Financial Markets Today: Quick Take – February 20, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): gains for February have evaporated

Friday’s session was weak ending with the lowest close print for February as the market reacted to higher interest rates and data suggesting inflation pressures remain high. Last week, was still a strong week for bubble stock despite the rising interest rates while commodity related companies and Chinese stocks were the weakest links in the global equity market. S&P 500 futures have opened up this week below Friday’s close trading around the 4,085 level with the key 4,000 level still in play on the downside if S&P 500 futures make another lower close in today’s session.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg) rallied with A-shares leading

China’s A-shares rallied strongly on Monday with the benchmark CSI300 rising 2.3%. Although the 1-year and 5-year loan prime rates remained unchanged at the monthly fixing this morning, the average mortgage interest in the largest 100 cities fell 6bps M/M to 4.04% in February, or 143bps Y/Y for first-home mortgages and 84bps for second-home mortgages.  Construction materials, electronic appliances and telco names led the charge higher in A-shares. Hong Kong’s Hang Seng Index opened lower but spent the rest of the day climbing to 1.1% higher as of writing. China Hongqiao (01378:xhkg), a leading aluminium products manufacturer, jumped over 10%.

FX: Dollar reverses lower on sentiment shift Friday, NZD in focus as RBNZ meets this week

After a run higher last week on rising US treasury yields and Fed rate hike expectations, the US dollar was off its highs on Friday with US 10-year yields turning lower after trading close to the key 4% mark. This helped USDJPY retreat from 2-month highs above 135. Note Japan set to report CPI this Friday and BOJ governor nominee Ueda’s parliamentary hearings will likely keep the yen volatile. NZD was one of the underperformers last week on slowing 2yr NZ inflation expectations, and remains in focus this week as RBNZ is likely to downshift to a 50bps rate hike with some even considering a 25bps hike amid risks from the recent cyclone. GBPUSD touched lows of 1.1915 last week but was back above 1.2000 handle on Friday. ECB commentary remains mixed (read below) and EURUSD still close to 1.07.

Crude oil (CLH3 & LCOJ3) remains rangebound

Crude oil rebounded during Asian hours following last week’s selloff which once again confirmed the market remains rangebound, in Brent between $80 and $89, with a demand pick up in China at this stage not being strong enough to offset macroeconomic concerns that was strengthened last week following hawkish comments from US Federal Reserve members. OPEC and IEA raised the medium-term demand outlook but so far, data from China shows a meagre pickup in economic activity, and it has instead left the market focusing on US stock levels which have been rising well beyond seasonal expectations. This week’s focus will also be on geopolitics (read below) with US-China tensions ramping up and the one-year anniversary of Russia’s invasion of Ukraine.

Copper focusing on supply-side issues

Despite the hawkish tilt in Fed expectations, copper ended the week only down 0.4% as the key $4 area continued to provide support. Supply issues also remained in focus. Freeport-McMoRan Inc suspended operations at its Grasberg copper mine in Indonesia due to landslides. This is on the heels of disruptions to output in Peru amid social unrest and Panama. Zambia also reported that its copper output fell to a seven-year low in 2022. Some support also coming through via rising aluminum prices after smelters in China’s Yunnan province cut capacity due to energy shortages following a period of weak hydro generation.

Gold (XAUUSD) focus on dollar and interest rate trajectory

Gold traded steady in Asia near short-term resistance at $1845, after managing to find a bid on Friday following weak of rising dollar and yields-led selling. An uptick in geopolitical tensions potentially adding a small bid into a market that otherwise seems preoccupied with the scope for further interest-rate hikes from the Federal Reserve. Investor sentiment has once again been challenged with bullion-backed ETF holdings falling to a fresh three-year low on Friday while open interest in COMEX gold futures has fallen by 16% during the past month as traders cut their exposure, both long and short. Further dollar-led weakness could see gold target support in the $1792 to $1776 area with resistance at $1872.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) reverse lower Friday ahead of long weekend

After US Treasury yields all along the yield curve posted local highs for the cycle, a late wave of buying reversed the slide and yields closed lower for the session, with the 2-year closing at 4.62% after hitting 4.71% intraday and the 10-year retreating to close at 3.81% after hitting 3.92% earlier in the session. Today, US treasury markets are closed for a holiday. Heavy treasury supply is incoming this week with 2-year, 5-year and 7-year auctions Tuesday through Thursday. The US data highlight this week is Friday’s January PCE inflation data.

