling Netflix reported terrible results and suffered as much as a 25% mark-down in after-hours trading. This evening sees a debate between the two contenders in the French presidential run-off election on Sunday, Marine Le Pen and Emmanuel Macron.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities rebounded yesterday led by bubble stocks with S&P 500 futures pushing above the 50-day moving average again. With US interest rates continuing to rise and earnings being a bit mixed so far, the market could easily trade lower again with the 4,400 level being the key level to watch.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) - Hang Seng Index and CSI 300 Index hovered around the low end of their recent ranges in lackluster trading. Technology and sportswear stocks were among the top gainers while coal, gold and other mineral mining stocks fell. China’s largest EV battery maker, CATL fell 7%, despite the gradual resumption of production at Tesla’s Shanghai factory from yesterday. CATL reports earnings tomorrow.
Stoxx 50 (EU50.I) – Stoxx 50 futures have been compressed into a very small trading range now with the 3,785 level being the key level to watch on the upside. However, with Russia’s offensive in the Donbas region the risk picture is tilted towards the downside as Russian advancement could accelerate further sanctions and adding more pressure to especially food prices.
USDCNH – after a long period of quiet and what practically has looked like a managed peg of the renminbi versus the US dollar, the CNY (and its offshore tradeable CNH) weakened sharply overnight versus the US dollar and most other major currencies after the PBOC left rates unchanged (many expecting a marginal cut to rates). Ever higher US yields as the market anticipates significant Fed tightening have been providing pressure for quite some time on the USDCNY exchange rate. The major range level broken in UDSCNH was 6.40 and the 200-day moving average also now near 6.40 was taken out overnight, as the pair traded as high as 6.439.
USDJPY and JPY crosses. The JPY sell-off continued yesterday and USDJPY overnight reached as high as 129.40 as the Bank of Japan announced its third operation to cap 10-year Japanese Government Bond yields at 0.25% under its yield-control-policy, which keeps yields there steady at 10-years and shorter duration while yields have continued to rise elsewhere (and the US 10-year Treasury benchmark nearly touched 3.00% yesterday). Alas, USDJPY retreated back below 128.50, perhaps a sign that the move has gotten too aggressive, though the significant retreat in oil prices yesterday is a JPY-positive as it eases pressure on the country’s external balances (Japan reliant on energy imports.) The next major level for the pair is the 135.00 high from early 2002.
AUDUSD and AUD pairs – the RBA minutes released overnight revealed more hawkish than expected guidance as the central bank said that higher inflation and rising wages have “brought forward the likely timing“ of the first rate hike. The RBA has focused particular attention on wage growth as an important factor for the timing and scale of rate increases, and the next data release on that front is not until May 18, but we will see Q1 CPI data next Wednesday ahead of the RBA meeting the following Tuesday, as well as an April inflation expectations survey the day before the meeting. A May rate hike is looking increasingly likely, although still only priced at about 25% odds.
Gold’s (XAUUSD) failed attempt to reach and breach the important $2k level on Monday initially helped attract some profit taking yesterday before it dropped the most in three weeks as yields and the dollar pushed higher. Overnight US 10-year real yields turned positive for the first time since March 2020 on expectations for faster monetary tightening in the US. Gold remains a two step forward, one step back market and given the recent accumulation of nonstick longs from leveraged funds, the short-term outlook may once again be one of consolidation. While higher interest rates may weigh, worries about inflation, growth, and increased market volatility together with the war in Ukraine remain our key reasons for maintaining exposure to investment metals, such as gold, silver and platinum.
Crude oil (OILUKJUN22 & OILUSMAY22) added another big trading range to the historical many already seen since the Russian invasion of Ukraine threw the market into a flux. The biggest slump in two weeks highlights a market that is attempting to settle into a narrowing range around $107 in Brent and $102 in WTI. It does, however, also highlight a market where volatility and uncertainty remain high despite having eased a bit during the Easter period. Global growth downgrades driven by rising interest rates, inflation and the war in Ukraine together with a temporary reduction in Chinese demand due to lockdowns have started to offset the loss of barrels from Russia and now also Libya. A potential European ban on Russian crude oil and fuel imports, remains a major upside risk. Focus on US inventories with the API seeing a 4.5 million barrels draw.
