Financial Markets Today: Quick Take – February 21, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): skating on thin ice

US equity futures are picking up from Friday’s weak session after yesterday’s US holiday with S&P 500 futures trading lower at around the 4,066 level putting US equities into negative territory for the month. Today’s key event is naturally the annual speech from Putin as it could ignite fresh geopolitical risks as described in yesterday’s equity note. In the US session earnings from Walmart and Home Depot can also impact sentiment as both companies are expected to show weak revenue growth.

Hong Kong’s Hang Seng (HIG3) and China’s CSI300 (03188:xhkg)

The Hang Seng Index slipped 1.3% amid signs that Chinese eCommerce platforms are heating up competition for business. JD.com (09618:xhkg) plunged nearly 8% following launching a subsidy campaign to compete with rivals. Alibaba (09988:xhkg), Tencent (00700:xhkg), and Meituan (03690:xhkg) dropped more than 3%. HSBC (00005:xhgk) pared initial gains from an earnings beat and special dividend and slid 1.6%. Meanwhile, Hang Seng Bank (00011:xhkg) rose 2.9% despite an earnings miss due to a jump in loan loss provision for mainland property loans. In mainland China, the CSI300 is flat. Resource names, such as non-ferrous metal, coal, and steel continued to do well, as did the auto stocks. The consumer and AI generated content space declined.

FX: Awaiting USD direction after bearish reversal on Friday and long US weekend

As US treasury yields rolled over on Friday, the US dollar did likewise and posted a modest bearish reversal on the same day it was trying to break free of resistance. Given the nervous geopolitical backdrop, headline risk is paramount in coming days as we await further resolution in the USD direction. Overnight, hawkish RBA minutes did little for the Aussie, given downbeat markets in Asia,  while the RBNZ meeting tonight could shake the kiwi in either direction, given the uncertainty of the RBNZ’s stance in the wake of disastrous floods in parts of the country, although NZ yields remain near the highs since early January.

Crude oil (CLH3 & LCOJ3) fails to hold onto Monday’s gains

Brent crude oil futures dropped back to $83 during Asian hours, thereby reversing Monday’s gain in response to fresh dollar strength and concerns about the near-term direction of US interest rates, and despite sustained hopes of a recovery in China’s activity levels, especially following a fresh liquidity injection by the PBoC last Friday. Geopolitical developments remain a worry but so far, the positive impact on prices have been very limited.  Overall, the oil market remains rangebound, in Brent between $80 and $89 and WTI between $73 and $82, as the market weighs the impact of rising demand in China and India versus a potential slowdown elsewhere.

Copper receives a boost from BHP outlook

Despite the hawkish tilt in Fed expectations which left other metals on the defensive, copper has managed a strong recovery as the key $4 area continued to provide support. BHP, the world’s biggest miner reported its half-year result today, and according to its CEO the company expects domestic demand in China and India “to provide stabilizing counterweights to the ongoing slowdown in global trade and in the economies of the US, Japan and Europe,”. Also supporting prices are continued threats to supply in Peru, Panama and Zambia. . 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 softer overnight in response to fresh dollar and yield strength following Monday’s US closed session. The market remains on the defensive after recent US economic data strength and hawkish comments from Fed policymakers led to market to adjust higher the trajectory of US Fed funds rate. Apart from a very uncertain geopolitical situation, the market will be focusing on minutes from the Fed’s last meeting on Wednesday as well as personal spending on Friday. Holdings in ETF’s meanwhile dropped again on Monday with the 3.1 tons reduction to 2882 tons, a three-year low, bringing this year's net sales to 34 tons or 1.1 million ounces. In other words, gold for now needs continued demand from central banks to provide a floor under the market. Support at $1820 followed by $1790.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) after Friday reversal. 2-year auction today

US Treasury yields reversed sharply on Friday after posting new local highs. A heavy schedule of auctions lies ahead this week, starting with an auction of 2-year notes today after the benchmark traded within 10 basis points of the 15-year high of 4.80% posted last November. A 5-year auction will follow tomorrow and 7-year on Thursday.  The 10-year benchmark yield tested above the December high of 3.90% on Friday, but trades 3.85% this morning. The US data highlight this week is Friday’s January PCE inflation data.

What is going on?

