Global Market Quick Take: Europe – March 9, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): more wait and see

Following the big move in Tuesday’s session on Powell’s hawkish comments on policy rates and inflation yesterday’s session had much lower energy and ended with a small rebound in S&P 500 futures gaining 0.1%. Stronger than expected ADP job figures had a small initial negative impact as the jobs data continue to suggest a strong US labour market despite the higher interest rates underpinning the structurally higher inflation case. This morning the low energy in US equity futures continues and it feels like the equity market is back at the wait-and-see mode on inflation and the economy. As we have said before, it is the bond market that will dictate where equities go from here. If S&P 500 futures slips below Tuesday’s close, then the 3,950 level is the next level to watch and the approximate area for the 200-day moving average.

Chinese equities (HK50.I and 02846:xhkg): oscillated in a lacklustre session

Hang Seng Index and CSI 300 Index swung between small gains and losses. China’s CPI growth slowed to 1% Y/Y in February, much lower than the consensus estimate of 1.9%. Growth in food prices decelerated to 2.6% Y/Y from 6.2% Y/Y while growth in non-food prices halved to 0.6% Y/Y in February from 1.2% in January. PPI slide 1.4% Y/Y in February, bringing the producer prices deeper into deflation. Semiconductor Manufacturing (00981:xhkg) and Hua Hong Semiconductor (01347:xhkg) advanced, as investors expect the domestic chip making leaders to benefit from government policy initiatives and import substitution. COSCO China Shipping Energy Transportation (01138:xhkg) jumped 11.5% as investors anticipated the Chinese tanker and dry bulk shipping operator to benefit from recent rises in freight rates.

FX: USD strength eases ahead of data. JPY firms. CAD weak on BoC

The USD strength on the back of Fed Chair Powell testimony failed to find further momentum as the market awaits key incoming US data tomorrow (Feb. jobs report) and next Tuesday (Feb. CPI) for further conviction. With the rise in yields easing slightly, the JPY perked up after USDJPY failed to close above the 200-day moving average and as the market awaits a possible surprise from the outgoing Kuroda at tonight’s (Friday in Asia) Bank of Japan meeting (preview below). The Bank of Canada confirmed its prior guidance and did pause its rate tightening cycle at its meeting yesterday, continuing to signal a wait-and-see stance, which looks dovish in this environement. This saw CAD weak across the board yesterday, and USDCAD traded above 1.3800 at one point for the first time since November.

Crude oil holds Powell-led losses, but support is not far away

Crude oil futures remain stuck near a one-week low as the negative sentiment around further monetary tightening more than offset a surprise drop in US stocks, the first in ten weeks. Brent and WTI trade below their 21-day moving averages for a second day but the loss of momentum has yet to see either of them challenge trendline support, in Brent at $81.40 and WTI at $73.50. Rangebound for months and in no hurry to change that amid a balanced flow of supply and demand related news, the market is likely to pay close attention to the general level of risk appetite which is currently being dictated by the FOMC and its close attention to incoming data. With that in mind the next major market moving event is likely to be Friday’s US job report.

Gold trades near key support on Powell’s higher, faster and longer threat

Gold trades near support in the $1800 area as traders continue to digest Fed chair Powell’s comment on Capitol Hill that interest rates could go higher, faster and for longer. In the short-term with Powell signalling an incredible data dependency, the focus now turns to incoming US data, and ahead of Friday’s job report, another report showed US job openings drop to 10.8 million, still a number too high for the Fed. However, given the level of elevated rate hike expectation currently priced in, any weakness in incoming data may now trigger a stronger positive response than otherwise called for. Below the $1800 area the next level of interest is the 200-DMA at $1775.

Yields on U.S. Treasuries moved higher on hot JOLTS job openings and a poor 10-year auction

The Treasuries market did not react much to the hotter-than-expected ADP employment data and Powell’s second-day congressional testimony. Short-covering flows especially in the futures contracts drove the market higher and yields lower in the morning until selling emerged following the JOLTS job openings data which was stronger than estimates. Demand in the 10-year auction was weak as the auction stopped at nearly 3bps cheaper from the market level at the time of the auction and had a bid-to-cover ratio of 2.35, lower than 2.66 last time. The Treasury is auctioning USD 18 billions of 30-year bonds today. The 2-year yield rose 6bps to 5.07% and the 10-year yield edged up 2bps to 3.99%, inverting the curve further to -109bps.

What is going on?

The Netherlands proposing a chip gear export restriction to China

As part of the US CHIPS Act the US pushing its trading partners to also restrict semiconductor technology to China which has hurt chipmakers including Nvidia. So far, the Dutch-based ASML, the world’s largest lithography machine makers for chip production, has said that those restrictions did not apply to them. However, non-compliance by ASML and other equipment makers would make it possible for China’s semiconductor industry to circumvent the intentions in the new US policy on semiconductors. Yesterday, the Dutch government announced that the Netherlands is proposing chip gear export restrictions to China and will include DUV (deep ultraviolet) lithography machines which are the most advanced machines for chip production. ASML says that the new export restrictions will not affect the 2023 outlook nor the long-term outlook, but the latter part might be a stretch and only time will tell.