US Treasury yields surged across the curve (IEF, TLT). Short-end rates leading the way higher with 2-year rates up 15-basis points to 2.6% and the 30-year benchmark cracking above the key psychological level of 3%. 10-year yields have pushed to 2.96% with real yields turning positive for the first time since March 2020. Markets (based on Fed funds futures) have priced in an increasing odd of 3 consecutive 50-basis points hike each during the next Fed FOMC meetings on 4 May, 15 June & 27 July. Still watching Fed Chair Powell’s comments due on Thursday. The next major obvious test for the long end is the 2018 high for the 10-year Treasury benchmark at 3.25%
What is going on?
Headline risk from the war can increase as Donbas region is now in focus. Russia seems to be in a stronger position now, and this could mean more risk aversion and possibly more sanctions. Grain supplies face further threat, especially for corn and wheat, and both surged further in the Asian session today.
Netflix shares tumbled 26% in extended trading. The world’s leading streaming platform posted Q1 revenue figure of $8.05bn vs est. $8.23bn as Netflix lost 200K paid subscribers in Q1 against their own previous target of 2.5mn gains. Q1 EPS was $3.53 vs est. $2.91. However, it was the Q2 outlook with Netflix expecting a decline of 2mn in paid subscribers vs estimates of 2.4mn additions that spooked the market accelerate the pressure on the business to a degree not seen in a decade. Netflix’s profitability or business model is not the problem as the figures show, but that some consumers might be cancelling their subscription due to inflation and post-pandemic user fatigue. In addition, Netflix has issues with shared passwords which is a major headwind for revenue growth and something that will be addressed going forward. Netflix is also considering an advertising model to supplement their paid subscriptions which could add another layer of revenue.
China will continue strengthening ties with Russia, according to a senior Chinese diplomat, Vice Foreign Minister Le Yucheng. This suggests that the Russian invasion and behaviour in Ukraine is not leading China to shy away from its economic and diplomatic ties with the country, which has become a virtual pariah state for much of the world. He cited a 30% rise in trade between Russia and China in the first months of 2022 as showing “the great resilience and internal dynamism of bilateral cooperation.”
IBM Q1 earnings showed that the company is doing well gaining market share and business. Its shares rose 2% in extended trading on reporting stronger than forecast 1Q results and outlook. Q1 revenue rose 8% to $14.2b (vs $13.8b expected); after consulting revenue rose 13% in Q1 (more than expected) & software revenue rose 12% (also stronger than expected).
What are we watching next?
Global lithium stocks are in focus. The Lithium Price Index (one measure of lithium prices) is at its highest level in history supporting lithium stocks. The lithium price is likely to remain bid given the supply deficit, but surplus in that market could happen already by 2023 according to Morgan Stanley. Elon Musk, previously hinted that Tesla could move into lithium mining to offset some of these rising costs, so smaller and medium sized lithium miners are potential takeover targets.
French presidential debate between Marine Le Pen and Emmanuel Macron tonight at 700 pm GMT. In economics, the focus will be on the cost of living and perhaps on pension reform. France’s CPI increased to 4.5 % YoY in March versus 3.6 % in February. It is expected to move above 5 % in April. In the interim, economic growth is slowing down fast, at only 0.25 % in Q1 according to the market consensus. The government’s official GDP target at 4 % this year is clearly unreachable. In our view, Le Pen has a stronger and more coherent economic platform to tackle cost of living issues. We expect she will perform much better than during the 2017 presidential debate. But she will probably ultimately lose. An IPSOS poll released on 18 April shows that Macron will win over Le Pen by a margin of 6 % (this is more than the margin of error). In recent days, a smaller proportion of Eric Zemmour’s voters are ready to vote for Le Pen (73 %) while the percentage of Jean-Luc Mélenchon’s voters ready to vote for Macron is increasing (38 %). The ‘Front Républicain’ – a coalition of left- and right-wing parties calling to vote against Le Pen – is still working. This will likely prevent Le Pen from being elected. The second round of the election scheduled for 24 April will probably have limited market impact.
Earnings Watch. Today’s earnings focus is on ASML, Sandvik, Tesla, and Procter & Gamble. ASML has already reported in Europe this morning disappointing on its revenue outlook for the current quarter estimating €5.1-5.3bn vs est. €5.9bn, but most of the miss might still be some mismatch in recognition of revenue and not related to their underlying demand.
Economic calendar highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy