Global Market Quick Take – May 3, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): fresh jolt to regional banks ahead of FOMC

US equities traded nervously yesterday with S&P 500 futures declining 1.2% driven by selloffs in energy, banking, and real estate stocks as steep declines in regional banks such as Western Alliance and WestPac Bancorp triggered fresh risk-off waves across all banks. This confirms that more banks could fail in the future as Charlie Munger also alluded to in a recent interview. Today’s big event is naturally tonight’s FOMC event with the market expecting a 25 basis points rate hike and then is split on what to expect on the forward guidance. For equities the most dovish signal would be if the Fed signals no more rate hikes going forward and indicating that rate cuts could come should the economy weaken further from here.

Hong Kong equities (HK50.I): decline on US stock weakness

While the mainland Chinese stock market remained closed, Hong Kong equities declined, on the back of overnight weakness in U.S stocks.  Hang Seng Index shed over 1.8% as of early Asian afternoon. Brewers, diary, and some other domestic consumption names bucked the decline. During the first three days of the five-day-long Labor Day holiday in the mainland, domestic passenger traffic surged 162% from the same holiday period last year with 160 million trips.

FX: JPY recovers as Treasury yields slide, NZD and AUD also bid

The concerns on the US jobs market as well as fresh concerns in the US banking sector sparked buying in Treasuries on Tuesday and also disrupted the pricing of the FOMC, taking the USD lower. The Japanese yen benefitted from the risk-off tone and the plunge in US yields, and USDJPY fell from highs of 137.77 to the 136.00 area in late Asian trading. EURUSD reversed back above 1.10 despite the weak Euro area bank lending survey yesterday while GBPUSD is still stuck below 1.25. Gains in AUDUSD to 0.67+ after the RBA’s surprise hike were somewhat pared while NZDUSD jumped as high as 0.6250 overnight as Q1 NZ labor data out showed the unemployment rate steady at 3.4% vs. expected 3.5% and wage inflation climbing higher.

Crude oil: sharp drop amid fresh banking sector concerns

Crude oil prices tried to stabilize overnight after tumbling 5% on Tuesday amid fresh technical momentum selling following Monday’s failed attempt to reach safer grounds above $80.50 in Brent and $76.50 in WTI. Risk sentiment in general was challenged by continued worries about the stability of the regional US banking system despite the bailout of First Republic by JP Morgan. Despite current demand and growth concerns, the Fed is expected to hike once again later today, and it continues to weigh on the demand outlook even as supply side is looking stable for now. EIA’s weekly stock report is likely to be a sideshow, even after API reported a 4m barrel inventory drop. With short sellers back in control prices may once again overshoot to the downside.

Gold (XAUUSD) holds above $2000 ahead of FOMC rate decision

Gold surged higher on Tuesday to reach its highest close since April 14 at $2016.6 after downbeat US economic data and continued concerns about the stability of US regional banks drove investors into safe-haven bonds and gold. The 2-year US government bond yield slumped more than 20 basis points while short-end rates priced in +160 bps of rate cuts before June 2024. The FOMC is expected to deliver a 25-bps rate hike today and whether they signal a pause may determine the market reaction (see FOMC review below). Support in gold at $2002 followed by $1980 while a break above $2020 could see it target the April high in the $2050 area. Silver, still suffering a hangover from Monday’s pump-and-dump action, has struggled to keep up with its industrial link also weighing on sentiment.

US Treasuries rally (TLT:xnas, IEF:xnas, SHY:xnas) on JOLTS & fresh bank turmoil

US Treasury yields cratered yesterday on a weaker than expected job opening survey and on further turmoil in US regional banks, as trading in two banks’ shares (see more below) was halted yesterday. The market has marked down the odds of a hike at today’s FOMC meeting slightly as the 2-year yield plunged some 18 basis points lower and back below 4.00%, while the 10-year benchmark posted its third consecutive day of direction changes, dropping almost 15 bps lower back to 3.42%.

What is going on?

Fresh focus on US regional bank woes

The KBW regional bank index fell more than 5% yesterday to new lows for the cycle, currently near 82 after trading above 110 before Silicon Valley Bank’s sudden failure in early March. Trading in shares of two banks, PacWest Bancorp and Western Alliance Bancorp, were halted due to aggravated intraday volatility before trading resumed. PacWest’s shares ended the day down almost 27% and are down some 75% from early March levels. Western Alliance Bancorp shares fell just over 15% on the day. Western Alliance and PacWest Bancorp have balance sheets of $71bn and $44bn respectively.

Slowing US JOLTs job opening points to more slack in US labor market

The US JOLTS survey revealed that job openings fell to 9.59m in March from a revised up 9.974m previously, falling beneath the consensus of 9.736mln. That was the lowest in nearly two years and hinted at the gradual moderation in labor demand, which had so far continued to run higher than the supply keeping the market in an imbalance. The ratio of openings to unemployed dropped further to 1.6 in March from 1.8 earlier, but still remains above the pre-pandemic level of 1.2. Today, the focus turns to the Fed decision but private ADP employment survey and the US ISM services, where the priced paid component will again be key after the jump higher in the manufacturing prices on Friday sparked inflation concerns yet again, is also due.

