Global Market Quick Take: Europe – May 9, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): a snooze as traders await US inflation figures

Narrow trading range session yesterday in US equities with S&P 500 futures increasing slightly from Fridays close but still firm inside the trading range of 4,072 to 4,189 that has been in place since late March. The equity market is clearly in a wait-and-see mode until tomorrow’s US inflation figures and with the earnings calendar being light today, we expect little action unless we get some idiosyncratic news and risks out of the US regional banks industry. The VIX Index closed yesterday below 17 reflecting a very relaxed equity options market.

Chinese equities (HK50.I & 02846:xhkg): gain driven by banks and SOEs

In anticipation of more widespread increases in the regulated retail prices for residential used natural gas in China, share prices of residential gas suppliers rose, with Hong Kong and China Gas (00003:xhkg) and China Resources Gas (01193:xhkg) surging over 5%. Other top gainers included China brokerage names, led by CICC which soared nearly 10%. Weakness in semiconductors, healthcare, and sportswear weighed on the benchmark index. Hang Sent Index shed 0.5% in the early Asian afternoon. In A-shares, CSI300 added 0.4%, with brokerage names among the best performers.

FX: USDJPY spiked higher as BOJ’s Ueda talked about policy review in parliament

USDJPY popped higher overnight as Bank of Japan Governor Ueda answered questions in parliament USDJPY rose from 135 to 135.30 before retreating later back below 135.00 even as his comments were nothing new, saying that the scheduled review won't have any pre-set idea in mind on specific monetary policy moves. He also said that BOJ will take necessary policy action at each meeting, with an eye on financial and price developments, even while conducting the review – a repeat of what was hinted at the April BOJ meeting. Earlier, Japan’s March labor data signalled that easy monetary policy could continue. EURUSD remains within the orbit of the 1.1000 figure, and has not traded above 1.1100 or below 1.0900 since April 11. The US CPI data tomorrow possibly an important catalyst.

Crude oil trades lower ahead of US CPI and after finding technical resistance

Crude oil traded higher again on Monday before easing back as technical resistance got in the way of further gains. Overall, demand concerns have somewhat eased with China’s increased travel demand over the Golden Week holiday underpinning sentiment, while supply concerns were raised due to the wildfires in Alberta which halted at least 145kb/d of oil production. WTI traded lower overnight after finding resistance at $73.58 and Brent at $77.47, the 50% and 38.2% retracement respectively of the post OPEC+ cut slump. Key levels to break to send a signal of strength, thereby forcing additional short covering. Today the EIA will publish its Short-term Energy Outlook (STEO) while US CPI tomorrow may provide further market signals.

Gold (XAUUSD) holds above key support ahead of US CPI

Following Friday’s correction, courtesy of a strong US jobs report, gold has settled into a relative tight $2020-30 range as traders await the US CPI report on Wednesday. An important report that may add to the debate on whether the FOMC is likely to keep hiking or, as the market expect, will turn to cutting rates later this year. The SOFR futures market is currently pricing in a 75 bps cut before yearend followed by another 1.4% next year. Gold’s current resilience, apart from support from a softer dollar and yields, can also be seen through continued and firm demand for gold exposure through futures and ETFs. Support at $2007 followed the $1986.

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) stuck mid-range ahead of US CPI

US yields extended a bit higher yesterday, but eased back slightly lower overnight, still very much embedded in the range that the market has established since the March bank turmoil and awaiting a 3-year Treasury Auction today (10-year and 30-year auction follow tomorrow and Thursday). US 10-year benchmark at 3.49% and 2-year at 3.98%.

What is going on?

China reports slower export growth, plunge in imports

China reported 8.5% growth in exports in April, a growth number that was flattered by Year-on-year comparisons due to Shanghai lockdowns last year, but still stronger than expectations. The bigger news was the 7.9% drop in imports versus expectations for nearly flat growth. The overall trade surplus for the month was $90 billion.

Another strong U.S. labor market data point

The U.S. labor market remains very strong. Yesterday, the Conference Board Employment Trends Index was released. In April, the index was up to 116.2 versus 115.5 in March. The index is usually considered as a leading indicator for employment. It is based on eight labor-market indicators such as Job Openings, the industrial production, or the ratio of involuntarily part-time to all part-time workers. When the index increases, which is the case for the month of April, it suggests that employment is likely to keep growing in the short-term. So far, the situation of the U.S. job market is not consistent with an imminent risk of a recession.

Fed survey shows tighter lending standards in Q1, demand slumped

The Federal Reserve released the April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices, which showed that credit standards tightened further, and credit demand tumbled in the first quarter to levels not seen since 2009. Lending standards tightened across commercial and industrial sectors, both for large/middle market firms (up to 46% from 44.8% in Q4) as well as for small firms (46.7% from 43.8%), and more so for households except government sponsored enterprises. More banks charged borrowers with widened loan spreads over the cost of funds (62% for large/mid-sized firms vs 45% prior; 58% for small firms vs 33% prior). Meanwhile, demand was weak across all sectors, also including commercial real estate as high interest rates bite. Comments on question suggested that banks expect to tighten standards further across all categories.