The cost of sea freight is back to pre-Covid levels

The cost of sea freight is now back to pre-Covid levels, which is positive news on the inflation front. The drop in prices is both explained by cyclical (1) and structural (2) factors. The U.S. consumer is very resilient, as shown by the recent release of the U.S. retail sales. But this is not the case in other countries. The rise in the cost of living is causing a drop in global consumption (1). In addition, the sea freight market is facing a surplus of containers. And this will get worse in the months to come. The number of container ships under construction represents nearly 30 % of the fleet that is currently operational. That’s three times more than normal. Companies in the sector have misjudged the evolution of global demand in the post-Covid period. Wrongly, they anticipated it would remain unchanged or it would even increase. The fall in prices is likely to continue all this year and perhaps partially in 2024. The market consensus expects a drop in transported volumes of around 4 % this year.

Downshift in RBNZ’s rate hike trajectory could signal NZD weakness

The Reserve Bank of New Zealand meets on Wednesday, 22 February and consensus expects a return to 50bps rate hikes after a 75bps in November when even the possibility of a 100bps was debated. Economic data has been soft since the last meeting, with 2-year inflation expectations easing and unemployment rate seeing a slight uptick. However, Cyclone Gabrielle has brought fresh risks of inflation pressures in the short-term. Calls for no rate hikes have also picked up although Finance Minister Robertson was out calling for the RBNZ to address inflation yesterday. Still, risks of further kiwi weakness loom large after NZD has weakened 1.7% against the USD so far this year. If RBNZ signals that the peak for the current rate hike cycle is near, the 38.2% retracement of NZDUSD uptrend from the October low at 0.6146 could be challenged. AUDNZD broke above 1.1030 and its 200-day moving average yesterday, posting a new 3-month high.

BHP guides for a pick up in metals and readies its balance sheet to become a copper giant

BHP - the world’s biggest miner saw profits in the six months to December 2022 decline by more than expected but sees the ongoing price recovery extend into the second half year and beyond as it sees demand picking up in China, but also in India - and this offsetting the slowdown in trade with the US, Japan and Europe. All in all, it also guided for mining production costs to be markedly higher than before the Covid-19 pandemic – amid higher energy, labour and other input costs. Its HY results were impacted by lower realised prices in copper, iron ore and coal across the last six months of 2022. Wet weather also impacted on its coal business’ production and pushed up unit costs – and there were difficulties in securing enough staff. This resulted in underlying attributable profit falling to $6.6 billion - vs the $6.96 billion expected by consensus (from continuing operations). BHP’s interim dividend was trimmed to $0.90 per share – down from last year’s record $1.50 per share. Still BHP’s payout ratio is 69% and that’s BHP’s 5th highest dividend on record. We also believe the lower dividend payout reflects that BHP is readying itself for the $9.6 billion takeover of Oz Minerals which, if approved, will occur in May.

What are we watching next?

Putin speech today. China said to hope broker peace deal over Ukraine after US warns China on lethal aid to Russia

Biden made a surprise visit to Ukraine  yesterday and met with President Volodymyr Zelenskiy, declaring "unwavering support" as Russia's invasion nears the one-year mark. China is said to be promoting a peace plan for Ukraine as China’s top diplomat will arrive in Moscow today, but German and US authorities are already declaring themselves sceptical on China’s intentions and accuse it of taking sides. European source familiar with the plan (cited by Bloomberg, the officials asked not to be identified) said it would likely include a call for a cease-fire and the cessation of arms deliveries to Ukraine. Putin is set to make a speech today in Moscow, with added interest given the presence of a top Chinese official.

In Saxo’s view, the playbook for the week should be risk-off given the possibility of any ugly turns in geopolitics. That would mean long JPY and USD, long commodities, long defense stocks and lowered exposure or hedging of risky assets. Once we are past this week with hopefully no further escalations, focus will shift back to inflation concerns and driving Fed rate cut expectations further into 2024.

Earnings to watch

Today’s US earnings focus is Walmart and Home Depot with analysts expecting Walmart to report revenue growth of 4.4% y/y and EPS $1.52 down 1% y/y as volume of goods sold is expected to be under pressure. Analysts expect Home Depot to report revenue growth of 0.6% y/y and EPS of $3.27 up 1.8% y/y reflecting lower volume across US home improvement industry.

• 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)

0815-0900 – Eurozone Flash Feb. Manufacturing and Services PMI

0930 – UK Flash Feb. Manufacturing and Services PMI

1000 – Germany Feb. ZEW Survey

1330 – Canada Dec. Retail Sales

1330 – Canada Jan. CPI

1445 – US Flash Feb. Manufacturing and Services PMI

1500 – US Jan. Existing Home Sales

1800 – US 2-year Auction

0030 – Australia Q4 Wage Price Index