Financial Markets Today: Quick Take – January 25, 2023

What is our trading focus?

Equities: Momentum faded in US equities mixed earnings

The Q4 earnings releases yesterday weighed on sentiment yesterday with the biggest negative surprise coming from 3M expecting -3% to 0% organic revenue growth in 2023 which indicates a sharp decline in volume which 3M confirmed is taking place in consumer electronics and retail related businesses. After the cash close Microsoft reported a worse than expected outlook sending S&P 500 futures lower trading around the 4,020 level early European trading hours. We expect sentiment to remain in a negative mood as the market awaits Tesla’s Q4 result after the market close.

FX: USD generally weaker together with sterling, AUD surges

The USD was sold again yesterday after a minor rebound, with EURUSD trading back above 1.0900 by this morning and near the cycle highs, while the weaker USD signal was not particularly pure or broad. USDJPY remains above 130.00 as the price action there has lost energy, for example. Some of the euro strength may be on EURJPY flows as the ECB jawboning remains on the hawkish side of late, and on EURGBP flows as sterling stumbled badly yesterday on a very weak preliminary January UK Services PMI yesterday, with EURGBP well back up into the range above 0.8800. The recent cycle top there was just south of 0.8900. Overnight, AUD jumped broadly to the strong side overnight on hot CPI data (more below).

Crude oil (CLH3 & LCOH3) sits between two chairs

Following Tuesday’s sharp fall, as investors turned more risk adverse following disappointing earnings, crude oil prices are slightly higher into today’s session with recession fears continuing to be offset by an expected increase in Chinese demand and supply concerns related to next month's EU embargo on Russian seaborne sales of fuel products. In Brent the approach to $90 and the December high at $89.40 is likely to prove a tough nut to crack until more supporting news reaches the market. API data showed another build in US crude stocks, but at 3.4mn barrels if was less than the huge builds seen recently. The EIA data is out later today.

Gold at new cycle high

Gold reached a new cycle high on Tuesday of $1942.5 before profit taking emerged following the better-than-expected PMIs before bouncing back after the weak Richmond Fed index. Bullion trades up close to 6% this month and more than 300 dollars above the early November low on growing recession fears and expected slowing of Fed tightening. The remainder of the week is littered with US economic data, including US Q4 GDP and PCE, the Fed’s favoured inflation metric. Gold remains in a steep uptrend with support at $1900 followed by $1880 where the 21-day moving average and trendline from the November low meet. Silver has stabilised following Monday’s short-lived sell off below $23.15 but a couple of closes above the 21-day moving average, last at $23.76 will be needed to turn the sentiment more supportive.

Chicago wheat futures advance

Chicago wheat, one of the three most shorted commodities by the hedge fund industry trades near a one-week high after crop conditions worsened in Texas, the second biggest US producing state of winter wheat, a reminder that dry soil conditions remain following last year's massive drought. In the week to January 17, data from the CFTC showed hedge funds held the biggest short position in Chicago wheat since May 2019. Together with Arabica coffee, another heavily shorted contract, these contracts remain exposed to short covering should the technical and/or fundamental outlook turn more favourably.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas) yields fall. Very strong 2-year Treasury auction

US treasuries found support and rallied yesterday, taking the 10-year treasury yield benchmark back below 3.50% and the 2-year was back below 4.20% this morning, in part after a very strong 2-year auction that saw the strongest bidding metrics since the early 2020 pandemic outbreak timeframe. The US treasury will auction 5-year T-notes today. Grumbles around a protracted US debt ceiling showdown in Congress and the risk of default by the US government not wearing on trust in US sovereign paper yet, with “crunch time” for the issue seen as early as early summer if the situation not resolved before then.

What is going on?

Microsoft’s outlook sent shares lower

The world’s largest software company missed revenue estimates in Q2 (ending 31 December) by a small margin but hit the EPS consensus estimate with EPS at $2.32 for the quarter. The initial reaction was positive in the extended trading session but as the outlook became clearer to investors shares sold off. Microsoft forecasts a continuous slowdown in the commercial business in the next two quarters leaving room for a growth acceleration later in 2023.

ASML confirms strong demand for chips

Europe’s largest technology company reports Q4 sales of €6.4bn in line with estimates and a gross margin of 51.5% vs est. 49.3%. Investors will be pleased to see the confidence in the outlook with Q1 sales guidance at €6.1-6.5bn vs est. €6.1bn and FY23 revenue growth of 25% compared to consensus at 20% y/y. The company also sees a slight improvement in the gross margin.

The Aussie dollar rallied up to 0.8% to 0.7100+, a new 5-month high on hot Q4 CPI print

The Australian dollar popped to 0.7108 US, its highest level since early August after another Australian inflation print came out hotter than expected after electricity prices surged, rents also remained stubbornly high, along with furnishings, and household equipment price. Core Trimmed Mean CPI rose 6.9% YoY, above the 6.5% consensus expected. Headline inflation came in at 7.8%, slightly below consensus expectations. Recall the RBA expects inflation to remain high in early in 2023, particularly amid higher energy costs. This is also in line with several other government bodies’ thinking. The stronger inflation data saw odds of an RBA hiking pause for February falling, with a majority now looking for a hike at the Feb. 8 RBA meeting, with about 65 basis points of total additional tightening priced for the RBA, with a peak policy rate priced near 3.75%.

