Global Market Quick Take: Europe – March 31, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Equities end the month higher

S&P 500 futures increased 0.6% yesterday and extending this morning trading around the 4,085 level pushing equities to a positive gain for the month of March despite a banking crisis and increased risks of a recession this year. The month is ending with banks, diversified financials, insurance, and real estate industry groups declining and being the worst performer. At the other spectrum industry groups such as semiconductors, media & entertainment, technology hardware, and software have been the best performing driven of course by lower interest rates and the optimism around the GPT 4 AI system. Today’s key event for US equities is the US February PCE inflation which if it shows to remain sticky then forward interest rates pricing might rally again suppressing risk sentiment in equities.

Hang Seng Index and CSI300 gained as China’s PMIs better than expected

Hang Seng Index advanced 0.7% and CSI 300 climbed 0.3% in the early Asian afternoon. China’s March Manufacturing PMI came in at 51.9, moderating from the prior month but better than expectations. The biggest positive surprise came at the Non-manufacturing PMI print, which surged to 58.2 in March from 56.3 in February while economists estimated a decline. The Services sub-index increased, by 1.3 points to 56.9, signaling strong momentum in demand for in-person services. Meanwhile, JD.COM (09618:xhkg) jumped 6% as the e-commerce giant filed for listings of subsidiaries Jingdong Property and Jingdong Industrial at the Stock Exchange of Hong Kong. Alibaba (09988:xhkg) gained 3.6% as the group is reportedly preparing to get its logistic unit, Cainiao Network Technology listed in Hong Kong.

FX: yen lower still into Japan’s financial year-end

Very low volatility across much of FX, with the USD edging lower in places, but with yen weakness into Japan’s financial year-end today the most notable development this week. EURJPY even poked at the highest levels of the year overnight above 145.00 before easing back lower into this morning’s session, perhaps in part on hotter than expected Tokyo CPI in March AUD and especially NZD firmed overnight on strong Chinese official PMI data for March and ahead of an RBNZ meeting that is expected to see the central bank take rates 25 basis points higher to 5.00%, the highest among G-10 currencies. It could be a key meeting for a shift to more neutral guidance after the recent turmoil. Only one more 25 basis point hike beyond next week’s meeting is priced into the forward NZ rates curve.

Crude oil near two-week high on supply disruptions and short covering

Crude oil trades firm ahead of month-end with a 7% rally this past week being driven by continued supply disruptions from Northern Iraq, a weaker dollar, the biggest drop in US crude stocks since November, China’s recovery showing continued strength, and not least an improve risk sentiment forcing short covering, not least ahead of today’s expiry of the May Brent contract which has seen prompt spread rise above 70 cents. In a monthly survey published by the Dallas Fed, shale oil basin executives said the “uncertainty of the depth and duration of bank crisis is causing us to be nervous about capital spending plans in 2023”. In addition to access to credit, record costs from a shortage of labor and supply chain issues have led to a slowdown in production growth. Support in Brent at $77.90 while a break above $80.40 is needed to fully cancel out the March sell-off.

Will US PCE inflation dampen gold’s biggest monthly gain since 2020?

Following a month of turmoil across the banking industry, gold and silver is heading for monthly gains of around 8% and 14% respectively, and despite easing tensions this week both metals have managed to hold onto most of their gains in anticipation of a near-term peak in US rates being followed by a succession of rate cuts. This outlook, however, could be challenged today by the US PCE inflation print, the Fed’s preferred measure of underlying price pressures. As the banking crisis ease inflation above target may trigger fresh rate hike expectations. On the upside, $2000 remains the key level to watch, while support is seen at $1933, the 38.2% retracement of the recent runup to $2000. In silver, watch a weekly close above $23.90 as it may signal a breakout of a two-year downtrend.

Treasuries ended mixed in a muted session

The 2-year yield edged up 2bps to 4.12% while the 10-year yield 2bps to 3.55% in a muted session. Fed’s Kashkari and Collins both reiterated that the Fed has “more work to do” to bring inflation down to the 2% target while Fed Barkin said he is undecided. Flight to quality bids for the front end of the Treasury curve fades and the PCE data today is in focus.

What is going on?

