Global Market Quick Take: Europe – March 8, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): fresh hawkish pivot from Powell reverses rally

US equities turned sharply south yesterday on a hawkish pivot from Fed Chair Powell as he is clearly not comfortable with the most recent data. This took the 2-year rate above 5% for the first time in over 15 years and reversed the recent market rally, taking the S&P 500 back below the 4,000 level, though with some ways to go before the 200-day moving average comes into view just below 3,950. The Nasdaq 100 likewise reversed course, but is far more elevated relative to recent lows and the 200-day moving average – with the cash index trading 12,150, some 250 points above the moving average. Incoming US data and its impact on Fed expectations and especially longer yields will be key through next Tuesday’s US February CPI data.

Hang Seng Index and CSI 300 declined on regulatory overhaul and US rates outlook

Hang Seng Index dropped by 2.7% and the Hang Seng TECH Index plunged by nearly 4%. EV and China Internet stocks led the charge lower. In A-shares, CSI300 slid nearly 1%. On top of the tighter U.S. interest rate outlook stemming from Fed Chain’s Powell’s testimony, the establishment of the National Financial Regulation Bureau and the National Data Bureau and the consolidation of power around them may have stirred up concerns about uncertainty in the mind of investors about the regulatory trend on areas such as mobile payment and e-platform data. 

FX: USD rips higher on hawkish Powell. CAD in focus on Bank of Canada meet today

With Powell’s hawkish remarks, 2-year Treasury yields jumped some 13 basis points to close above 5% for the first time since 2007 and the USD rushed to fresh YTD highs. AUD and NZD were hurt by the deterioration in risk sentiment, with the former also pressured by a dovish turn from the RBA. Widening yield differential between US and Japan weighed on the yen, and USDJPY pierced above 137.50 in the Asian session despite volatility risks from the Bank of Japan meeting scheduled on Friday. GBPUSD broke below the 200DMA to reach YTD lows in the low 1.1800’s, with BOE’s Mann commenting that sterling could weaken further. EURUSD dropped below 1.0550, paring the hawkish ECB Holzmann reaction earlier in the week. CAD will be in focus today after the Bank of Canada trid to position for a tightening pause at its most recent meeting (read more below), with USDCAD likely to take a look at 1.38+ levels if the BoC doesn’t shift hawkish in line with the Fed.

Gold and silver slump on Powell warning

Gold and silver slumped after Fed Chair Powell, in his prepared remarks to Congress, said the Fed was prepared to increase the pace of rate hikes and to a higher-than-expected level should incoming data continued to show strength. Terminal Fed rate expectations shifted higher to 5.66% with the market pricing in a 60% risk of a 50 bp move at the March meeting. Across market risk appetite tumbled with the selloff in metals being led by silver’s 4.6% slump to a four-month low near $20.  Gold meanwhile has given back most of last week's bounce and following the failure to challenge resistance at $1864 and gain a foothold above the 21-DMA, the market is once again looking for support in the $1800 area ahead of $1775, the 200-DMA. With Powell signalling an incredible data dependency, the focus now turns to Friday’s job report.

Crude oil drops over 3% on hawkish Powell

Crude oil made an abrupt turnaround from a three-week high on Tuesday with growth and demand concerns taking center stage after Powell signaled his determination to fight inflation with more rate hikes. The most inverted US yield curve in decades now signals an even bigger risk of a recession and with that weakening demand for fuel. Together with China’s lower than expected growth target and OPEC Chief Haitham Al-Ghais seeing slowing oil consumption in US and Europe, both WTI and Brent dropped towards support at the lower end of their current ranges, in Brent at $81.30 and WTI at $73.50.  EIA also released its short-term energy outlook and lowered its crude oil production forecasts for US supply for both this year and next amid signs of subdued growth and higher costs.

Copper trades back below the $4 mark

Base metals were broadly pushed lower on Tuesday as the dollar surged to fresh YTD highs on remarks from Powell’s testimony opening the door for a bigger hike in March and a higher terminal Fed funds rate. China import data also gave mixed signals on the first two months of the year, with mined copper ore imports increasing but inflows of refined copper declining. Supply constraints from Peru also seemed to ease as the Peruvian government expects shipments of copper and zinc will normalise with days, following months of social unrest prompted by the impeachment of former President Pedro Castillo. Copper trades back below $4, bringing last week’s low of $3.93 and the 200DMA at $3.77 into focus.