Eurozone Flash Jan. Composite PMI edges into expansion

Eurozone PMI rose to 50.2 in January from 49.3 in December and 49.8 expected, suggesting that the region may be able to skirt a recession due to a less harsh winter this season which has given room to the ECB to continue to focus on fighting underlying inflationary pressures. Manufacturing PMI was just below the key 50-mark at 48.8 but better than last month’s 47.8, while the rise of services PMI to 50.7 drove most of the gains. UK services PMI, on the other hand, fell to 48 from 49.9 in December, while manufacturing gained slightly to 46.7 in January from 45.3 previously but still remained in contraction. This suggests further signs of UK being in a recession in early 2023 and possibly a sooner pause for the BOE than the ECB.

US Flash Jan. PMIs hold up better than expected

US flash PMIs for January surpassed expectations, as services rose to 46.6, above the expected 45.0 and the prior 44.7, while manufacturing lifted to 46.8 from 46.2 (exp. 46.0), which comes ahead of ISM on February 1st. The composite rose to 46.6 from 45.0, and this will probably further boost the calls in favour of a soft landing rather than a deep recession as has been the case since the start of the year due to faster-than-expected China reopening and stronger Eurozone outlook. Still, activity is in contraction and job growth is cooling, but the January print also pointed to a re-acceleration in the input cost inflation.

US and Germany to send tanks to Ukraine

The Biden administration is reportedly expected to announce the intent to send 30 M1 Abrams tanks to Ukraine, with Germany’s Chancellor Scholz also reportedly deciding to send at least 14 of its Leopard 2 tanks to Ukraine after a long hesitation. Reports suggest Germany would only agree to send its best tanks if the US did likewise. It is unknown how rapidly the tanks could be deployed at the front.

The US Justice Department and eight US states sue Alphabet Inc.’s Google (GOOGL:xnas)

... charging the company with a monopoly in its digital advertising market place and calling for a break-up of the company’s business in this area. Google retorted that the case “largely duplicates an unfounded lawsuit by the Texas Attorney General, much of which was recently dismissed by a federal court. DoJ is doubling down on a flawed argument....” Alphabet, Inc.’s share price fell 2% yesterday.

Codelco produced 10% less copper than planned last year

Production at Codelco, the Chilean state-owned miner said on Tuesday it produced 10% less copper than planned last year. Driven by mishaps at existing operations, such as rockfall, equipment malfunctions and dam freeze. In addition, some projects were delayed as the industry is seeing cost blowouts. Chile, the world's biggest supplier has increasingly been challenged by steadily falling ore quality, water shortages and projects becoming pricier. Developments that together with social unrest in Peru and the expected pickup in demand from China and the green transformation point to underlying support for copper. Freeport-McMoRan (FCX) report production and earnings later today and it may overtake Codelco as the world’s top producer.

What are we watching next? 

Bank of Canada meets today – most see a 25-basis point hike tomorrow followed by a pause

Most observers are looking for the Bank of Canada to hike one last time for this cycle today to take the policy rate to 4.50% and to indicate a pause to assess inflation- and labour market conditions before deciding on next steps. The Bank of Canada hiked rapidly in 2022 in an attempt to catch up with galloping inflation but has contrasted with the Fed in signalling a pause in the hike cycle well before the Fed, which has been slower to signal that peak rates may be nearing. USDCAD trades near the lows since last November at 1.3350 this morning (2023 low is 1.3322), with the 200-day moving average creeping higher and near 1.3200.

Tesla earnings on watch for margin pressure from price cuts

Analysts expect revenue growth of 36% y/y and EPS of $1.12 up 64% y/y. Analysts are still very bullish on revenue growth for 2023 with expectations at 30% growth despite the recent slip in deliveries and three quarters of growing difference between production and deliveries. This is also reflected in the consensus price target at $190 vs the current price of $144. Traders and investors are also expressing a bullish take on Tesla with the put-call ratio on volume being 0.79 and the put-call open interest ratio at 0.65. The key thing to watch will be the comments on recent price cuts for several models, and how that impacts the bottom line, and whether the demand response is big enough to offset the price reduction to see the bottom line grow this year.

Earnings to watch

Today’s key earnings focus is ASML and Tesla as both earnings will set the direction for sentiment in the market. Read our earnings preview from yesterday here. 

• Today: ASML, Lonza Group, Tesla, Abbott Laboratories, NextEra Energy, IBM, Boeing, ServiceNow, CSX, Freeport-McMoRan, Lam Research, Norfolk Southern 
• Thursday: Tryg, Novozymes, Kone, Nokia, LVMH, Christian Dior, STMicroelectronics, SAP, Diageo, Atlas Copco, Volvo, SEB, Visa, Mastercard, Comcast, Intel, Blackstone, Valero Energy, Archer-Daniels-Midland, Dow, Nucor, L3Harris Technologies, Southwest Airlines, American Airlines 
• Friday: Fanuc, Chevron, American Express, Colgate-Palmolive 

Economic calendar highlights for today (times GMT)

• 0900 – Germany Jan. IFO Business Climate survey 
• 1500 – Canada Bank of Canada Rate Decision 
• 1530 – US Weekly DoE Oil and Product Inventories 
• 1600 – Canada Bank of Canada Statement and Press Conference 
• 1800 – US 5-year Treasury Auction