Market Insights Today: Yields & dollar fall; FOMC minutes ahead – 23 November 2022

What’s happening in markets?

The Nasdaq 100 (NAS100.I) and S&P 500 (US500.I)

Nasdaq 100 gained 1.5% and S&P 500 rose by 1.4%. All 11 sectors within the S&P 500 gained, led by energy, materials, and information technology. Trading was thin ahead of Thanksgiving. Investors were not overly troubled by yet another round of hawkish-leaning remarks from Fed officials on Tuesday. Best Buy (BBY:xnys), surging 12.7%, was the best performer in the S&P 500. The consumer electronic retailer reported better-than-expected earnings driven by smaller-than-feared declines in revenues and margins. On the other hand, Dollar Tree Store (DLTR:xnas), a discount store chain, tumbled 7.8%, after reporting earnings beat but downbeat Q4 guidance on margin pressure.

US treasuries (TLT:xnas, IEF:xnas, SHY:xnas)

In spite of a weak 7-year auction, treasuries were well bid over the day on Tuesday, in particular for the long end. The 2-year yield fell 4bps to 4.51% and the 10-year yield closed 7bps richer at 3.76%. Following a series of remarks from Fed officials since last week to push back to the market speculation of an early pause at a lower terminal rate next year, investors are adding onto their bets for a recession in the U.S. in 2023.

Hong Kong’s Hang Seng (HISX2) and China’s CSI300 (03188:xhkg)

Daily new cases in mainland China continued to surge and approach the April high. Hang Seng Index fell 1.3% while CSI 300 managed to finish the session flat. Southbound investments registered an HKD5.8 billion net outflow, the largest outflow since August 2021. Southbound investors sold a net HKD3.5 billion of Tracker Fund (02800;xhkg) and HKD1.7 billion of Meituan (03690:xhkg). Meituan tumbled 8.3% and was the worst performer among stocks in the Hang Seng Index on Tuesday. On the other hand, SOE telecommunication and infrastructure stocks surged as the Chairman of the China Securities Regulatory Commission said listed state-owned enterprises were undervalued by stock investors. China Unicom (00762:xhkg) gained 6.8% and China Communications Construction (01800:xhkg) rose by 8.4%. China Aluminum (02068) surged 25.5% after jumping as much as 42.8% at one point.

FX: Dollar weakens as risk sentiment stabilizes

Data and news flow was thin on Tuesday before it picks up today with FOMC minutes and PMIs due ahead of the US Thanksgiving holiday. Fed speakers Mester and George added little new information, continuing to reaffirm that the fight against inflation had further room to run. US Richmond Fed marginally improved, albeit still negative with mixed details. Philly Fed non-manufacturing survey improved slightly, but firm-level business activity dropped into negative territory alongside full-time employment falling. Dollar slid to lows of 107.11, with gains led by NOK and NZD (ahead of RBNZ meeting where expectations are for a 75bps rate hike). EURUSD is poking at 1.032 while USDJPY is attempting a move below 141.

Crude oil (CLZ2 & LCOF3)

Crude oil prices were bid on broader risk appetite and continued OPEC+ denials of any production increases. Meanwhile, there was also a larger-than-expected draw of crude inventories while deliberations around Russian energy price caps were held ahead of the planned December 5th implementation. However, there were also reports that China has paused some purchases of Russian oil ahead of the price cap implementation. Supply worries however remained with API reporting that US crude inventories fell by 4.8 million barrels for the week ended November 18, higher than the expected draw of 2.2 million barrels. API data also showed that gasoline inventories declined by about 400,000 barrels last week, and distillate stocks increased by 1.1M barrels. The official government inventory report due Wednesday is expected to show weekly U.S. crude supplies fell by about 1.1M barrels last week. WTI futures traded firm above the $80 mark while Brent futures were near the $88 mark. Natural gas prices also rose as much as 5.2% after Gazprom threatened to cut its gas flows sent via Ukraine — the last remaining route to western Europe — next week.

What to consider

The increase in the ECB’s TLTRO funding costs for European banks came into effect

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.    

A testing time for the implementation of the fine-tuning measures for controlling Covid-19 outbreak in China

The number of new Covid-19 cases hit 27,307 and reportedly as many as 48 cities across the countries are under some sort of lockdown or movement. Guangzhou, the provincial capital of Guangdong reported over 8,000 new cases and Chongqing seconded with over 6,000 new cases. So far the municipal government of Guangzhou avoids adopting stringent. However, Chongqing the manufacturing hub of Western China has rolled out more stringent lockdown. Chinese local governments are struggling to strike a right balance about adhering to zero-Covid policy and minimising disruption to daily lives and economic activities. The swing from abandoning PCR testing a week ago but only to reinstate mandatory testing days later was an example of such dilemma. In a press conference on Tuesday, health officials from the State Council reiterated the importance of implementing the 20 recently released fine-turning measures.

Fed’s Mester and George keep the focus on inflation

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.

Russian oil price cap in the works

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 $7 per barrel ahead of 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.

EU’s new proposed cap on gas prices

The EU proposed a cap of €275 per megawatt-hour on natural gas prices to defend consumers against a steep rise in energy costs. The level is well above the current price of about €120, but below last summer's highs when Dutch TTF gas prices went as high as €300+. The tool will only be used if futures on the Dutch Title Transfer facility exceed €275 for two weeks and the gap between TTF and liquefied natural gas prices is greater than €58 for 10 trading days. Even at the height of the crisis in the summer, the price didn’t stay above that level for two weeks, suggesting the tool would not have been activated had it been in place then. That led several market watchers to question how powerful can will actually be. If approved by EU countries, the cap would be available for one year from January 1.

Ant Group could be fined more than USD1 billion, setting the stage for concluding regulatory overhaul over the company

According to Reuters, the Chinese regulators may be close to a decision to impose a fine of over USD1 billion on the Ant Group. Since being called to stop its IPO 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 are positive as the fine could set the stage for the conclusion of the regulatory overhaul.

JD.COM (09618:xhkg) 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 towards staff benefits.

The OECD revised downward its 2023 growth forecasts

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. Get access to the full report here.

FOMC minutes to be key for terminal rate pricing

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 message hawkishly 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.

Flash PMIs on the radar for US, UK and EU

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.

Singapore’s Q3 GDP revised lower

The final print of Singapore’s Q3 GDP was revised lower to 4.1% YoY, 1.1% QoQ from 4.4% YoY, 1.5% QoQ in the preliminary estimate. This came primarily on the back of weaker-than-expected manufacturing sector growth amid global demand weakness, which resulted in the first decline in non-oil exports for October. Meanwhile, covid curbs in China also continue to weigh on Singapore’s growth trajectory. The 2022 growth forecast was also trimmed to around 3.5% from a range of 3%-4% seen previously, a reflection of an increasingly challenging global macro environment, while 2023 growth forecast was set at 0.5-2.5%.

For our look ahead at markets this week - Read our Saxo Spotlight.