US debt ceiling impasse brings short-term yield opportunity

The impasse over the US debt ceiling continues to threaten further pressure on the US financial markets this week. President Biden is scheduled to meet with Congressional leaders today to discuss raising the current USD 31.4tn limit, with Congress typically tying approval of a higher debt ceiling to budget and spending measures. Treasury Secretary Janet Yellen has warned that there are “no good options” for solving the debt limit stalemate other than Congress lifting the cap.

Further concerns on credit tightening or delays in debt ceiling solution could continue to drive up short-term Treasury yields, potentially in 3months, as investors hedge against a possible default. The yield on a T-bill maturing at the end of this month is ~4.5%, but there’s a 60-90 basis-point premium for bills maturing in June and July, reflecting the tension in markets. Our Senior Fixed Income Strategist Althea Spinozzi explains what T-bills are and how to get exposure in this article.

US earnings: PayPal and KKR

KKR reported a 26% decline in Q1 earnings as fees dropped 9% y/y and asset sales slowed down as a function of higher interest rates over the past year. Uncalled commitments declined 7% y/y suggesting investor inflows cannot keep up with investments across the firm’s portfolio. Shares were down 4% in yesterday’s session. PayPal beat on Q1 revenue and earnings, and even raised the fiscal year guidance, but despite of this a lower operating margin guidance soured the mood among investors. PayPal shares were down 6% in extended trading.

Japan’s March wages remain underwhelming

Wage data remains a key focus in Japan with BoJ’s new governor Ueda having hinted at his first policy meeting that he will be watching next year’s wage negotiation to be convinced that price pressures in Japan are wage driven. March wage data released this morning however showed that nominal wage growth softened to 0.8% YoY and February’s figure was also revised lower to 0.8% from 1.1% previously. Real wage growth remains in negative territory, coming in firm at -2.9% YoY. Household spending also came in below expectations, sliding into negative territory at -1.9% YoY from +1.6% previously, suggesting weakening private consumption may continue to support the case for easy monetary policies.

Most shorted grain market since 2020 as planting gather momentum

The outlook for a strong production year recently drove the Bloomberg Grains index to a 15-month low last week before bouncing, and speculators responded by shifting to a net short position for the first time since August 2020. In the week to May 2 all six grains and soy contracts saw net selling led by corn and soybeans. One current focus are the weekly planting progress reports, released on Mondays by the USDA and in the latest they said that 35% of US soybeans were planted as of May 7, the second fastest pace on record. Corn was 49% planted, ahead of the 5-year average at 42% and last year's 21%. Wheat meanwhile was only 24% complete, well below the 5-year average at 38%.

China imports plunge in April

China’s exports in USD terms rose 8.5% Y/Y in April, above the expected 8.0% but decelerated from 14.8% the prior month. The biggest surprise was the plunge of imports by 7.9% in USD terms, much worse than the 0.2% decline expected and raising concerns about the lack of strength of the economic recovery.

What are we watching next?

US April CPI is up tomorrow

The next macro calendar event risk of note is tomorrow’s US April CPI release, with the consensus expectations looking for +0.4%/5.0% for the headline and +0.3%/+5.5% for the core, Ex Food and Energy, reading. The low core YoY reading for the cycle was the 5.4% registered back in February. Markets continue to price that the Fed is finished with its tightening cycle and will cut as soon as September (with low odds even of a July FOMC meeting rate cut), and the next two to three months of inflation and employment-related economic data will be crucial for the outlook for yields.

Earnings to watch

Today’s US earnings focus is Airbnb which is expected to report Q1 earnings after the US market close with analysts expecting revenue of $1.79bn up 19% y/y and EBITDA of $259mn compared to $37mn a year ago. Travel stocks continue to be among the strongest segments in the global equity market as activity is rebounding from last year’s muted travel season due to pandemic restrictions. Recent comments from Mastercard are suggesting that travel activity remains resilient in Q2, so we expect Airbnb to remain positive on the outlook. Read our earnings preview for this week’s earnings from Airbnb, DIsney, and Richemont here.

• Tuesday: Suncor Energy, Daimler Truck, Nintendo, Amadeus IT, Endesa, Alcon, Airbnb, Duke Energy, Occidental Petroleum, Electronic Arts, Coupang, Rivian Automotive
  
  
• Wednesday: Nutrien, Vestas Wind Systems, Genmab, Credit Agricole, Siemens Healthineers, E.ON, Toyota, SoftBank, Panasonic, Compass, Disney, Trade Desk, Li Auto, Roblox
  
  
• Thursday: Verbund, Coloplast, Engie, Deutsche Telekom, Merck, Bayer, Hapag-Lloyd, RWE, Takeda Pharmaceuticals, Honda Motor, 3i Group, ING Groep, JD.com
  
  
• Friday: Societe Generale, Allianz, Richemont

Economic calendar highlights for today (times GMT)

0730 – Sweden Riksbank Minutes

0800 – ECB’s Chief Economist Lane to speak

1000 – US Apr. NFIB Small Business Optimism

1200 – Mexico Apr. CPI

1230 – US Fed’s Jefferson (Voter) to speak

1600 – EIA's Short-term Energy Outlook

1605 – US Fed’s Williams (Voter) to speak

1700 – US 3-year Treasury Auction

2030 – API's Weekly Crude and Fuel Stock Report