US Treasury yield curve sees next extreme in inversion. (TLT:Xmas, IEF:xnas, SHY:xnas)

Fed Chair Powell’s surprisingly explicit rhetoric on the willingness to consider hiking by larger amounts again shocked the 2-year Treasury yield some 13 basis points higher with yields following through a few bps higher still in overnight trading. The 10-year yield only edged a few basis points higher and is still stuck near 4.00% this morning, which means the yield curve inversion has reached its deepest level yet for the cycle and sinc 1981 at below –105 basis points. The 3-year auction yesterday showed strong demand.  A 10-year auction is up today.

What is going on?

Powell’s testimony opens the door to a 50 bps rate hike in March

Fed Chair Powell, in his prepared remarks to Congress, said that if “the totality” of incoming data indicates faster tightening is required, the Fed is prepared to increase the pace of rate hikes, warning that the ultimate level of interest rates is likely to be higher than previously anticipated given the string of hot January data. This is another signal that March “dot plot” of Fed rate forecasts could see an upward shift for this year and next. Powell even explicitly said that a 50-bp rate hike in March is possible and market pricing has shifted to favouring a bigger hike on March 22. Terminal rate expectations have shifted higher to 5.63% from 5.48% previously. Remarks brought the 2-year yields above 5% and the deepest inversion in the 2-10 year yield curve.

Adidas cuts dividends and confirms uncertain outlook

Adidas shares are down 3% in pre-market trading as the German sports retailer reports Q4 revenue of €5.2bn vs est. €5.3bn and operating loss of €724mn vs est. €717mn in addition to cutting 2022 dividend to €0.70 vs est. €1.64. The key questions remain for Adidas of whether China growth can come back, what to do with the Yeezy inventory of sneakers and clothes, and finally is the brand impacted so much that the turnaround case will take longer than estimated.

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What are we watching next? 

Bank of Canada meets next

After RBA’s dovish hike, the stage is set for the Bank of Canada to pause on its tightening cycle at the meeting today. In light of the weaker-than-expected data and BOC’s signal from the January meeting, market is not expecting any rate hikes today although the message is likely to convey policy flexibility. Read our full preview here to know what it means for the CAD as the divergence of BOC to the Fed widens.

More Powell today. Next US macro data and Bank of Japan loom

After Powell surprised yesterday, the incoming data will need to support the market’s shift to a more hawkish stance, with potential for a further cementing of a 50 basis point move at the March 22 FOMC meeting possible on uniformly hot data (currently just above 40 basis points priced for March 22). Today we will get the February ADP payrolls change number and January JOLTS job openings data (together with some revisions of prior data), but these weigh less heavily than the official jobs report on Friday. Easily as important, the US February CPI data is up next Tuesday and will likely prove the arbiter of whether the Fed moves 50 basis points at the meeting. In the meantime, the global lift in yields is piling pressure on the yen this week, and on the Bank of Japan to shift away from its yield-curve-control policy ahead of its meeting this Friday, which will be the final meeting with Kuroda at the helm before he leaves early next month.

Earnings to watch

There are on US earnings releases today of importance. The market will focus on Adidas earnings (see review above) and then focus on earnings tomorrow from CATL and JD.com. 

• Wednesday: Ping An Bank, Thales, Adidas, Geberit 
• Thursday: CATL, Deutsche Post, JD.com 
• Friday: Daimer Truck, AIA Group, Oracle, DiDi Global 

Economic calendar highlights for today (times GMT) 

1000 – ECB President Lagarde to speak

1315 – US Feb. ADP Employment Change

1330 – US Jan. Trade Balance

1330 – Canada Jan. International Merchandise Trade

1500 – Canada Bank of Canada decision

1500 – US Fed Chair Powell to testify before House Panel

1500 – US Jan. JOLTS Job Openings

1530 – EIA's Weekly Crude and Fuel Stock Report

1700 – USDA's World Agriculture Supply and Demand Estimates (WASDE)

1800 – US 10-year Treasury Auction

1900 – US Fed Beige Book

0001 – UK Feb. RICS House Price Balance

0130 – China Feb. CPI/PPI