What is going on?

US Secretary of State Blinken warns China on lethal aid to Russia

At the sidelines of the Munich Security Conference, US Secretary of State Antony Blinken warned of “serious consequences” if China were to provide military support to Russia. Blinken suggested that the US has information that China may be considering supplying arms to Russia. China’s top diplomat Wang Yi spoke earlier in the day at the same conference on the US’ “hysterical” response to charges of Chinese spy balloons. Yi will travel to Italy, Germany, and Hungary and make a final stop in Russia. Putin will also be giving a state of the nation address, and focus will be on any risks of further escalation noting that 500k Russian troops have been mobilised. US President Biden will be visiting NATO ally Poland to talk about the importance of the international community’s resolve, and unity in supporting Ukraine, adding that the next weeks and months are going to be difficult for Ukraine’s forces, and the US is going to continue to stand by them. Saxo’s Defense equity theme baskets was one of the top performers last week despite the news of China sanctions on US defense companies like Lockheed Martin and Raytheon due to balloon shooting incident.

Meta launches monthly subscriptions

Snap already has it and Twitter is rolling it out, and now Meta is announcing a new monthly subscription model to create a new revenue stream that is more stable that online advertising. The monthly subscription comes with extended account verification, direct customer support, and more protection against impersonation. Apple’s major data privacy change back in late 2021 has been a major factor as well as targeting has become more difficult putting downward pressure on advertising pricing.

Luxury stocks are the key contributors to the French CAC 40 index’s 2023 performance

The French CAC 40 index is recording a strong YTD performance with an increase of +14 %. This is partially explained by the weight of luxury stocks in the index. Kering, L’Oréal, LVMH and Hermès represent about a third of the jump. Other major contributors are: Schneider Electric (which directly benefits from China’s economic reopening), BNP Paribas, Vinci (a construction company and operator of toll roads), STMicroelectronics (semiconductors) and Air Liquide (which can be considered as a market maker in his business segment). The French index is now valued at less than 13 times the estimated profits. This is below its 10-year average of 14. This could imply the market can go much higher in the short- and medium-term. The French stock market is the largest one in Europe followed by the UK’s.

Key US stocks on the move Friday, including Lithium names

On Friday, US farm equipment maker Deere (DE:xnys) led market gainers, posting a 7.5% advance. Moderna Inc (MRNA:xnas) fell 3.3% after its experimental messenger RNA-based influenza vaccine delivered mixed results in a study. Lithium miners Livent Corp (LTHM:xnys), Albemarle Corp (ALB:xnys) and Piedmont Lithium (PLL:xnas) slumped between 9% and 12% due to concerns about weakness in Chinese prices for the EV battery metal.

ECB’s mixed messages

ECB speakers had mixed messages on Friday with the hawkish Isabel Schnabel saying that investors risk underestimating the persistence of inflation. That bolstered rate-hike bets, with money markets pricing a 3.75% peak in the deposit rate. However, later dovish member Francois Villeroy said that rates are now in restrictive territory and that they may raise above 3% but it’s not automatic. The German 2-year Schatz yield posted a new high since 2008 at 2.95% on Friday before falling back and closing unchanged at 2.88%.

Deere lifts outlook on strong outlook for agricultural spending

Deere was the star performer in the S&P500 on Friday, rising 7.5% after raising its forecasts for the year - and reporting better than expected Q4 results. It reported EPS of $6.55 vs est. $5.56 and revenue of $12.7bn vs est. $11-3bn. The bottom line is demand from farmers is strong, and producers are prepared to buy more equipment and upgrade their fleets. Its production and precision agricultural division which includes autonomous crop planting and harvesting – saw the most sales growth – with quarterly sales up 55% y/y. Deere raised its net income outlook to $8.75-9.25bn compared to previously $8-8.5bn. This reinforces Saxo’s bullish view of investments in the physical world outperforming the intangibles.

