Financial Markets Today: Quick Take – January 19, 2023

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) fall over 1% on recession fears

U.S. equities opened higher initially as bond yields tumbled on a dovish Bank of Japan and much weaker than expected prints on U.S. retail sales, industrial production, and producer prices. Comments from the Fed’s Bullard in a Wall Street Journal interview about his preference of keeping the pace of rate hike at 50bps at the February FOMC triggered a reversal around mid-day and saw U.S. stocks plunge during the afternoon session. The weak economic data and the risk of the Fed overdoing it on rate hikes troubled equity investors. On the close the Nasdaq 100 was down 1.3% while the S&P 500 slipped 1.6%. All 11 sectors of the S&P 500 declined, with the consumer staples sector falling the most to finish the session 2.7% lower. In the Fed’s Beige Book released on Wednesday, U.S. retailers said they were having difficulties in passing through cost increases to consumers.

Hong Kong’s Hang Seng (HIF3) and China’s CSI300 (03188:xhkg)

Following the decline in U.S. stocks overnight, Hong Kong and mainland Chinese stocks opened lower but managed to pare losses and more. Hang Seng Index and CSI300 edged up modestly in the early afternoon local time. Chinese property developer stocks outperformed while technology names were among the laggards. Hang Seng TECH Index dropped more than 1% on profit taking ahead of the 3-day Lunar New Year holiday next week. Chinese social platform, Kuaishou (01024:xhkg) plunged nearly 6% after a co-founder sold shares.

FX: US dollar posts strong rally on weak US data; JPY roars stronger still overnight

The weak US data yesterday (more below) took US treasury yields sharply lower all along the curve, but with risk sentiment sliding badly on the news, the USD rallied sharply rather than selling off on the implications for less Fed tightening at coming meetings. This suggests investors may finally be fretting the risk of an incoming recession. The USD strength eased overnight as the Japanese yen, already beginning to reverse to the strong side by late US hours despite the dovish BoJ earlier in the day (the JPY traditionally thrives most on falling global yields and weak sentiment/recession fears) rallied hard, handily outpacing the US dollar and ripping stronger across the board, particularly against the hapless AUD, which was hit by weak December employment data overnight.

Crude oil (CLG3 & LCOH3) tumbles badly on sluggish US data

Crude oil extended Wednesday’s sharp losses which occurred after poor US economic data triggered fresh growth concerns. The move lower was strengthened by technical and momentum traders getting wrong-footed after having bought an upside break earlier in the day. A reopening of China has been the main supporting focus in recent weeks but with activity there now slowing ahead of the Lunar New Year holiday, traders turned their attention elsewhere and did not like what they saw. Also, the API reported another chunky inventory rise of 7.6 million barrels, well above the 2-million-barrel rise expected by the EIA later today. Finally, IEA delivered a bullish outlook for 2023 demand as China recovers and air travel rebounds.

Gold ended lower for a third day, but bids keep coming

Gold’s newfound strength continues to be tested but so far, the metal has shown resilience and found fresh bids on any pullback. Yesterday it ended lower for a third day, but still above $1900 with traders (many of which are algorithmic, and machine based) taking their directional input from the US bonds market and not least the dollar. Traders have built positions in the belief we will see peak rates soon in the US, a development that triggered very strong rallies on three previous occasions during the past 20 years. However, as long the market trusts the FOMC will deliver lower inflation, major institutional investors are likely side lined, something that shows up in ETF holdings which remain near a two-year low. Support at $1896 followed by $1855, the 21-day moving average.

US Treasury yields lower on weak US data, BoJ standing pat (TLT:xnas, IEF:xnas, SHY:xnas)

Treasuries surged in price and yields collapsed on dovish outcomes from the Bank of Japan’s monetary policy meeting. Treasury yields then took a further dive following the release of larger-than-expected declines in US retail sales and industrial production as well as a bigger-than-expected 0.5% month-on-month fall in the Producer Price Index in December. The hawkish comments from Fed’s Bullard about keeping the February hike at 50bps was ignored by Treasuries despite being picked up by traders as a reason to fade the rally in equities. The result from the USD12 billion 20-year Treasury bond auction was strong. The 2-year trades this morning at 4.04% while the 10-year yield has dropped to a four-month low at 3.32%, with the 2-10 curve still very inverted at -72.5 bps.

What is going on?

