Markets Today: Risk sentiment recovers; Month-end flows in play – 28 February 2023

What’s happening in markets?

Nasdaq 100 (NAS100.I) and S&P 500 (US500.I) moved up cautiously, European equities outperform

On Monday markets seemed pacified a little in a thin volume session after US headline durable goods orders fell in January while the UK and the EU reached a deal on Northern Ireland’s trading arrangements after years of friction caused by Brexit. The S&P 500 rose as much as 1.2% to 4018 in early trading before paring much of the gains to close 0.3% higher. Gains in the benchmark index were driven by consumer discretionary, industrials, and information technology stocks. The Nasdaq 100 finished Monday rising 0.7%. Union Pacific (UNP:xnys) surged 9.4% after the railroad company announced to search for a new CEO. Solar energy equipment makers Enphase Energy (ENPH:xnas) and SolarEdge Technologies (SEDG:xnas) each advanced 5.9%.Telsa (TSLA:xnas) rallied 5.5% amid its German plant hitting a production level of 4,000 per week, three weeks ahead of schedule.

European equities started the week on a stronger footing as well with EuroStoxx 600 and Germany’s DAX each up 1.1%, France’s CAC index up 1.5% and UK’s FTSE 100 up 0.7%. Some of the optimism came from UK PM Sunak striking a deal with the EU on Northern Ireland trade (read below). Retailers bounced higher as consumer spending remains resilient after fears of recession and energy crunch have eased and the prospect of Chinese demand.

The short end of the US Treasury curve (TLT:Xmas, IEF:xnas, SHY:xnas) rallied as the long lend dragged by supply

Yields on the 2-year through 5-year Treasury dropped 5bps on short covering amid mixed economic data with a decline in headline durable goods orders due to weak Boeing orders, strong pending home sales, and a weak Dallas Fed manufacturing activity index. The long end underperformed, with yields on the 10-year shed 3bps and the 30-year finished the Monday session unchanged. Upcoming corporate supply estimated to be more than USD30 billion this week weighed on the long end. Across the pond, the 10-year German Bund yield rose to as high as 2.59%, the highest level since 2011 following hawkish comments from ECB Governing Council member Vujcic. Yields on the 10-year Gilts jumped 15bps to 3.81% following the UK and the EU reached an agreement on treading arrangements in Northern Ireland.

Hong Kong’s Hang Seng Index (HSI.I) and China’s CSI300 (000300.I) slid; Chinese consumer names bucked the decline

Hang Seng Index and CSI300 extended their declines, falling around 0.3% and 0.4% respectively. Haidilao (06862:xhkg), surging 13.7%, was the best-performing stock within the Hang Seng Index, following the Chinese hotpot restaurant chain preannounced positive profit alert with an FY22 earnings beat. The Chinese consumption space did well overall. Budweiser Brewing (01876:xhkg) and China Resources Beer (00291:xhkg) each advanced over 2%. Xiabuxiabu (00520:xhkg) climbed 1.2%.

The performance of China internet names was mixed. Kuaishou (01024:xhkg) gained 2.6% and was the biggest winner with the Hang Seng TECH Index. Nonetheless, news about China’s National Radio and Television Administration studying measures to tighten regulation over short videos broke out after the Hong Kong market close. Baidu (09888) rose 2% while Alibaba (09988:xhkg) slid 0.7%.

In the EV space, BYD (01211:xhkg) lost 3.4% on price cuts while Li Auto (02015:xhkg) advanced 2.1% after reporting a 41% Y/Y jump in Q4 non-GAAP earnings, beating estimates. XPeng (09869:xhkg) edged up 0.3% after being added to the Hang Seng China Enterprises Index with a weight of 0.59%.

In A-shares, solar, AI generated content, media, electronic, and construction materials declined. Food and beverage, and Chinese white liquor names, coal mining, chemical, and communication bucked the overall trend of decline. Kweichow Moutai (600519:xssc) climbed 1.3%; Wuliangye (000858:xsec) advanced 1.8%.

Australian equities (ASXSP200.I) move up - but remain at the lowest levels since Jan 12

The ASX200’s short term downtrend still appears to be at play, despite the market rising 0.6% today. Pressuring equities now are a trifecta of reasons- not only a more hawkish RBA, plus its ex-dividend season – marking the 2^nd worst month of the year, and thirdly, from a technical perspective, quant traders will be on their toes as the ASX200 is testing a rising trend line, that it formed last year. If it breaks below the area tested yesterday - the market could be at risk of falling further. What does it mean when shares are trading ex-dividend? It’s simply where the dividend right is transferred to shareholders, ahead of dividends being paid out. This typically pressures share price performance.

