Financial Markets Today: Quick Take – February 9, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): tight trading range

Yesterday’s trading session did not confirm the cyclical growth bets in equities with S&P 500 futures erasing the prior gains on Powell’s tight labour market comments and the need for higher policy rates. It feels like the market is transitioning into a tighter range before getting new information on which to decide whether to continue to uptrend or reverse lower. The signs are leaning towards a cyclical uptrend, but the signal-to-noise level remains low across many macro indicators. Yesterday’s open price in S&P 500 futures at 4,167 is the key level to watch on the upside.

Chinese equities: Hang Seng (HIG3) and CSI300 (03188:xhkg) lacked of direction

Hang Seng Index and CSI300 bounced over 1% after a week-long consolidation. Xiaomi (01810:xhkg), surging 9.5%, was the biggest winner within the Hang Seng Index. Lei Jun, Chairman and founder of the mobile phone and electronic device maker, announced on Twitter in the form of Q & A with a Chatbot that the company is launching its Xiaomi 13 Series mobile phone on 26 Feb. Mobile phone hardware suppliers Sunny Optical (02382:xhkg) and AAC (02018:xhkg) surged 5.3% and 4.1% respectively. The technology space outperformed overall, with the Hang Seng Tech Index climbing 2.5%. In A-shares, food and beverage, communication, defense, and internet-of-things stocks led the advance.

FX: Aussie gains stall; sterling outperforms

After a strong run higher post-RBA, AUDUSD turned lower yesterday after taking a stab at 0.7000, but was choppy overnight in the Asian session, perhaps buoyed into early European hours by a bounce in metals prices. The key levels for that pair to the downside are the recent 0.6856 low and the 200-day moving average another 50 pips lower currently. USDCAD also returned back above 1.3400 despite the surge in oil prices, with the line of resistance for that pair near 1.3475. Sterling bounced off 1.2000 support in GBPUSD and managed a poke through 1.2100 but has found resistance in that area. The 38.2% Fibo retracement at 1.2120. UK GDP for Q4 will be released tomorrow. The EURGBP rally, meanwhile, has partially deflated after the pair broke well above the key 0.8900 area, trading near 0.8875 this morning and threatening a full reversal if it closes much lower in coming sessions.

Crude oil (CLH3 & LCOJ3) prices rise on demand outlook

Crude oil trades higher for a fourth day as last week’s long-liquidation-driven sell-off continues to be reversed as the dollar softens and on renewed optimism about the demand outlook for oil, especially in China and other parts of the world that may narrowly avoid a recession. The EIA reported US crude stocks building 2.4mln bbls in the latest week, contrasting the private data that indicated a draw of a similar magnitude. On the demand side, TotalEnergies sees oil demand will rise to a record this year, in line with the IEA’s messaging. Brent is currently trading above its 21-day moving average, currently at $84.95 - in WTI at $78.25 - with a close above likely to provide additional positive momentum.

Gold (XAUUSD) trades steady but risk of further weakness lingers

Gold remains supported around the $1860 level but so far the failure to break decisively higher to challenge support-turned-resistance in the $1900 area is raising concerns that a correction floor has yet to be found. The yellow metal erased earlier gains on Wednesday after Fed members reaffirmed the view that interest rates will need to keep rising to contain inflation. Since hitting a $1861 low last Friday, gold has been trading within an 18-dollar rising channel, currently between $1870 and $1888, and a break to the downside carry the risk of an extension towards $1828, the 38.2% retracement of the run up from early November.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) pulled back on a strong 10-year auction

The reaction in the Treasury market was muted to the chorus of hawkish comments calling for higher for longer from Fed’s Williams, Waller, Kashkari, and Cook.  The action came in after a strong 10-year auction which awarded the notes 3bps richer than the market level at the time of auction and a strong bid-to-offer-cover at 2.66 times, increasing from 2.53 times in the previous auction. Yields on the 10-year fell 6bps to finish Friday at 3.61%.

What is going on?

Credit Suisse sees weak 2023 on significant outflows

The Swiss bank reports this morning Q4 net income loss of CHF 1.4bn vs est. loss of CHF 1.1bn, but even worse the bank is expecting a substantial loss before taxes in 2023, but also expect to bounce back to profitability in 2024. Outflows in Q4 totalled CHF 111bn but deposits looked positive in January according to Credit Suisse.

Walt Disney announces job cuts and $5.5bn cost-cutting plan

The Walt Disney Company reported quarterly earnings after hours yesterday, with profits of 99 cents per share well north of consensus estimates of 74 cents and revenue growing 7.8% y/y to $23.5bn, also above estimates. Disney+ streaming service subscribers fell 1% in the quarter, mostly due to their Indian streaming service loosing streaming rights to cricket games. CEO Bob Iger announced a $5.5bn cost saving plan that will include a $3bn reduction in movie-production budgets and the axing of 7,000 jobs. Shares were up over 5% in late trading last night, near $117.80 per share.

Uber shares gained 5% yesterday after reporting earnings.

