Global Market Quick Take: Europe – May 17, 2023

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US equities (US500.I and USNAS100.I): US retail sales upsets Fed rate cut pricing

Yesterday’s US April retail sales figures surprised to the upside suggesting US households are hanging on to spending despite inflationary pressures and recent labour market weakness. The figures were painting a different picture than Home Depot in its earnings release lowering fiscal year comparable sales growth to -2% to -5% from previous flat. SOFR Dec 2023 futures declined pricing in less rate cuts by December this year which at the margin pushed S&P 500 futures lower and into their weakest close 4 May. Maximum confusion seems to be the main theme in markets.

Chinese equities (HK50.I & 02846:xhkg): retreat as Chinese housing market recovery slows

Hang Seng Index extended its retreat, slipping around 0.6% as of early Asian afternoon. Chinese real estate, pharmaceutical, industrial, and sportswear stocks led the decline. Residential property prices showed a decreased monthly growth in China's top 70 cities, signaling a slowdown in the housing market's recovery momentum. China Internet companies and microchip manufacturers gained. Baidu (09888:xhkg) rose 1.2% following better-than-expected Q1 results. The CSI300 Index dips 0.3%, driven by declines in drug makers, education, auto services, and insurance sectors. Conversely, defense and e-commerce stocks witness advanced.

In the Chinese ADR space overnight, Futu (FUTU:xnas) and Up Fintech (Tiger Brokers; TIGR:xnas) plummeted 4.4% and 7.4% respectively. Reports indicated that both Chinese brokers were removing their trading apps from online stores in China.

FX: AUD and JPY drops extend as USD threatens higher

The US dollar was higher in the wake of stronger than expected US Retail Sales (more below) and after sterling made an odd quick round-trip from weakness to strength and back to weakness in the aftermath of the dismal UK employment numbers. GBPUSD trades this morning near the lows this week of 1.2465 and not far above the pivotal 1.2450 area. AUDUSD remains heavy after the weak Chinese data yesterday knocked the Aussie back lower across the board. The rise in US treasury yields saw JPY crosses higher across the board, despite the strong Japanese growth data overnight.

Crude oil: back in the red despite IEA’s upbeat demand forecast

Crude oil continues to trade with a negative bias on near-term demand concerns, especially in China, and the US debt ceiling debacle which is lowering the general level of market risk appetite. The IEA concluded the monthly batch of oil market reports by joining OPEC in saying global oil demand in 2023 will be stronger than previously expected, rising by 2.2m b/d to a record 102m b/d as China demand recovery surpasses expectations, clearly not a view that is being shared by the market at large. Ahead of EIA’s weekly stock report, the API reported a 3.7 million barrels increase, but another drop in fuel products. The latter underpinning a recent, albeit so far small recovery in refinery margins, especially for diesel. Brent and WTI remain stuck in downtrends with a break above $77.5 and $74.50 respectively needed to change that.

Gold and copper in risk off mode

While US economic data was firm and Fed speakers remained hawkish, markets have been in a risk-off mode mainly because of the debt ceiling talks and that has seen Treasury yields higher this week. The dollar has also risen and that, together with the downbeat China economic data, is sparking declines in the commodities complex. Copper fell as low as $3.65 after China’s industrial production saw a decline. German economic data was also weak, with new manufacturing orders falling. Compounding this was rising stockpiles. Readily available copper inventories rose to their highest level since October. Meanwhile, rising yields and dollar saw gold (XAUUSD) tumble below $2000, and the recent loss of momentum may in the short-term pose a challenge to an elevated hedge fund long, especially on a break/close below $1980

30-year US Treasuries yields (30YK3 and LT treasury ETFs TLT:xnas, IEF:xnas and SHY:xnas)

The US 30-year bonds broke above their resistance line at 3.85 briefly yesterday on strong US Retail Sales, but also possibly on anticipation for supply for long end debt in the upcoming Pfizer bond (PFE:xnys) issuance.