Donald Trump indicted for hush money payments during campaign

A grand jury in New York indicted former president Donald Trump late yesterday for his role in paying hush money paid to a woman to suppress her story of their affair, which had occurred a decade prior to her interest in selling the story during his presidential campaign in 2016. The specific charges mostly revolve around the use of campaign funds to pay the hush money. Mr. Trump is expected to turn himself in to authorities in Manhattan and has issued blistering statements against what he calls “political persecution and election interference at the highest level in history”. Mr. Trump’s standing in presidential polls and particularly in Republican primary polls has surged in recent weeks.

Fed’s Kashkari says not clear if SVB demise will lead to credit crunch

The President of the Minneapolis Fed Neel Kashkari said it is too early to determine whether the “banking stresses of the past few weeks” will lead to a sustained credit crunch that slows down the US economy, saying it would “take us a while until we fully understand, are there more losses out there”. He also noted that inflation remains too high.

Tesla looks to build a battery plant in the US with China’s battery leader CATL

Tesla is looking to build a battery plant in the US with China-based CATL, the world’s largest battery manufacturer. Ford announced a similar move last month. Given EV batteries are the most expensive component of an EV, CATL's technology is sought after, as it makes lithium iron phosphate batteries, that are cheaper than the nickel-based batteries predominantly used in EVs. Tesla has been in talks with the White House in recent days, to clarify the rules and potential funding support as part of the Inflation Reduction Act. Tesla is deep in expansion mode, deploying $22 billion in cash to crank up production, while scoping ways to lower costs, and contend with increasing EV competition.

What are we watching next?

The grain market awaits key reports on stocks and planting intentions.

Later today, the USDA will release its 2023 Prospective Planting and Q1 stock reports. The planting report is the government's first attempt to gauge which crops farmers will be planting in the coming season. If trade estimates are met farmers will plant the most wheat in 7 years while Q1 stocks will be the lowest in 15 years and corn in 9 years. The cotton acreage is expected to be cut by +19% and together with reductions in other small crops such as barley and oats it has made room for more planting of the bigger crops.

The RBA likely to pause rate hikes next week

Australian’s households are under pressure from the RBA’s policy tightening. The RBA has warned that the ‘full effect’ of its 10 interest rate rises have yet to be seen. Already over 1 million mortgages have been deemed ‘at risk’ and another 880,000 Australians roll off fixed mortgages to variable, which will sharply raise mortgage-related expenses and strain household budgets. Seven Australian banks have cut mortgages rates slightly to reflect the recent drop in interest rates and the RBA is seen likely to pause its hiking cycle and then cutting later this year. With Australia’s households the second most indebted in the world behind, Sweden, we explore what a rate hike pause could mean for investors and traders in our article.

Heavy anticipation around Bank of Japan policy as Kazuo Ueda set to take charge in a week

We are rolling into a new Japanese financial year next week and the week after, Bank of Japan Governor Haruhiko Kuroda is set to retire, to be replaced by the Kazuo Ueda, an economist and former Bank of Japan policy board member. He has signaled a cautious approach to adjusting Bank of Japan policy, but looking forward, some level of convergence between the BoJ’s ultra-easy policy of the last ten years under Kuroda and the rest of the world’s dramatic tightening and exit from negative- and zero- interest rate policies is likely.

Earnings to watch

The earnings calendar next week is light, so the equity market will focus on inflation, credit, and the economy next week, while waiting for Q1 earnings season starting up in two weeks.

Next week’s earnings releases:

• Monday: BOE Technology
• Wednesday: Industrivärden, Conagra Brands, Sodexo
• Thursday: Seven & I, RPM International
• Friday: Aoen, Yaskawa Electric

Economic calendar highlights for today (times GMT)

0755 – Germany Mar. Unemployment Change/Rate

0900 – Italy Mar. Preliminary CPI

0900 – Eurozone Mar. Preliminary CPI

1230 – US Feb. PCE Inflation

1230 – Canada Jan. CPI

1400 – US Mar. Final University of Michigan Sentiment

1500 – ECB President Lagarde to speak

1905 – US Fed’s Williams (Voter) to speak

2145 – US Fed’s Cook (Voter) to speak