Global Market Quick Take: Europe – March 29, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Positive Asia sentiment extends into US equities

S&P 500 futures are pushing higher in early trading hours extending the positive sentiment out of Asia which is driven by the divestment strategy of Alibaba splitting the business into six separate businesses. The index futures are trading around the 4,027 level this morning which is exactly at the 50-day moving average. Strong outlook from Lululemon and the positive consumer confidence figures yesterday have also helped on risk sentiment. Our view is that consumer confidence is likely a poor leading indicator with credit conditions and the banking crisis likely to put the economy into a recession this year.

Chinese equities (HK50.I) and (02846:xhkg): Gains on Alibaba divestment strategy

Hong Kong’s Hang Seng Index gained around 2%, driven by a 13.2% jump in the shares of Alibaba (09988:xhkg) which announced a plan to reorganize the conglomerate into six separately run business groups. The market reacted positively to the e-commerce and technology giant’s reorganization plan, hoping it will remove some regulatory barriers to business growth as well as benefit the valuation of individual business lines. Industry peers gained, with Meituan (03690:xhkg) rising 4.8%m and JD.Com (09618:xhkg) climbing 2.6%. In A-shares, CSI300 edged up 0.3%, with Alibaba-related names, and semiconductor stocks outperforming. Rongsheng Petrochemical (002493:xsec) hit the 10% daily up-limit for the second day in a row after Saudi’s Aramco made a USD 3.6 billion investment for a 10% stake in the independent refinery.

FX: Japanese yen leads decline, AUD down on CPI miss

Lack of market news saw the US dollar being slightly offered on Tuesday, even as banking concerns remained at bay and traders continued to increasingly price in a 25bps rate hike from the Fed for May. A recovery however took hold in Asia today with JPY leading the decline. USDJPY rallied from 130.80 to touch the 132 handle amid the retreat in banking sector woes and BOJ Governor Kuroda talking about strengthening wage pressures in the parliament today, potentially leaving the door open for his successor to tweak policy. AUDUSD also unable to sustain gains above 0.67 with a softer-than-expected February CPI providing enough ammunition for an RBA pause next week.

Brent Crude oil closing in on $80 as focus returns to fundamentals

With fears of a banking crisis easing, focus returned to fundamentals in the crude oil market forcing short covering from funds. The pace of China’s reopening continues to attract additional barrels while a legal dispute between Turkey, Iraq and its semi-autonomous region of Kurdistan has halted around 400,000 barrels a day of seaborne exports from the Turkish port of Ceyhan. OPEC+ show no signs of adjusting oil production as it meets next week amid financial market jitters. In addition, prices also found support after the API reported a 6 million barrels drop in US crude stocks, the biggest of the year if confirmed by the EIA later today.  Brent, up +12% from last week's low is likely to see additional momentum and short covering on a break above its 21-DMA, currently at $79.25.

Gold tied in a range awaiting next trigger

Markets are awaiting a further direction in Gold which managed to recover back above $1970 overnight but appears to be waiting for its next catalyst. Banking sector fears have eased this week, but markets are for now not pricing in the incoming risks of a credit crunch or a slowdown in growth as US data stays robust. Last night’s consumer confidence report remained strong despite covering a part of the period after the SVB collapse. Meanwhile, the disconnect between market and Fed expectations of the rate cycle continue to stay wide, and US PCE data this week may be worth watching. On the upside, $2000 remains to be the key level to watch, while support is seen at $1933, the 38.2% retracement of the recent runup to $2000.

Treasuries bear flattened as the 2-year yield rose to 4.08%

As fears of the risk of an escalation of the banking turmoil dissipated, traders adjusted their positions in Treasuries and added to the selloff in the front end. The 2-year yield rose 8bps to 4.08%, closing firmly above the 4% handle. The selling started during London hours as German bund yields climbed. For U.S. data, the Conference Board Consumer Confidence and the Richmond Fed Manufacturing Index came in stronger than estimates. The 5-year Treasury notes auction was awarded 1bp through and at a slightly above-average bid-to-cover ratio. The result helped stabilize the selloff somewhat in the New York afternoon. Yields on the 10-year climbed 4bps to 3.57%. The 2-10-year yield curve bear flattened 5bps to -52bps.

What is going on?