Pfizer will sell $31bn bonds to buy Seagen, becoming the fourth largest deal in history (PFE:xnys)

The bond issuance will come in 8 tranches becoming the fourth largest deal in US history. The 40-year tranche will offer 160bps pick up over Treasuries, down 20bps from IPT. With a long-term rating of A1/A+, this bond issue will offer an alternative and provide a sizeable pick-up for long-term investors.

Appetite for long-term Gilts remains resilient amid the economic slowdown (FLGM3)

Appetite for longer-term UK sovereigns was tested yesterday as the DMO sold 40-year gilts through a syndication offering only +6.5bps over the yield curve. Books covered 10x the total amount issued. A coupon of 4%, the highest since 2008, made it a desirable issue among long-term real money.

What is going on?

Debt ceiling talks still in limbo

US House Speaker McCarthy gave mixed comments on the debt ceiling talks. He said they set the stage to carry on further conversations and President Biden agreed to appoint a couple of people from the administration to negotiate directly with his team. McCarthy also said there is a lot of work to do in a short amount of time and that they are still very far apart but added it is possible to get a deal by the end of the week and it is not that difficult to reach an agreement. However, McCarthy later said he is not more optimistic about getting a deal by the end of the week. President Biden is set to return early from the G-7 meeting this coming weekend for more meetings next week.

US retail sales brings no glaring concerns on consumers

Headline retail sales came in beneath analyst expectations at 0.4% MoM (exp. 0.8%) but pared some of the 0.7% decline seen in March. Although the headline missed, the internals were more encouraging with ex-autos at 0.4% (exp. 0.4%, prev. -0.5%), while the ex-gas and autos rose 0.6%, above the prior -0.5% and expected 0.2%. Meanwhile, the control group, which feeds into GDP data, saw a strong reading at 0.7% MoM, above the 0.4% forecast and prior -0.4%. Discretionary categories such as clothing, electronics and sporting goods were all in the red while spending at restaurants and bars was still strong. While the report showed no signs of immediate concerns on the state of the consumer, there are some shifting consumption patterns suggesting caution in consumers as banking concerns and debt ceiling talks underpin. Meanwhile, US industrial production for April rose 0.5%, above the expected 0%, although the March data saw a revision lower to 0% from +0.4% after flatlining in February too.

Siemens sees super cycle driven by climate change investments

Siemens reports this morning Q2 (ending 31 March) orders, revenue, and net income above estimates increasing the fiscal year comparable revenue growth to 9-11% from previously 7-10%. The CEO says in an interview that Siemens is seeing a super cycle in industrial components driven by climate change investments and said that some industries might leave Germany on high energy costs and that the country will need to weigh which industries to protect.

Earnings review: Home Depot, Baidu, and Nibe

Home Depot, the largest US home improvement retailer, reported disappointing Q1 revenue figures missing estimates. Q1 comparable revenue growth was -4.5% vs est. -1.4% and Home Depot lowered its fiscal year comparable revenue growth to -2% to -5% from previously flat as US consumers are spending less money on improving homes. Home Depot shares were down 2%.

Baidu reported Q1 revenue of CNY 31.1bn vs est. 30bn and Q1 EBITDA of $8.2bn vs est. $6.4bn yesterday as the recovery in the Chinese advertising market is full under way suggesting the Chinese reopening will pick up speed in the months ahead. Baidu’s ADR shares rose 5% during the US session.

Nibe, the Swedish industrial company manufacturer heat pumps, reported Q1 revenue and operating profit above estimates, but the market clearly had higher expectations than analysts tracking the company sending shares down 5%.