Apple to put more focus on India growth

Apple is revamping its global sales unit shifting its focus to India from China with a new separate sales office and reporting line in India. This move follows the decision to increase production capacity of various Apple products to India from China underscoring the shifting geopolitical interest for the US and its corporate sector. With Apple being one of the most important companies in the US this is an important signal to other US companies about how to change global supply chains and where to get revenue exposure.

WASDE adds further downside pressure on corn and wheat futures

Chicago corn and not least wheat futures extended their slump on Wednesday after the USDA said domestic stockpiles rose by more than expected in response to lower exports. The agency also boosted the outlook for Ukraine corn exports while wheat, already under pressure from Russian sales and expectations the Ukraine grain corridor deal will be extended, dropped to an 18-month low after the agency raised production estimates for Kazakhstan, Australia and India. Soybeans meanwhile found support after the USDA slashed production from drought-stricken Argentina by more than expected. The world’s biggest exporter of soymeal and soyoil will harvest 33 million tons of beans this year, the smallest crop since 2011 and a 20% decline from its February estimate.

More hot job data coming out of the US

The ADP Employment report had a 242K increase in jobs in February, rising from 119K (revised from 106K previously reported) in January and way above the 200K consensus estimate. JOLTS Job Opening also came in stronger than expected at 10,824K (consensus estimate: 10,546K; January 11,234K).

Bank of Canada confirms pause in rate tightening regime

The Bank of Canada confirmed its guidance from the prior meeting and did not hike the policy rate yesterday, a particularly jarring divergence relative to the hawkishness we saw this week from Fed Chair Powell which has the market debating a re-acceleration in the pace of Fed hikes, and at a time when the ECB, for example, is priced to hike another 150 basis points or more this year. The Bank of Canada continues to expect that inflation in Canada will ease to “around 3%” by mid-year. The guidance on further in the policy statement remained unchanged: "Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target.". One particularly complicating factor for the Canadian economy is the heavy load of private debt, much of it in mortgages, with a large minority of Canadians financing with adjustable rate mortgages and even fixed rate mortgages adjust their rate every five years, which will stress the budgets of a growing portion of Canadian households with every month that passes at the current yield levels – several multiples of where rates were for the 2020-2021 timeframe.

Powell largely repeated his message on the second day of his testimony

On the second day of his congressional testimony, this time to the House Financial Services Committee, Powell told lawmakers that no decision had yet been made on the size of the rate hike at the March FOMC while he reiterated that the Fed was likely to bring the policy rate higher than previously anticipated and could move at a faster pace.

What are we watching next?

Bank of Japan meeting tonight will be Kuroda’s last after 10 years as Governor

Significant two-way volatility potential for the JPY tonight on the Bank of Japan meeting as the market well remembers the surprise decision from Governor Kuroda to expand the yield-curve-control “band” for 10-year Japanese Government bonds (really a cap in this era of higher interest rates) to +/- 0.50% from the prior 0.25%. One-week implied volatility in USDJPY options remains very elevated at almost 19% in anticipation of tonight’s decision and guidance, as the market is uncertain whether Kuroda might significantly tighten policy at his last meeting as a kind of declaration of victory on succeeding in bringing more sustained inflation to the Japanese economy, or whether he will leave the bulk of the tough process of policy normalization to his likely successor, Kazuo Ueda. USDJPY rose above its 200-day moving average this week at 137.20 and traded most of the way to 138, but has retreated this morning to well below 137.00. The market is only pricing a policy rate (the short rate) of positive 0.15% by the end of this year, versus –0.10% currently. More likely for the Bank of Japan to focus on loosening yield-curve-control for now rather than tinkering with the policy rate.

Earnings to watch

Today’s key earnings release to watch are CATL and JD.com which will provide fresh information from China’s corporate sector. JD.com is expected to report FY22 Q4 earnings before the US market open with analysts expecting revenue growth of 7% y/y down from 23% y/y a year ago, and EBITDA of CNY 8.06bn up from CNY 5.08bn a year ago. The outlook from JD.com matters a lot this time as it will reflect management’s confidence and expectations related to the Chinese reopening. CATL is expected to report sometime after the Chinese equity market close and is expected to report Q4 revenue growth of 87% y/y reflecting the strong demand for electric vehicles and batteries.

• Thursday: CATL, Deutsche Post, JD.com
• Friday: Daimer Truck, AIA Group, Oracle, DiDi Global

Economic calendar highlights for today (times GMT)

1200 – Mexico Feb. CPI

1230 – US Feb. Challenger Job Cuts

1330 – US Weekly Initial Jobless Claims

1400 – Poland National Bank Governor Glapinski press conference

1530 – EIA's Weekly Natural Gas Storage Change

1800 – US Treasury to auction 30-year T-bonds

1845 – Canada Bank of Canada Deputy Governor Rogers to speak

Asian session: Bank of Japan meeting