Global Market Quick Take: Europe – April 26, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Banking crisis resuming or earnings turning?

US equities had their worst session since March with S&P 500 futures taking out the trading range of 4,100 to 4,200 closing at 4,093 driven by a plunge of 49% in First Republic Bank as the bank’s Q1 results showing a significant drop in deposits and balance sheet mismatch spooked investors. First Republic Bank said yesterday that it is engaging in selling around $100bn of assets to get the balance sheet in order. At the other spectrum Alphabet and Microsoft earnings releases beat expectations with shares rallying 1.5% and 8.5% respectively as the two companies lifted operating income and in the case of Alphabet finally saw profits in its cloud business. The question is whether we are headed into a new banking crisis or earnings will improve.

Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index rallied driven by Internet stocks

Hang Seng Index snapped a three-day decline and rallied over 1% by early Asian afternoon, driven by China Internet stocks and electricity utilities.  JD.COM (009618:xhkg) bounced over 4% after yesterday hitting the level last seen in October 2022, before China’s reopening from pandemic restrictions. Tencent (00700:xhkg) climbed nearly 3% as speculation mounted on potentially a new round of share buyback. In A-shares, CSI300 ticked up 0.3%, with electric equipment and tourism names outperforming.

FX: USD and JPY rally on weak risk sentiment, yield drop

The US dollar rallied sharply yesterday, with the Japanese yen matching its strength as global bond yileds slumped again, in part on the weak US consumer confidence survey (more below). The reversal came at a pivotal time as EURUSD, for example, was eyeing the cycle highs above 1.1050. The close back below 1.1000 suggests that the big round level is a tough nut to crack for bulls. The JPY strength is par for the course, given the sharp drop in bond yields over the last couple of sessions, but JPY traders also await the first Bank of Japan meeting with new governor Kazuo Ueda at the helm on Friday. Short-dated implied options volatility for USDJPY is at the lowest level preceding a Bank of Japan meeting for the last twelve months, suggesting little anticipation that Ueda will surprise the market. The AUD weakness deepened on softer than expected Q1 inflation data, with the core “trimmed mean” measure coming in at 1.2% QoQ vs. 1.4% expected.

Crude oil bouncing with focus on US stock report and dollar

Crude oil dropped to a fresh low for the month on Tuesday, driven by weak sentiment following a plunge in US consumer confidence and fresh banking sector risks as well as a stronger dollar. On top of this the recovery in China remains underwhelming, thereby reducing what was expected to be a major pillar of support for the market. Meanwhile the API reported a price supportive 6.1m and 1.9m barrel drops in crude and gasoline stocks ahead of today’s official stock report from the EIA. Having almost closed the gaps that were left open following the OPEC+ production cut spike on April 3, traders will be looking for support in Brent towards $80 and $76.60 in WTI, its 50-DMA.

Gold continues to bounce from support

Gold’s current correction phase remains unimpressive as the yellow metal continues to bounce of trendline support, currently at $1977, thereby keeping it well above key support in the $1955-60 area. Overnight sport gold briefly traded back above $2k in response to a continued drop in US Treasury yields after US consumer confidence dropped to the lowest since July. A stronger dollar was ignored with a potential debt-limit fight in the US also adding support. Resistance in gold at $2012 and $2018 while silver maintains support in the $24.50 area, having so far retraced less than one-quarter of the recent strong gains.

Copper and iron ore recover after big drop but recession risks weigh

Copper prices saw a sharp decline on Tuesday, along with other industrial metals including iron ore and steel in response to a slower than expected recovery in Chinese demand during a time that’s meant to be the busiest construction period of the year. Risks of a global slowdown in growth also re-emerged strongly with a plunge in US consumer confidence and banking sector risks seemed to be brought back to life with First Republic earnings. Copper, however, traded back above $3.90 overnight after finding support at $3.82, the March low, potentially highlighting fresh demand for a metal that look set benefit from increased green transformation demand in the coming years. Iron ore futures briefly touched the phycological important $100 per tons level in Asia, down from a +$130 earlier this year - before bouncing back to $103.

US Treasury (TLT:xnas, IEF:xnas, SHY:xnas) yields plunge on US confidence data, 2-year auction

Treasuries opened with a strong bid (declines in yields) following First Republic Bank reporting a large decline in deposits and potential asset sales the day before. Gains were extended after a 2.7-point decline in the Conference Board Consumer Confidence. Rising concerns about the debt ceiling also contributed to the fall in yields by fuelling flight to quality bids for Treasuries. The 2-year and 5-year yields took a decisive dive and bull-steepened the yield curve after a well-received 2-year auction with a strong 2.68 times bid-to-cover ratio. The 2-year yield dropped by 13bps to 3.95% and the 10-year declined by 9bps to 3.40%. Large buying in red months (2024 delivery months) SOFR interest rate futures, seeing yields down 25-27bps, implying more rate cuts being priced in for 2024.

What is going on?

Earnings take: Microsoft and Alphabet

Alphabet Q1 results beat on both revenue and operating income with Google’s advertising revenue coming in stronger than estimated. It was also the first quarter with positive operating income in its cloud business signaling that this business has now reached critical mass and will begin meaningfully contributing to the operating income going forward. In addition, Alphabet said it will begin buying back its own shares worth $70bn. While revenue growth was just 2.6% y/y it did improve from Q4 at 1% y/y. Microsoft was an even bigger surprise with fiscal quarter Q3 revenue at $52.9bn vs est. $51bn and EPS of $2.45 vs est. $2.24 driven by robust performance in its cloud business. Microsoft sounded very bullish on the AI system ChatGPT from OpenAI and it is betting that it will be the main driver of profit growth in the future. This bet will increase CAPEX in the current quarter as Microsoft invests more in data centers. Microsoft expects the Azure business to growth 26-27% y/y excluding currency effects.