US consumer confidence rose again in March, inflation expectations up as well

Despite the one-year ahead consumer inflation expectations ticking higher to 6.3% (prev. 6.2%), US consumer confidence for March rose to 104.2 (prev. 103.4) above the expected 101. Looking at the split in the index, the Present Situation index fell to 151.1 (prev. 153.0), while Expectations slightly lifted to 73.0 (prev. 70.4) still staying soft. The strength of the index may be a slight surprise as the cutoff date for survey was March 20, after the US bank failures hit, and risks of a credit crunch ahead keeps risks tilted to the downside.

Sector rotation between tech and financials, large cap and small cap

Large cap stocks, especially in tech, have seen big gains in the last few weeks primarily due to the slide in Treasury yields and flight to safety amid the banking sector woes where companies that are less dependent on financing needs become attractive. We wrote this piece, asking how long can that outperformance continue, given tech is not immune to a recession. Even if banking concerns were to ease now, risks of a credit crunch remain and have brought forward the next recession. What that could mean is small cap stocks could continue to be under pressure as bank lending tightens.

Alibaba is splitting into six independent business groups

In a statement from its CEO, Alibaba announced that the e-commerce giant is going to break up into six separate and independently operated business groups which could seek separate capital financing including IPOs in the future. The six business groups will be cloud intelligence, e-commerce, smart logistics, local services, global digital business, and digital media and entertainment. The reorganization could effectively dismantle the business empire founded by Jack Ma. The conglomerate has grown to be too large and dominant in the e-commerce and technology industries in the eyes of the authorities and a fundamental restructuring of Alibaba has long seemed to be inevitable.

US earnings recap: Micron Technology, Lululemon

Micron Technology misses on Q2 revenue and operating income as the memory chip maker reports Q1 adjusted operating loss of $2.1bn vs est. $676mn. Q3 revenue outlook is $3.5-3.9bn vs est. $3.75bn with management saying that the market has turned a corner in the data center business. The company expects smartphone shipments to decline slightly in 2023 and shipments of PC units to decline mid-single digit in 2023. Micron reiterates their headcount reduction of 15% of the workforce. The long-term outlook for 2024 and 2025 looks strong according to management. Lululemon beat on FY23 Q1 revenue and earnings per share with fiscal year revenue outlook of $.93-9.4bn beating estimates of $9.1bn. The healthy apparel maker is still taking market share as it pushes into new categories. Lululemon shares up 13% in extended trading.

RBA may pause rate hikes next week as Australian inflation and retail sales cool

Australian retail sales pointed to household spending beginning to slow, following higher interest rates. This suggests the RBA may pause rate hikes next week. Retail sales rose 0.2% from a month earlier, which was in line with forecast. However, today’s February CPI was more telling, showing inflation easing to 6.8% YoY from 7.4% and more than the 7.2% expected. This is the last important read before the RBA potentially considers a rate pause next week. Given CPI cooled more than Bloomberg consensus expected; it triggered a small drop in the Australian dollar while bond yields trade around a 3-month low.

Apple rolls out buy-now-pay-later service

With Apple looking to double its revenue over the next four years to $50bn, by moving into financial services, communications and EVs. Apple has taken another step and launched its buy-now-pay-later (BNPL) services after a lengthy delay. Not only will this diversity its revenue, but it will allow Apple to take market share from providers such as Affirm, Klarna and Square’s Afterpay. Apple launched its BNPL service, which allows customers to pay for their products over four payments across six weeks, with no interest or fees. This year Apple is expected to unveil plans to launch its EV business, with the “Apple Car’ reportedly due to release in 2024 or later.

What are we watching next?

Earnings to watch

It is a light earnings calendar today in the US with our next focus on H&M reporting tomorrow before the European market opens. Analysts expect FY23 Q1 (ending 28 Feb) revenue growth of 11% y/y but only EBITDA of SEK 4.25bn down from SEK 5.77bn a year ago as the Swedish fashion retailer is still struggling with excess inventory and cost pressures.

• Wednesday: Constellation Software, Cintas, Paychex
• Thursday: Kweichow Moutai, Great Wall Motor, H&M

Economic calendar highlights for today (times GMT)

1530 – EIA's Weekly Crude and Fuel Stock Report

2100 – South Korea April Business Survey