US earnings review: Uber, Starbucks, Ford, AMD

Expectations were set high for Uber before its Q1 earnings release, but the on-demand ride hailing company reported better than expected Q1 revenue figures up 29% y/y and beat also on adjusted EBITDA with $761mn vs est. $679mn. The Q2 guidance on both bookings and adjusted EBITDA were above consensus and shares rallied 10% during the session. The CEO said that Uber is not seeing any slowdown in food delivery.

Starbucks reported FY23 Q2 (ending 31 March) after the close with comparative sales beating estimates across all geographies, but the FY23 comparative sales growth guidance at 7-9% disappointed investors sending the shares down 5% in extended trading.

Ford Motor reported Q1 revenue of $41.5bn up 20% y/y and guided FY adj. EBIT of $9-11bn vs est. $9.5bn. The US carmaker says the operating environment is opaque but is maintaining a steady outlook and is aiming to keep inventory lean to support prices. Finally, Ford said on the earnings call that it expects to lower investments in China and expects to only cut costs by $2bn vs $2.5bn expected due to high commodity prices. Shares were unchanged in extended trading.

AMD delivered better than expected Q1 figures last night but the Q2 revenue guidance of $5-5.6bn vs $5.5bn disappointed investors and highlights the slow turnaround in PC sales. AMD also said that enterprise server sales declined substantially, but like Samsung and Intel, AMD is seeing server and PC end markets to return to growth in the second half. Shares were down 6% in extended trading.

What are we watching next?

Difficult reaction function to FOMC tonight?

While odds have shifted slightly lower after yesterday’s turmoil in risk sentiment, the Fed is still overwhelmingly expected to hike 25 basis points at the FOMC meeting tonight, with the suspense for the market centering on how willing the Fed is to confirm market expectations that this will be the last rate hike for the cycle, or at least for now. Much of yesterday’s risk off tone was on a single JOLTS job openings report that is still some 2 million jobs higher than the previous record, suggesting an overreaction. The Fed may want to deliver as little in the way of guidance as possible, keeping the door open for a pause or even an additional hike as it would likely like a look at the full April and most of May data cycles that it will have on hand ahead of the June 14 FOMC meeting, when it delivers a refresh of the economic projections.

Scenarios and reaction functions for FOMC

On the dovish side, the Fed could tout that its policy rate is now above core PCE inflation and tout signs of a less tightness in the labor market as solid reasons for pausing on further tightening for now. This would presumably lead to a risk-on rally in equities and sell-off in the US dollar if this isn’t already fully priced (arguably it is, given that market has not even fully priced today’s rate hike and anticipates more than 60 basis points of Fed easing by year-end. The more hawkish (and risk-off, initially USD-up) scenario would be a Fed that sticks to two-way messaging on guidance. We could also get a mix of few clues in the monetary policy statement, with more colour and hints from Powell’s performance at the press conference.

Earnings to watch

Today’s US earnings focus is on Qualcomm and MercadoLibre with analysts expecting Qualcomm to deliver FY23 Q2 (ending 31 March) revenue growth of -19% y/y as consumer electronics markets remain muted and EBITDA of $3.1bn compared to $4.3bn a year ago. Qualcomm is expected to report earnings after the US market close. MercadoLibre, the largest local e-commerce player in South America, is expected to report Q1 revenue growth of 29% y/y and EBITDA of $368mn compared to $252mn a year ago. MercadoLibre is scheduled to report after the US market close.

• Wednesday: Barrick Gold, Orsted, Airbus, BNP Paribas, Deutsche Post, Enel, UniCredit, Lloyds Banking Group, Qualcomm, CVS Health, Estee Lauder, MercadoLibre, Kraft Heinz
  
  
• Thursday: National Australia Bank, Anheuser-Busch InBev, Shopify, Novo Nordisk, Maersk, Volkswagen, BMW, Infineon Technologies, Uniper, Rheinmetall, Zalando, Shell, ArcelorMittal, Equinor, Apple, ConocoPhillips, Booking, Regeneron Pharmaceuticals, Zoetis, Becton Dickinson, EOG Resources, Ferrari, Fortinet
  
  
• Friday: ANZ, Macquire Group, Enbridge, Canadian Natural Resources, Adidas, Intesa Sanpaolo, CaixaBank, Cigna Group

Economic calendar highlights for today (times GMT)

1215 – US Apr. ADP Employment Change

1345 – US S&P Global Final Services PMI

1400 – US Apr. ISM Services Index

1430 – US Weekly DoE Crude Oil and Product Inventories

1800 – FOMC Monetary Policy Statement release

1830 – US Fed Chair Powell press conference

0130 – Australia Mar. Trade Balance

0145 – China Apr. Caixin Manufacturing PMI