Highly indebted listed companies face a tough time

With higher cost of capital, many listed companies are facing difficulties refinancing their debt. At the Paris Stock Market, there are several examples of listed companies in disarray: the retirement group Orpea (total debt about 9.7bn EUR) and the distribution group Casino (total debt about 6bn EUR). There are rumors that the distribution group could find new shareholders but no matter what the final solution will be, it will likely involve a very dilutive capital increase. The biotech sector is also in trouble now that the cost of capital is higher and that investors are more selective. Yesterday, the small cap French biotech company Nanobiotix (market cap EUR 84 million) collapsed by more than 25%. The company needs funding. According to the latest report, Nanobiotix only has six months of cash left to burn. The process of M&A and exit will probably intensify in the French stock market in the small and medium cap segment in the coming months as more and more listed companies are looking for new investors. Generally speaking, as a retail investor, it is wise to stay away from companies opting for very dilutive financing (such as convertible bonds with warrants attached).

US Consumer Confidence suggest weakening outlook

US consumer confidence hit its lowest levels since July on pessimism on the expectations side even as the present situation component of the survey held up. The headline fell to 101.3 in April, well below expected 104.0 (March reading was 104.0). The Present Situation index rose to 151.1 (prev. 148.9), but Expectations dropped to 68.1 (prev. 74.0). The level below 80 on the expectations index is considered to be associated with a recession within 12 months. Meanwhile, consumer inflation expectations remain elevated.

US New Home Sales surged higher again

US homebuyers seem to be adjusting to the new normal in US mortgage rates, which remain just below 7.00% after peaking late last year just above 7.25% and versus the 2020-2021 pandemic levels of 3.00%. That’s the message, at least, in US March New Home Sales surging to their fastest pace since March of the prior year, at an annualized pace of 683k vs. 632k expected and 640k prior).

What are we watching next?

Sweden’s Riksbank likely set for 50 basis point hike today

Sweden’s Riksbank is expected to hike the policy rate 50 basis points this morning to take the rate to 3.50%, a new post-2008 high after Sweden’s headline inflation peaked at 12.1% in and core inflation peaked at 10.2% in December. The steep pace of rate hikes has hit the Swedish economy hard, due to the impact on housing prices after the low rates of the pandemic era aggravated the housing bubble, which is now in steep retreat. The economy is contracting and credit growth has almost ground to a halt. Interesting to see both the Riksbank’s guidance on the potential for any further tightening of rates and whether the Swedish krona is brought into the conversation more forcefully, as its weakness has aggravated inflation over the last 12 months.

US House Republicans may vote on debt ceiling bill today

US House Republicans may call for a vote on their spending bill today, even though sources indicated, according to Politico, that House speaker McCarthy does not have the votes to pass the bill, but that he is unwilling to change it. Failing to pass the bill might indicate the Republicans can’t maintain sufficient discipline to continue to threaten to hold the Biden administration hostage on lifting the debt ceiling, though it isn’t clear what terms would be necessary to get a handful or more of Republican House members to agree to a deal, as the US Treasury’s inability to issue net new debt without a lifting of the ceiling threatens market turmoil as soon as early June if the situation is not resolved.

Earnings to watch

Today key earnings are from Meta after the US market close. The company is scaling back its ambitions for Metaverse and has begun significant cost cutting, which investors expect to see reflected in the earnings outlook from Meta. Alphabet’s results yesterday bode well for Meta earnings tonight. In the primary session, Boeing is the key US earnings to watch with analysts expecting 25% y/y revenue growth and positive operating income as demand is coming back for aviation.

• Wednesday: Teck Resources, Novozymes, Kone, Dassault Systemes, Deutsche Boerse, Ping An Insurance, FANUC, Canon, GSK, Universal Music Group, Iberdrola, Assa Abloy, SEB, Svenska Handelsbanken, Meta, Thermo Fisher Scientific, Boeing, ServiceNow, eBay
  
  
• Thursday: DSV, TotalEnergies, Sanofi, STMicroelectronics, BASF, Deutsche Bank, China Life Insurance, Sinopec, BYD, Keyence, Hitachi, AstraZeneca, Barclays, DNB Bank, BBVA, Repsol, Atlas Copco, Nordea Bank, Amazon, Eli Lilly, Mastercard, Merck, AbbVie, Linde, Honeywell, Amgen, Intel, Caterpillar, Mondelez, Valero Energy, L3Harris Technologies, Newmont, Rockwell Automation, First Solar, Cloudflare, Pinterest, Snap
  
  
• Friday: Imperial Oil, Danske Bank, Neste, Mercedes-Benz, PetroChina, China Shenhua Energy, Eni, Sony, Norsk Hydro, Yara International, Hexagon, Exxon Mobil, Chevron, Colgate-Palmolive

Economic calendar highlights for today (times GMT)

0730 – Sweden Riksbank Rate Announcement

1230 – US Mar. Preliminary Durable Goods Orders

1430 – EIA's Weekly Crude and Fuel Stock Report

1700 – US 5-year Treasury Auction

0100 – New Zealand Apr. ANZ Business Survey