US December Retail Sales and other US data disappoint

The December US Retail Sales report for December was the second consecutive monthly report to disappoint expectations, with the headline falling –1.1% MoM vs. -0.9% expected and despite the negative November revision to –1.0% (vs. -0.6% originally). The ex Auto and Gas number was also disappointing at –0.7% vs. 0.0% expected and also with a negative revision for November to –0.5% (from –0.2%). These are particularly negative numbers given still high inflation in the US as they are not inflation-adjusted. Elsewhere, the US PPI data was softer than expected at –0.5% MoM and ex Food and Energy at +0.1%, with the YoY dropping to +6.2%/5.5% vs. 6.8%/5,6% expected. Finally, December US Industrial Production fell 0.7% MoM vs. 0.1% expected, with a negative revision of November data to –0.6% from -0.2%.

New Zealand Prime Minister Jacinda Ardern shocks with resignation announcement

Her resignation was announced after five and a half years in power and came in the context of announcing an October 14 election this year. She will step down no later than February 7. Her Labour Party is trailing the opposition National Party slightly in the polls. Ardern said she hadn’t the energy to continue as PM.

Microsoft to lay off 10,000 employees

... as a part of it what it considers a set of cost-cutting measures outlined in a securities filing yesterday. CEO Satya Nadella cited a downward shift in demand for digital services and fears of  a recession. “...we saw customers accelerate their digital spend during the pandemic, we’re no seeing them optimize their digital spend to do more with less.” The layoff are just under 5% of the company’s global workforce.

Rising volume of trades on Euronext Paris

In recent sessions, we have noticed a strong rise in the volume of trades and a sharp increase of volatility for several small and medium companies listed on Euronext Paris. Target Spot (which connect brands to their audience through a premium portfolio of publishers across digital audio) has experienced a huge rebound in recent sessions (+28 % on a weekly basis) driven by an increase in the volume of trades. This company can be considered as a penny stock (the stock was exchanged at 50 cents two weeks ago). There is also a jump in speculation for companies using dilutive financing in the form of OCABSAs ((bonds convertible into shares with share subscription warrants). In October 2022, the French stock market authorities, the AMF warned against the risks associated to this financing, especially for retail investors. There are several listed companies in that case at the Paris stock market, such as Avenir Telecom (manufacture of mobile phones) and Spineway (implants and surgical instruments). Usually, stay away from any kind of ultra-dilutive funding.

Fed speakers continue to be mixed, with the non-voters staying hawkish

Fed’s Bullard (non-voter) said his dot plot forecast for 2023 is just above the Fed's median of 5.1% at 5.25-5.50% and that Fed policy is not quite in restrictive territory, reiterating it needs to be over 5% at least. Bullard added the Fed should move as rapidly as it can to get over 5% and then react to data, noting his preference is for a 50bps hike at the next meeting (against the consensus 25bps). Loretta Mester (non-voter) said further rate hikes are still needed to decisively crush inflation and we are not at 5% yet, nor above it, which she thinks is going to be needed given her economic projections. She believes the Fed's key rate should rise a "little bit" above the 5.00-5.25% range that the Fed median implies. Harker (voter) said Fed needs to get FFR above 5%, but its good to approach the terminal rate slowly. Dallas President Lorie Logan (voter) spoke later as well, and also hinted at a slower pace of rate hikes. She said she wants a 25bp rate hike, not 50, at the February 1 FOMC meeting. She said if slower rate hike pace eases financial conditions, then the Fed can offset that by gradually raising rates to a higher level than previously expected.

What are we watching next?

Norway Central Bank the latest to indicate end-of-cycle hike today?

The Norwegian central bank was the first G10 central bank to hike rates back in 2021, but maintained a curiously slow pace of hikes relative to other central banks. The market is divided on whether the Norges Bank is set to hike by 25 basis points today, with most believing that even if it doesn’t, the following meeting in late March will see a hike, probably the last of the cycle for now.

Earnings to watch

The Q4 earnings season continues today with two big earnings reports from two very different companies: the huge US consumer products company Procter and Gamble (Market Cap $350B) and streaming services provider Netflix, which has enjoyed a more than 100% rally off the lows by rejuvenating subscriber growth and rolling out plans to launch advertising on its platform for the first time. Still, that stock is down more than 50% from the bubble peak in 2021.

• Today: Procter & Gamble, Netflix
• Friday: Investor, Sandvik, Ericsson, Schlumberger

Economic calendar highlights for today (times GMT)

• 0900 – Norway Rate decision
• 1330 – US Dec Housing Starts and Building Permits
• 1330 – US Initial Jobless Claims
• 1330 – Philadelphia Fed Business Outlook
• 1330 – Canada Dec. Terante/National Bank Home Price Index
• 1530 – EIA Natural Gas Storage Change
• 1600 – EIA's Weekly Crude and Fuel Stock Report (delayed)
• 1815 – US Fed Vice Chair Brainard to speak on economic outlook
• 2330 – Japan Dec. National CPI
• 0001 – UK Jan. GfK Consumer Confidence