Fed speakers remain mixed

A number of Fed speakers were on the wires on Tuesday, and many of them pushed for more rate hikes. Thomas Barkin (non-voter) said he is still not convinced that inflation is defeated and would be "comfortable" with more increases. Loretta Mester (non-voter) said she thinks rates aren't yet sufficiently restrictive. Lorie Logan (voter) was neutral and noted that a slower pace and vouched for a slower pace considering stability risks. John Williams (voter) was less hawkish, highlighting that the demand and supply in the economy is moving back into a balance as Fed hikes filter through the economy. Clearly, most voters are turning cautious while the other members on the committee still see further interest rate hikes.

Japan Q1 GDP smashes past expectations

Preliminary GDP for the first quarter from Japan smashed expectations with annualized growth of 1.6% q/q (vs. 0.8% exp and -0.1% prev). Growth was boosted by private consumption which rose 0.6% q/q (vs. 0.4% exp and 0.2% prev) as well as business spending which was up 0.9% q/q (vs. -0.3% exp and -0.7% prev). Exports were a drag on growth, reflecting the weakening external demand but the strong domestic pillars could provide another boost to Japanese equities which have seen rising interest lately due to the improvement in corporate governance and the rising inflation

What are we watching next?

Long Treasury yields on watch

US Treasuries sold off yesterday on the stronger than expected US Retail Sales, although support was found later in the session, but not until the 30-year US T-bond benchmark yield poked above the range high since early March above 3.85% briefly yesterday. The rise in the 10-year benchmark yield was tamed well before it threatened the range high near 3.64%, topping out at 3.57%. Still, one gets the sense that one of the reasons many markets seem frozen here is the sense of indecision and confusion since the March banking turmoil on what comes next – recession or continued economic expansion? And will inflation continue to fall apace? Treasury yields will be an important coincident indicator across all asset markets for next steps and the upper and lower bounds of the 10-year benchmark yield should be on everyone’s radar. Below a 3.25% yield and the market is more urgently looking for an imminent recession and above 3.64%, and perhaps 3.75% and markets are either suggesting that the economic expansion will continue and/or that longer term inflation expectations may be rising again. Yields may also react strongly to the US debt ceiling issue finally clearing.

G-7 meeting kicks off Friday – China-related policy the focus

As we have covered extensively in recent Quick Takes, the G-7 meeting starting Friday in Japan and continuing into the weekend is shaping up to be an important geopolitical event risk, both for what the countries can agree on in terms of policies said to be focused on addressing China’s “economic coercion” policies, but also how far the rest of the G-7 is willing to sign up for the more aggressive US stance.

Today’s Technical Highlights:

• Nasdaq 100 higher. Strength Indicator suggests uptrend is weak
• S&P 500 still range bound
• Gold Key support at 1,980. A close below next support is around 1.950
• Silver is trying to break below strong support at 23.70. Could be dropping to 23.00
• EURUSD lower. Key support at 1.0745
• Dollar Index trying to break above 0.382 retracement at 102.56. Next resistance at 103.20
• GBPUSD rejected at rising trendline. Could drop to 0.382 retracement at 1.2344
• USDJPY could be re-testing key strong resistance at 137.85 in a few days
• EURJPY higher cancelling Shoulder-Head Shoulder reversal. Back above trendline towards 149.72
• 30-year US Treasury yields higher but 10-year still range bound between 3.25-3.65

Earnings to watch

Today’s US earnings focus is Target expected to report before the US markets open with analysts expecting Q1 revenue (ending 30 April) of $25bn down 1% y/y and EBITDA of $1.8bn compared to $2.1bn a year ago.

• Wednesday: Siemens, Munich Re, Commerzbank, Tencent, Experian, Cisco, TJX, Target
• Thursday: KE Holdings, National Grid, Walmart, Alibaba, Applied Materials
• Friday: Deere

Economic calendar highlights for today (times GMT)

0900 – Eurozone Final Apr. CPI and CPI Core

1230 – US Apr. Housing Starts / Building Permits

1430 – EIA's Weekly Crude and Fuel Stock Report

1700 – US Treasury to auction 20-year bonds

0130 – Australia Apr. Employment Data