Sweden CPI jumps more than expected at core – SEK surges

Sweden reported January CPI data this morning, with the headline slightly softer than expected at –1.1% MoM and +11.7% YoY vs. -1.0%/+11.8% expected, but the core inflation data was firmer than expected at +0.4% MoM and +8.7% YoY vs. -0.2%/+8.2% expected and 8.4% in December. SEK is surging on the anticipation that the Riksbank will have to continue firming its message on tightening policy.

What are we watching next?

Critical week for geopolitics as we await China’s response to US warnings on aiding Russia

US Secretary of State Blinken’s warning to China on aiding Russia’s military (see above) sets up a moment of maximum danger for geopolitics depending on the nature of China’s response in coming days and weeks. Should the latter move to aid Russia’s military with lethal weaponry, it will likely accelerate the deglobalization theme and US sanctions against the country, creating significant disruption risks for global supply chains.

The CFTC will start publishing delayed CoT reports this week

Last Friday the CFTC once again postponed its weekly publications of the Commitments of Traders report (CoT), bringing the number of weekly reports to three that has been delayed due to the January cyber-related incident at ION Cleared Derivatives, a third-party service provider of cleared derivatives order management, order execution, trading, and trade processing. The CFTC in a statement on Friday, however said that staff intends to resume publishing the CoT report this Friday, starting with the report that was due February 3 but also that they do not expect the backlog will be cleared and “live” data resume until mid-March.

BHP and Rio Tinto earnings will set the course for copper and aluminium companies 

BHP and Rio Tinto report this week and, if Fortescue is something to go by with stronger than expected profits, then BHP and Rio could surprise to the upside. The focus will be on their outlooks with both BHP and Rio expected to give optimistic forecasts for the year amid Chinese demand picking up. They may also shed light inflationary pressures remaining sticky, such as wages picking up. Iron ore, and copper and coal giant BHP is expected report 2022 earnings (EBITDA) of $40.6 billion, with free cashflows of $26 billion and declare a full-year gross dividend yield of 14%. Iron ore, aluminium and copper giant Rio is expected to report earnings (EBITDA) of $27.1 billion in 2022, free cash flow of $11.2 billion and declare a full-year gross dividend yield of about 11%. Saxo’s preferred commodity exposures include aluminium, copper, and lithium.

Earnings to watch

Today’s earnings focus is later tonight when BHP Group reports FY23 1H results (ending 31 Jan) with analysts expecting revenue of $26.7bn down 13% y/y from the same period last year. EPS is expected at $1.37 down 28% y/y as iron ore prices have come down their recent highs. The commodity markets have been very muted in their reaction to the Chinese reopening and as such BHP Group’s outlook will be of key interest to investors. Later this week our earnings focus is one Walmart, Home Depot, and Nvidia.

• Monday: BHP Group, Williams Cos
• Tuesday: Teck Resources, Gapgemini, Engie, HSBC, Walmart, Home Depot, Medtronic, Palo Alto Networks
• Wednesday: Rio Tinto, Genmab, Danone, Lloyds Banking Group, Iberdrola, Nvidia, TJX, Stellantis, Baidu, eBay
• Thursday: EssilorLuxottica, Deutsche Telekom, Munich Re, Kuaishou Technology, Eni, Anglo American, BAE Systems
• Friday: BASF, Monster Beverage

Economic calendar highlights for today (times GMT)

US markets closed for Presidents’ Day.

0830 – Sweden Riksbank Meeting Minutes

1500 – Eurozone Feb. Preliminary Consumer Confidence

1900 – UK Bank of England’s Woods to speak

0030 – Australia RBA Meeting Minutes