For longer term investors and those seeking yield (dividends)– it be worth considering buying a company’s shares before the ex-date if you wanted to be entitled to the upcoming dividend to be paid. But also keep in mind, when a company goes ex-dividend on the day, it usually falls. For example yesterday Fortescue shares fell 4.1% after going ex-dividend, moving FMG under its 50-day moving average. Today, one day after going ex-dividend Fortescue’s shares trade  3% higher. Though it is worth mentioning, the iron ore price rising 0.7% is adding to positive sentiment after the iron ore price fell over 3% on Monday. So - it’s important to consider companies going ex-dividend ahead. Today, Origin Energy, Evolution Mining, WorleyParsons and Domino’s go ex-dividend. Coles and Woolworths go ex-dividend on March 2, along with Pilbara Minerals. Next week on March 9 - BHP and RIO go ex-dividend, along with Mineral Resources, South32, the ASX, and CSL.

FX: GBP surged on Brexit trade deal, AUD still a laggard

The USD softened on Monday, nearly erasing all of Friday’s gains as yields fell and stocks jumped in a risk-on environment. US durable goods data missed estimates, cooling off some concerns of another uptick in the tightening pace. However, inflation fears continue to spell caution and no reversal in Fed’s tightening expectations was seen. Most of the USD softness came on the back of GBP strength on UK-EU finalizing a deal to smoothen Northern Ireland trade. GBPUSD surged from 1.1923 to 1.2060 and EURGBP slid below 0.88. AUDUSD failed to break below 0.67 handle but remained near recent lows even as metals recovered a notch.

Copper back above $4 amid risk-on, Lithium supply concerns return

A broad recovery in base metals was seen as the PCE data from Friday didn’t materialize in risk sentiment capitulation. Copper prices rose ~1.5% after dropping to lows of $3.94 yesterday. Focus this week is on China’s PMI releases due on Wednesday to assess the pickup in Chinese activity after Covid restrictions have been eased. Aluminum also gained following four weeks of losses amid ongoing supply concerns. Zinc and aluminium smelters in Yunnan have been asked to reduce output due to power rationing. Concerns about Lithium supply are also likely to rise as China investigates illegal mining. Operations in Yichun have been ordered to halt work indefinitely. The move could impact between 8-13% of global supply.

What to consider?

UK-EU Brexit deal on Northern Ireland trade sealed

The UK and EU reached a deal on Northern Ireland's trading arrangements aimed at ending years of friction caused by Brexit. The deal, known as “Windsor Framework”, aims to considerably cut customs paperwork and checks on goods moving from Great Britain but destined to stay in Northern Ireland. Existing requirements on trade from Northern Ireland to the UK will be removed. GBPUSD surged on the news to 1.20+.

Yellen in Kyiv to show support

Janet Yellen made an unannounced trip to Ukraine to highlight US support. She met with Zelensky and PM Shmyhal and also announced a disbursement of $1.25 billion in fresh economic aid, the first out of a total $10 billion pledged by the administration. It was also reported that the dignitaries discussed additional sanctions on Russia, including confiscating frozen Russian assets to benefit Ukraine's recovery, despite legal obstacles.

Food price inflation continues to ease – wheat prices tumble to lowest levels since Sept, 2021

As mentioned in Saxo’s Quick Take global wheat prices remain under pressure from a flood of Russian supplies forcing EU and US sellers to lower prices to stay competitive. In Chicago the soon to expire March wheat contract trades near a 17-month low, down 48% from the March 2022 panic peak while Paris Milling wheat has declined by 38%. The focus is turning to the outlook for global wheat crops this year. According to Bloomberg, US farmers are likely to plant more than analysts expect, and nearly all of France’s soft-wheat crop is in good to very good shape. Traders are also watching talks on the Ukraine grain-export deal, which is up for renewal in March. Click for the technical levels to watch in Wheat, Corn and Soybean

Energy giant Occidental goes against the grain of the energy sector and disappoints

Occidental reported adjusted EPS of $1.61, missing the $1.79 Bloomberg consensus expected for the fourth quarter. Despite production increasing by about 3% YoY, the miss on earnings was a result of lower than expected realised prices for natural gas, while it received slightly higher realised prices for oil than expected. This was all while OXY increased capital expenditure to $1.5b, vs the $1.3b expected in the quarter and repaid $1.1 billion of debt. Despite delivering record earnings that missed expectations, OXY increased its dividend by 38% and announced a new $3 billion share buy back. Warren Buffett’s Berkshire Hathaway is the largest Occidental shareholder. The company will hold a conference call to discuss these results Tuesday at 1 p.m. ET. For the year ahead, OXY guides for cap ex to be as high as $6.2b (vs $5.66b). Occidental shares fell 1% after hours, moving further away from its 50-day moving average. Occidental is the only major oil company lately to report results that missed market expectations; with Shell, BP, and Woodside all beating.

Softer Eurozone flash February CPI may not be a big relief

Broader expectations are for the Eurozone flash CPI to ease to 8.2% YoY in February from 8.6% last month amid lower energy prices. However, the core measure is still expected to be firm at 5.3% YoY, underpinned by higher non-energy industrial goods. This continues to suggest that the underlying price pressures remain firm, and another 50bps rate hike from the ECB remains likely in March. The minutes from the last ECB meeting are also out on Thursday, and the path after the next 50bps rate hike remains on watch. Lagarde previously noted that the ECB will not be at peak rates in March and there will most likely be ground left to cover, which suggested that hopes for a pause in May could be disappointed.