Summary: Markets are in a holding pattern as earnings season unfolds and the S&P 500 price action remains bottled up near the 4,200 resistance, with a small cluster of large cap names having driven most of the gains this year. A host of regional US banks, both large and small, will report their earnings in the coming two days and should help the market gauge the status of the ongoing stress on banks as depositors seek higher yields.
US equity markets are losing a bit of momentum with the S&P 500 futures treading water in yesterday’s session and headed lower in early trading hours today. Netflix earnings after the close was not a positive catalyst as the guidance was on the weak side. US bond yields are steadily climbing here, and the Fed rate cuts priced in for later this year are slowly being reduced as the market is adjusting its inflation and rates outlook higher as more recent data points are suggesting the economy is still humming along. The big focus in US equities is later tonight with Tesla reporting Q1 earnings after the close.
Hang Seng Index shed more than half a percent, driven by weaknesses in property developers, EV, and sportswear names. After another round of intervention by the Hong Kong Monetary Authority to sell the US dollar in support of the Hong Kong dollar to prevent it from weakening beyond 7.85, the interbank liquidity measure, aggregate balance, fell to HKD49.23 billion, its lowest level in 15 years. The draining of liquidity stirred up fears of Hong Kong dollar interest rising to narrow the gap with the USD interest rates and weighed on interest rate-sensitive local property developers. Macao casino operators bucked the decline following a leading investment bank calling for sustained revenue recovery of the sector. In A-shares, CSI300 slid 0.4%, with property names leading the decline. On the other hand, semiconductors, co-packaged optics (CPO), and media stocks gained.
The US dollar rally from Friday reversed course yesterday as treasury yields went sideways and risk sentiment remained steady as US equities threaten the highs for the year. Upside for the greenback likely needs support from a combination of higher yields toppling risk sentiment, or risk sentiment stumbling badly because of fears of an economic slowdown. Most of the US data this week is second-tier stuff, although we are on watch for other regional manufacturing surveys (April Philly Fed up tomorrow and expected at fairly dire –19.2 after –23.2 in March) after the huge Empire Manufacturing number on Monday, and especially if confirmed by the preliminary April S&P Global US Manufacturing PMI on Friday. The market may be sensitive to big surprises in the weekly claims tomorrow as well. Meanwhile, NZD has stabilized a bit ahead of its Q1 CPI print tonight, and the UK’s CPI data is out this morning (see quick report tomorrow, as it is breaking just before we publish).
Crude oil prices steadied after hawkish comments from Fed’s Bullard and demand concerns, especially for diesel fuel which powers heavy machinery such as truck and construction equipment, were offset by China’s strong Q1 GDP data. Oil exports from Iraq’s Kurdistan region will resume this week according to the Iraqi PM. Ahead of today’s US stock report the API reported an across-the-board and price supportive drop in crude and fuel stocks. Apart from stock levels the market will also be focusing on export, production and fuel demand in today’s report. Having failed to build on the OPEC+ production news a couple of weeks of ago, the market could now be exposed to some long liquidation from recently established longs. Brent is currently trading below $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).
Precious metals trade lower as the SOFR market continues to price away rate cuts this year with Gold (XAUUSD) getting close to challenging the 21-DMA at $1989 while silver Silver (XAGUSD) trades below $25. Both metals have lost some of their recent shine on a combination of overbought markets in need of consolidation and hawkish Fed comments forcing bond yields and the dollar higher. In our latest update we highlight the short-term risks to precious metals while also highlighting the reasons why we believe prices could go higher still. Below $1989 gold will be looking for support at $1957, the 38.2% retracement of the banking-crisis-led runup in prices. Silver meanwhile is now looking to $24.50 for support being an area that provided several tops back in January and February.
Global coffee prices continue to get more expensive with Arabica coffee, the high-quality bean primarily produced in South America, trading up 19.6% this month to $2.0525/lb, a seven-month high, after the pace of buying accelerated last week when the price broke above the 200-DMA, now support at $1.90/lb. Robusta coffee, primarily produced in Asia, has enjoyed the tailwind to trade up 10% this month so far. The market is worried about weather developments in Brazil with heavy rainfall in some areas and low temperatures in others raising some concerns. In addition, the May contract (KCK3) has been exposed to short covering ahead of the futures first notice day tomorrow.
