Financial Markets Today: Quick Take – January 27, 2023

What is our trading focus?

Equities: US equity hits new highs since early December, but weak Intel weighs after hours

The market rallied again yesterday, closing at new high since early December, with a broad advance across most sectors. The rally took the S&P to within hailing distance of the next key resistance area, the range highs into 4100, while the tech-heavy Nasdaq 100 closed just a hair above its 200-day moving average on the cash index and north of 12,000, the highest close since last September. A weak earnings report from Intel (more below) marred sentiment in late trading as the chip giant’s shares were marked sharply lower.

Hong Kong’s Hang Seng (HIF3) consolidated, holding onto weekly gainsy

Hang Seng Index fluctuated between modest gains and losses after yesterday’s strong post-holiday rally and ahead of the resumption of trading in the mainland bourses on Monday. High-frequency data on multi-mode traveling activity and holiday consumption continued from various sources continued to be positive and pointed to a solid recovery. Chinese developers and Macao casino operators were among the top gainers. Country Garden (02007), rising nearly 6%, was the best performer within the benchmark Hang Seng Index after the developer secured a 3-year bank loan.

FX: USD avoids further drop on strong US data

The latest weekly US jobless claims posted a new low for the cycle at 186k and since May of last year, with the first Q4 GDP estimate marginally stronger than expected. This helped US treasury yields rebound slightly and generally helped the USD avoid a further drop, although volatility in US yields has eased. EURUSD can’t seem to decide whether to take out 1.0900 after having criss-crossed the level for several days running, just as GBPUSD has been unable to take 1.2400 and the pivot high of 1.2446 from December after several over the last seven trading days, and USDJPY has meandered without conviction in the 130.00 area, with new lows in US long yields or some further indication of policy action from the Bank of Japan or both likely needed to post new lows. A dip back below 129.70 was seen in early Asia as Tokyo CPI for January came in above expectations. The next event risk for USD traders is today’s December PCE inflation data release ahead of the Fed meeting next week where the broad consensus is still for a step down to a 25bps rate hike. 

Crude oil (CLG3 & LCOH3) prices range-bound

Crude oil trades near unchanged on the week with an underlying positive sentiment, as China demand optimism offsetting slowdown and recession risks elsewhere. Trafigura Group sees “a lot of upside” for oil markets as pent-up demand is unleashed, especially as Chinese consumption rebounds after the nation dismantled its strict Covid Zero policy. The market is also focusing on a potential risk to supply from EU sanctions on Russian fuel shipments from February 5, and a plan under consideration to introduce a price cap on diesel at $100 a barrel against a current market price of $130. Brent is currently trading within nine-dollar wide up trending channel within a medium-term downtrend, both offering firm resistance in the $89-$90 area. Ahead of channel support at $80.35 some support is likely to be provided by the 21- and 50-day moving averages, currently around $83.50. 

Gold (XAUUSD) rejected at $1950 

Gold is heading for its first, albeit small, weekly loss in six weeks and following Thursday’s rejection at $1950 an upbeat US GDP report for Q4 and a still-low initial claims weekly print helped send yields and the dollar a tad higher, thereby reducing the appeal. Given gold’s steep ascent during the past two months a period of consolidation is long overdue and whether it’s consolidation or correction will depend on the yellow metals ability to hold trendline and the 21-day moving average both currently around $1890. Watching ETF holdings which reached an 11-week high following a modest increase, and US breakeven and inflation swaps which have started to move higher, thereby challenging the markets outlook for sub-2.5% inflation. Focus now turns to next week's FOMC and in the meantime the dollar remains the key source of short-term trading strategies.

Yields on US Treasuries (TLT:Xmas, IEF:xnas, SHY:xnas) rose on stronger-than-expected economic data 

U.S. Treasures sold off after the release of overall stronger-than-expected economic headlines. Real GDP grew at 2.9% annualized in Q4, faster than the 2.6% median forecast though more than half of the increase came from a rise in inventories. Initial jobless claims surprisingly fell further to 186K the lowest print since last May. New home sales rose 2.3% sequentially against expectations for a decline. Durable goods orders grew 5.6% M/M while the median forecast expected a decline. The 7-year auction had strong demand with a strong bid-to-cover ratio of 2.69 times and was awarded 2bps richer than the market level at the time of the auction. Yields on the 2-year notes settled 6bps higher at 4.18% and the 10-year bounced back to 3.49% on the close and rose to 3.52% into early European hours

What is going on?

IMF urges the Bank of Japan to consider policy flexibility 

The BOJ should consider increasing flexibility in long-term yields, the IMF said, highlighting that the risks to inflation are tilted to the upside with exceptionally high uncertainty. Options include raising its 10-year yield target, widening the trading band, switching back to a quantity goal for bond buying and aiming at a shorter-maturity yield. Japan needs to see a 3% across-the-board rise in nominal wages to anchor CPI above the BOJ's 2% target, fund Deputy MD Gita Gopinath said.

Intel sent nearly 10% lower after hours on revenue miss, dire forecast

The chip giant reported weaker than expected results for Q4, as it continues to deal with the post-pandemic slump in demand after the work-from-home and IT infrastructure upgrade wave boosted sales the prior two years. Even worse, the company posted a revenue forecast for the current quarter at $10.5 to $11.5 billion, far short of consensus estimates of $14 billion (the year ago quarter was north of $18 billion). In part, the weak estimate is due to customers having stockpiled significant inventories that must be worked through before demand for components rises again. The company predicted an earnings loss of 15 cents/share for the upcoming quarter as well, the first such prediction in decades.

