Global Market Quick Take: Europe – April 18, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I) getting closer to new highs for the year

US equity markets continued their rally yesterday with S&P 500 futures making their second highest close for the year with the closing high back from early February now in sight. Stronger than expected April Empire Manufacturing is a preliminary suggestion that economic growth continues to hum along despite the higher interest rates. Earnings from Charles Schwab were also good enough to calm the market about any potential new fallout in banking stocks improving sentiment in financials. Today’s key earnings focus is earnings from J&J (bef-mkt), Bank of America (bef-mkt), and Netflix (aft-mkt).

Chinese equities (HK50.I & 02846:xhkg) were mixed after strong GDP and retail sales

Hang Seng Index shed 0.5% while CSI300 Index added 0.4% after the release of a mixed bag of data. China’s real GDP rose 4.5% y/y in Q1, beating expectations and accelerating from the 2.9% in Q4 last year, driven by stronger-than-expected growth in the tertiary sector (mainly services). Retail sales also came in strong at a growth rate of 10.6% y/y. The growth in industrial production, however, was below expectation at 3.9% y/y, dragged by a deceleration in the mining industry. Fixed assets investment decelerated to 4.8% y/y in March from 5.5% in the first two months of the year, driven by a larger -5.9% y/y decline in property investment.

FX: USD fails to extend recovery despite new treasury yield surge

The bounce in the EURUSD failed to spread its wings, even as US treasury yields surged anew yesterday, in part on firmer US economic data, including a whiplash turnaround in the first of the regional US Manufacturing surveys (the Empire survey – more below) and a firmer NAHB Housing Market survey. A speech from ECB President Lagarde (more below) is worth considering as a game-changer for suppressing currency volatility long term if we see confirmation that other countries in the US/EU-aligned security sphere share her thinking.

Crude oil: stabilizing near key support on China growth outlook

On Monday, crude oil prices retreated by about 2% due to concerns over demand, as more bets on Fed tightening emerged amidst a strong showing of economic indicators. However, prices rebounded slightly overnight as China's Q1 GDP exceeded expectations, indicating faster growth. Nonetheless, there are concerns over a drop in demand in Asia, with reports suggesting that refiners in the region are considering cutting output due to a significant decline in profit margins. Refinery margins in Europe and the US have also weakened, particularly for diesel fuel, which powers heavy machinery such as trucks and construction equipment. Last week, Russian crude exports exceeded 3 million barrels per day. Brent is currently trading near $85, and a break below $83.50 could prompt a fresh attempt to close the gap down to $80 (for WTI, between $79 and $75.70).

Gold and silver: correction risks remain as Fed tightening bets pick up

Precious metals were pressured lower on Monday as US yields surged further with the 2-yr reaching 4.19%, up from 3.55% during last month's banking scare, while the 10-year touched 3.6% as the NY Fed’s manufacturing survey indicated further economic strength and room for Fed to keep rates higher-for-longer. The June23-Dec23 SOFR spread has narrowed to 59 bps from around 70 bps as the prospect for rate cuts are being scaled back. Gold has so far managed to hold above its 21-day moving average, currently at $1989 while silver is holding above $25 ahead of $24.50. Correction risks remain while the market focus on the risk of higher rates and a slow pace of cuts thereafter. Friday’s US PMI data as key along with a host of Fed speakers.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields rise anew on firm US data

US Treasury yields climbed sharply again yesterday and all along the curve, with the 2-year benchmark rising nearly 10 basis points to a new multi-week high just shy of 4.20%, while the 10-year yield advanced only slightly less to near 3.60%, which is close to the highest level since the treasury market stabilized after the storm of buying on the SV Bank collapse in early March. Strong US data (more below) seemed to drive much of the move.

What is going on?

ECB President Lagarde calls for coordinated CB action, united EU capital markets

In a sweeping speech delivered before the Council on Foreign Relations thinktank in the US, President Lagarde described a fragmenting world that could lead to the world dividing into as few as two blocs led by the two superpowers if the current scrambling to disentangle supply chains from unfriendly hands deepens. She noted attempts to set up alternatives to the SWIFT system so that powers considered a pariah in the US-aligned national security sphere can conduct trade. She also called for central bank interdependence to support weak spots, noting that the Fed and ECB had been “proactive in providing offshore liquidity when recent crises have hit” - a veiled reference to the bailout of the UK during its crisis last fall. She also called for a deeper integration of EU capital markets: “To put it bluntly, we need to complete the European capital markets union. This will be pivotal in determining whether the euro remains among the leading global currencies or others take its place.” Important to consider full text of President Lagarde’s speech.