The lack of negative surprises from banks’ Q1 results so far (although note the number of regional banks reporting below) and the rejection of recession risks in 2023 from St Louis Fed president Bullard weighed on the front end, seeing the 2-year yield rising 3bps to 4.20%. Yields from the 5-year to 30-year edged down 2bps, with the 10-year yield finishing the muted session at 3.58%. The 2-10-year curved flattened to -62. As yields were being range-bound lately, traders were seen shorting volatility in rates by selling strangles.
The world’s largest manufacturer of advanced semiconductor equipment is reporting Q1 results this morning with Q1 gross margin at 50.6% vs est. 49.8% and revenue of €6.75bn vs est. €6.3bn. The Q2 revenue guidance of €6.5-7bn is also exceeding estimates of €6.4bn suggesting the demand picture looks strong although ASML says in its statement that they see mixed signals on demand. ASML indicates +25% revenue growth in 2023 and that demand will exceed production capacity this year. China is roughly 8% of system sales and 20% of backlog with the CFO saying that the company is still awaiting the Dutch government’s final decision on China chip curbs.
Netflix reported last night after the US market close Q1 revenue of $8.2bn in line with estimates and Q1 paid memberships of 232.5mn in line with estimates. The streaming giant also raised its FY23 free cash flow guidance to at least $3.5b from previously at least $3bn as a function of Netflix reducing its spending on original content. Investors were initially spooked sending the shares down 12% because of its Q2 revenue guidance of $8.2bn vs est. $8.5bn, but comments on the conference call about plans to roll out paid sharing models which will increase monetization eased investor concerns.
This was the first issuance of AT1 debt since Credit Suisse’s AT1 debt was wiped out in its sale to UBS last month and was one of the large corporate bond deals in Japan this year. The bank plans to issue further AT1 debt in May. The bonds sold at a 171 basis point spread to JGB’s.
Fed’s most hawkish member Bullard was on the wires overnight, still vouching for terminal rate at 5.50-5.75% against current market pricing of 5.1%. He also stated that US recession predictions ignore the strength of the labour market and pandemic savings still to be used, and the risk of bank stress causing broad problems seems to have diminished. Raphael Bostic also reiterated that he expects one more rate hike, noting the economy still has lots of momentum and inflation is too high and it will take a while to move back to target. On the banking stress, he said that more caution in bank lending will allow the Fed to hike rates less.
The UK March CPI this morning came in at +0.8% MoM and 10.1% YoY vs. 0.5%/9.8% expected and the core was steady at 6.2% YoY versus expectations of a fall to 6.0%. These hot data points are a challenge to the Bank of England’s aggressively disinflationary CPI forecasts. The Retail Price Index only fell slightly to 13.5% vs. 13.3% expected and 13.8% in Feb.
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 or money market funds, given the unprecedented pace of declines in US commercial bank deposits in the weeks since the Silicon Valley Bank collapse kicked off the recent bank turmoil. Some of the larger US regional banks reporting this week include US Bancorp (US’ fifth largest bank), Zions Bancorp, Western Alliance Bancorp, and Citizens Financial Group Inc. Report today. Tomorrow Bank OZK, Comerica, Fifth Third, KeyCorp and Truist report, with at least eight additional smaller banks in the KBW Regional Bank Index reporting as well. One regional bank reporting Q1 earnings yesterday, Hancock Whitney ($35B total assets), saw an 11% drop in total deposits and a doubling of its short term borrowing.
Today’s key US earnings to watch are Tesla (aft-mkt) and US Bancorp (bef-mkt) with investors focusing on the gross margin developments of Tesla which has aggressively cut prices across its models in Q1 as lithium carbonate prices have declined more than 60% since the peak in November. Tesla’s expectations for orders and growth will also be closely watched by investors. Analysts expect Tesla to report 25% revenue growth y/y in Q1 and then Q2 revenue growth estimates are currently at 47% y/y. US Bancorp has not seen the same impact on deposits as other US banks so given the figures we have seen from US bank we expect a strong report from US Bancorp.
For an extended overview of all earnings releases check out the earnings calendar in our trading platform.
0900 – Eurozone Mar. Final CPI*
1035 – ECB Chief Economic Lane to speak
1215 – Canada Mar. Housing Starts
1430 – US DoE Weekly Crude Oil and Product Inventories
1600 – ECB's Schnabel to speak
1700 – US Treasury to sell 20-year T-bonds
1800 – US Fed Beige Book
2130 – UK Bank of England’s Catherine Mann to speak
2130 – US Fed’s Goolsbee (Voter 2023) to speak
2245 – New Zealand Q1 CPI
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