Indian stocks crater further on Hindenburg short-seller report on Adani.

The network of Adani companies saw their prices fall steeply again, after Indian markets were closed yesterday, with Adani Enterprises down over 8% in late trading overnight. Adani is said to be preparing a detailed response to the short-selling outfit’s allegations.

Visa and Mastercard report slower rise in card spending than expected

Visa earnings beat expectations, but the company only reported a +1.7% rise for the quarter in card spending, some 5% below expectations. Mastercard reported a growth of 11% on the quarter, but that was still below expectations. The companies report that customers are shifting to cheaper brands for some of their spending. Mastercard closed 0.4% higher, having reported before the market open, while Visa reported after hours.

EU considering $100 cap on Russian diesel

The European Union is floating a plan to cap the price of Russian diesel at $100 a barrel from February 5 (the same date as the EU will ban almost all imports of refined Russian products). For reference, diesel futures are currently trading at $130/barrel, as they usually trade at a premium to crude. A lower $45 threshold would be set for discounted fuels like fuel oil, but member states will need to unanimously agree to the final figures. The objective remains to keep the Russian flows coming but cut Moscow’s revenues.

Japan's Tokyo CPI beats expectations

Tokyo CPI for January came in above expectations, with the headline rising to 4.4% YoY from a revised 3.9% YoY previously and estimate of 4.0% YoY. The core measure rose to 4.3% YoY from 3.9% YoY while the core-core measure was also higher at 3.0% YoY from 2.7% YoY in December. This makes way from another beat in the overall CPI for January as well and saw USDJPY down by about 50pips in response to 129.70 after a modest rise in the US session as US yields rose. Asia’s inflation surge from Australia to New Zealand to Japan is raising concerns on how China’s reopening could potentially fuel another leg of price pressures globally as commodity prices surge.

Iron ore price hits new 2022 high, on Fortescue seeing China demand pick up in 1H2023

In thin trade with China’s market still on public holidays, iron ore (SCOA), the key steel making ingredient, hit a new six month high price today, $126.20 a ton, not only driven by expectations China will increase buying after the Lunar new year holiday, but also as Australia’s large pure play iron ore company, Fortescue sees stronger sales in the first half of 2023. Fortescue reported China increased buying of port side iron ore in the prior quarter to 4.0mt, and it sees sales in the first half increasing to 9.3mt. All in all, iron ore supply is still lower than it was a year ago, and demand is increasing which underpins price supports. The iron ore price is now up 67% from its low, which has boosted optimism that iron ore companies will guide for stronger outlooks.

Australia, an investment proxy for China reopening sees biggest monthly rally since 2020

Australia’s ASX200 (ASXSP200.I) has recorded its biggest monthly rally since November 2020, up 6.5% so far with Australia being considered an investment proxy for China's reopening. We see Australian investment instruments and exchange-traded funds drawing flows in 2023 as China’s economy emerges from covid19. Australia’s equity market, considered a dividend and commodity play, is heavily made up of financial and materials companies. Mining giant BHP Group expects 17% dividend growth, with iron ore miners forecasting higher demand for high-grade iron ore from China, which supports higher earnings. Australian insurers, banks and financials will likely benefit from the RBA’s rate hikes with QBE and Westpac as examples, see 60% and 40% profit boosts amid higher earnings on assets.

What are we watching next?

Lower output in the Black Sea region reducing world supplies key crops

Ukraine’s corn and wheat production is set to fall for a second year in 2023, with corn output not expected to exceed 18 million tons and wheat production 16 million tons as farmers reduce planting due to the war, a grain sector group said on Thursday. Ukraine’s agriculture minister said last month that 2022 corn production could fall to 22-23 million tons from 41.9 million tons in 2021. Wheat production is estimated to have fallen to about 20 million tons last year. In addition, the USDA said on Thursday it saw Russia’s official wheat crop estimate as “not feasible”. Because of disrupted wheat supplies and strong demand, Thai rice, a benchmark for Asia, has soared to the highest in almost two years. Rice is a staple for half the world, and while wheat soared to a record in March last year, rice was relatively subdued for most of 2022, constraining food inflation in Asia.

US December PCE Inflation is up today

While focus has pulled away from inflation a bit recently on the significant deceleration in its trajectory, the market may be somewhat poorly prepared for a hotter than expected number today. The headline figure is expected at 0.0% MoM and +5.0% YoY vs. +5.5% YoY in November. The core is expected in at +0.3% MoM and +4.4% YoY vs. +4.7% YoY in November.

Earnings to watch

Earnings reports are few and far between on a Friday, but a couple of interesting names are on the docket today, including Chevron, which has declared it will buy back $75 billion of its own stock and increase its dividend, and major US consumer products company Colgate Palmolive.  Next week’s sports an ongoing big blast of earnings reports, which will include most of the remaining mega-caps after Microsoft this week (Apple, Alphabet and Amazon reporting next Thursday).

• Today: Fanuc, Chevron, American Express, Colgate-Palmolive

Economic calendar highlights for today (times GMT)

1330 – US Dec. PCE Inflation
1500 – US Dec. Pending Home Sales
1500 – US Jan. Final University of Michigan Confidence
1600 – US Jan. Kansas City Fed Services Survey