The rise in Uber accelerated yesterday, posting a new 10-month high after Uber reporting stronger than expected quarterly results. Uber expects its first ever year of profits, including for its ride and Uber Eats businesses. Uber reported its highest ever number of trips for the quarter at more than 2 billion and nearly 1mn trips per hour. Meanwhile Uber is also receiving more advertising dollars, and on track to achieve its $1bn ad revenue in 2024.

A fourth activist investor joins the move to shake up Salesforce

Three activist investors, Elliott Investment Management, Starboard Value LP, and ValueAct Capital Partners, have already put pressure on Salesforce’s management to cut costs and improve profitability. Wall Street Journal writes that a new activist investor Third Point LLC has now also taken a stake in the software maker. This group of investors will put enormous pressure on the software maker to improve results over the coming year.

UK House Prices continue to drop sharply, according to RICS Survey.

The UK RICS Price Balance survey registered a new low for the cycle at –47%, suggesting that nearly 50% more of surveyed estate agents are seeing falling prices than rising prices, the lowest number since 2009, during the financial crisis. This was slightly worse than expected and a drop from –42%, although estate expectations are improving with only 20% believing in a worsening outlook for the next 12 months versus 42% a month ago.

European gas settles at 17-month low on mild weather outlook.

The Dutch TTF gas futures, Europe’s natural gas benchmark, settled at €53.69 on Wednesday, its lowest close since September 2021, and around 25 euros above the five-year average for this time of year. A cold spell across Europe this past week have had no major impact on prices with ample supplies to meet demand, and forecasters are now looking for milder than expected weather for the rest of the month than previously expected. EU gas in storage remains 69% full and we may enter the injection season in late March near 60% and unprecedented high level, even compared with the recession hit 2020 when the level was 54%.

Fed speakers call for higher rates

A slew of Fed speakers were on the wires yesterday. While a broad chorus on higher rates was maintained, much of which has been the Fed’s message throughout, markets perceived the messages as hawkish primarily as the January jobs report is still keeping investors concerned. Importantly, all the four speakers last night are voting this year. Christopher Waller said rates may have to stay higher for longer. John Williams called the December dot plot a good guide, adding that rates are "barely into restrictive" territory. He also hinted at a slightly higher terminal rate of 5.0-5.5%. Lisa Cook said "we are not done yet." Neel Kashkari expects the peak to rise above 5% this year as services side of the economy is still hot. Market pricing of the Fed path still pretty much unchanged, with terminal rate priced in at just over 5.1%.

What are we watching next?

Sweden’s Riksbank to hike today – watching guidance after krona’s woeful weakness.

EURSEK recently touched its highest level since the global financial crisis back in 2009, a rather unusual scale of SEK weakness, given strong global risk sentiment and an improved outlook for Europe. The new Riksbank governor Erik Thedeen warned on the concerns that rate rises and high inflation (which hit over 12% YoY a the headline and 10.2% for core inflation in December) are risks for Sweden’s financial system, suggesting that the central bank may be reluctant to continue hiking much more beyond today’s 50 basis point rate rise, which would take the policy rate to 3.00%. With 10-year Swedish government bonds trading with a yield south of 2.00%, the Swedish yield curve is even more steeply inverted than Germany’s, suggesting strong concerns for economic growth.

RBA inflation forecasts due tomorrow as Chinese students set to return to AU

The AUDUSD has had a volatile week, sentiment was lifted a bit overnight in Australia as the iron ore (SCOA) and copper prices moved up over 1% each. China recently docked its first Australian coal import shipment in two years. In what can only prove a boost to the Australian economy, almost 50,000 Chinese students are expected to arrive in Australia this month- ahead of the start of semester. This is due to Beijing’s government ruling that degrees earned online will no longer be recognized. Tomorrow, the RBA will issue its quarterly economic forecasts and policy outlook in Australia on Friday.

Earnings to watch

Today’s US earnings focus is PepsiCo and PayPal with analysts expecting PepsiCo to report revenue growth of 7% y/y and EPS of $1.64 up 7% y/y as the beverage and snacks business is resilient during inflation. PayPal earnings will an interesting to watch as Adyen in Europe yesterday spooked markets with a significant decline in the EBITDA margin on more hiring and investments in infrastructure. Analysts expect PayPal to report revenue growth of 7% y/y and EPS of $1.20 up 41% y/y.

• Thursday: KBC Group, Brookfield, Thomson Reuters, L’Oreal, Vinci, Credit Agricole, Siemens, Toyota Motor, NTT, Honda Motor, AstraZeneca, Unilever, British American Tobacco, ArcelorMittal, DNB Bank, Volvo Car, Zurich Insurance Group, Credit Suisse, AbbVie, PepsiCo, Philip Morris, PayPal, Cloudflare
• Friday: Enbridge, Constellation Software

Economic calendar highlights for today (times GMT)

0830 – Sweden Riksbank Policy Rate

0945 – Bank of England Governor Andrew Bailey to testify

1330 – US Weekly Initial Jobless Claims

1400 – Poland National Bank Governor Glapinski press conference

1530 – US Weekly Natural Gas Storage Change

1900 – Mexico Rate Announcement

0030 – Australia RBA Monetary Policy Statement

0130 – China Jan. CPI/PPI