Bank earnings: Mixed report from Charles Schwab but a disappointing one from State Street

Focus remains on regional banks reporting earnings this week, after we got an early insight last week on Friday with strong results from JP Morgan, Citigroup and Wells Fargo. But the regional bank earnings have started on a more mixed footing amid deposit outflows. Charles Schwab, which was under pressure during the recent banking crisis, has reported today Q1 net revenue in line with estimates and EPS of $0.93 vs est. $0.90. But the US broker also reported Q1 deposits that declined to $325.7bn down from $366.7bn in Q4 2022 and down from $465.9bn a year ago highlighting that it has been hit hard on the funding side. Meanwhile, State Street reported lower net interest income, deposits and fee revenue in Q1, and customers withdrew a net $26 billion from State Street’s investment products in the quarter, compared to expectations of $8bn in inflows. Its deposits fell to $39 billion from $44 billion, and they expect another drop of $4-5 billion in Q2.

Strong US Empire Manufacturing, NAHB Housing Market Index

The April US Empire Manufacturing survey shocked the consensus with a reading of +10.8 versus –18.0 expected and –24.6 in March, a whiplash turnaround that makes one wonder if the surge in new manufacturing buildout plans (FT notes that some $200B in expansion plans have already been announced) encouraged by the Inflation Reduction Act and CHIPS and Science Act are already showing up in the data. It is only one “soft” survey data point so far, but we should be on watch for whether the other regional US surveys show a similar pickup. Elsewhere, the US Apr. NAHB Housing Market Index continued to recovery, posting a reading of 45 as expected and 44 in March.

Apple introduces new “High Yield Savings Account” to US users with 4.15% yield

As we talked a lot about during the banking crisis, there is a stark difference between the US deposit rate and the money market rates. Apple is extending its financial services to take advantage of this yield difference by offering a savings account in partnership with Goldman Sachs to make the iPhone a digital wallet. There are some low-level constraints on the offering such as customers cannot spend money directly from the savings account, which leaves it an open question of how popular the account will become.

Wheat prices rise on renewed supply threats from Ukraine

Paris Milling wheat rose 2.4% to €256/t on Monday, potentially confirming a double bottom in the €245/t area, on worries that Ukraine grain exports could be disrupted after Ukraine said that Russia for the second time in a week had blocked inspections of vessels. That’s happening as Poland, Hungary and Slovakia have banned imports of Ukrainian gran over concerns supplies were hurting their domestic markets. Chicago and Kansas wheat meanwhile trades up more than 2% since Friday as well supported by poor winter crop conditions with only 27% of the winter wheat crop being rated in good to excellent condition versus 30% a year ago.

What are we watching next?

UK labor data to be the next key test for GBP

May hike from the Bank of England still remains in play with about a 80% probability, but commentary from officials has remained mixed. While economic momentum continues to pick up compared to recession calls being made late last year, this week’s data will be a key test for how much room there might be for further tightening. Labor data out on Tuesday and traders will be looking for signs on whether wage growth has peaked. Bloomberg consensus expects March employment change to come in at 48k from 98k in February, with the 3-month unemployment rate remaining steady at 3.7%. Weekly earnings is expected to grow 5.1% YoY in the three months to March from 5.7% previously. GBPUSD has plunged below 1.24 amid recent USD strength but supports are still far at with 100DMA and 50% retracement of the recent rally sitting just below 1.22.

Regional US banks reporting earnings will be in focus this week.

Regional US banks are not normally in focus in any given earnings season, but they are suddenly in the spotlight for this earnings cycle since the sudden March collapse of Silicon Valley Bank and ensuing signs that some depositors are moving their funds to larger banks, or even into US treasuries, given the unprecedented pace of declines in US commercial bank deposits in recent weeks. Some of the larger US regional banks reporting this week include Zions Bancorp and US Bancorp reporting Wednesday, and Bank OZK, Comerica, Fifth Third, KeyCorp and Truist reporting on Thursday.

Earnings to watch

Today’s key US earnings to watch are Johnson & Johnson (bef-mkt), Bank of America (bef-mkt), and Netflix (aft-mkt). Analysts expect Johnson & Johnson to report low revenue growth of 1% y/y in Q1 and no growth in operating profit. Bank of America Q1 earnings will likely be positive following the earnings we got on Friday from Citigroup, JPMorgan Chas and Wells Fargo. Netflix is expected to report revenue growth of 4% y/y in Q1, and EBITDA is expected to be slightly up compared to a year ago.

• Tuesday: Ericsson, Johnson & Johnson, Bank of America, Netflix, Lockheed Martin, Goldman Sachs, Intuitive Surgical
• Wednesday: Metro, ASML, Heineken, Tesla, Abbott Laboratories, Morgan Stanley, IBM, Lam Research, US Bancorp
• 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 Mar. Housing Starts & Building Permits

1230 – Canada Mar. CPI

1500 – Canada Bank of Canada Governor Macklem & Deputy Governor Rogers before Lawmakers

1700 – US Fed’s Bowman (Voter) to speak on Central Bank Digital Currencies

2030 – API's Weekly Crude and Fuel Stocks Report