Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Financial Markets Today: Quick Take – June 9, 2022
Saxo Strategy Team
Summary: Markets traded sideways to lower as global energy prices surged to new highs for the cycle, and with most global energy imports priced in US dollar, the elevated level of the US dollar means that crude oil prices are hitting records in local currency terms. Today features an important ECB meeting, with market participants watching for guidance on the size of the July rate hike Lagarde and company have flagged, as well as the new staff projections on inflation that may hint at the coming steepness of the impending rate tightening cycle.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equity volatility is still coming down with VIX setting a new low for the current short-term cycle. Nasdaq 100 futures are trading well in the consolidation range that has been established over the past 8 trading sessions with the index futures trading around the 12,610 level this morning in European trading hours. The key market event today is the ECB rate decision, which is expected to be unchanged, where the focus is on whether the ECB is warming to significant rate hikes during the rest of the year to combat inflationary pressures.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
The indices ended the morning sessions with moderate losses. After impressive gains yesterday in Hong Kong and ADR trading in New York, Chinese technology gave back some of the gains. Hang Seng TECH Index (HSTECH.I) was down 0.8%. Bilibili (09626) fell 1.5% ahead of reporting results later today. In May, China’s exports grew better-than-expectations at 16.9% YoY and imports increased 4.1% YoY in USD terms. Trade surplus increased by 82.3% to USD78.8 billion.USDJPY and JPY crosses
The yen accelerated lower yesterday after comments from the Bank of Japan Governor Kuroda continue to emphasize his commitment to maintaining the current monetary policy course under which the BoJ caps the 10-year JGB yield at 0.25%. He brushed aside JPY volatility concerns, saying that these are for the Ministry of Finance to address and maintained that the BoJ’s monetary easing has been “half, not fully successful”. EURJPY rushed to fresh multi-year highs above 144.00 as EU yields rose to new highs in the wake of an upward revision of Eurozone Q1 GDP and ahead of today’s ECB meeting (more below). US yields are also higher, but still solidly below the cycle highs, but USDJPY rose nearly to the early 2000’s high water mark of 135.00. Any continuation of the current scale of JPY volatility could elicit an MoF verbal response that jolts the market.
EURUSD and EUR crosses
It is an important day for the euro as the ECB is set to deliver a new set of staff projections on GDP and inflation that will allow market participants to infer guidance on the pace and persistence of the coming rate tightening cycle from the central bank. The ECB has flagged that it is set to wind down its QE programme this month and to lift rates in July (likely by 25 basis points as discussed in the ECB preview below, but market is about 50/50 on a larger hike), but the market will scrutinize guidance on the size of rate hikes to follow the lift-off and in the staff projections, any notable upgrades to 2023 and especially 2024 inflation forecasts, which might indicate a more sustained and steeper tightening cycle is anticipated. EU yields at the front end of the yield curve are trading at cycle highs ahead of today’s meeting, with the market pricing some 125 basis points of tightening through the December meeting. EURUSD has coiled in the 1.0625-1.787 range for more than two weeks ahead of this meeting.
Crude oil (OILUKAUG22 & OILUSJUL22)
Crude oil continued higher after EIA’s weekly inventory report showed that stockpiles of crude and gasoline continue to shrink, while OPEC Sec-Gen said most members are ‘maxed out’. Crude oil inventories at Cushing, the delivery hub for WTI crude oil futures dropped to a three-month low while gasoline inventories are at their lowest seasonal level since 2014, just ahead of the peak summer demand season. Despite record high prices at the pumps, US motorists are showing no signs of leaving their cars in the garage with demand rising above 9 million barrels a day for the first time this year. China’s reopening, meanwhile, has received a small setback as Shanghai will lock down a district on Saturday for mass testing. The bullish technical outlook for both Brent and WTI shows the risk of a revisit towards the early March highs at $139 and $130.50 respectively.
Gold (XAUUSD)
Gold is edging higher after with growth concerns while rising US treasury yields have been offset by slowing dollar momentum. Earlier in the week the World Bank cut its forecast for global growth and a FED GDP tracker showed the US economy could be on the brink of recession. Leveraged traders in futures and investors in ETF’s are currently showing no clear conviction with positions in both having been rangebound for the past month. For that to change we need to see a clear break above $1870, the key level of resistance ahead of Friday’s key US CPI print. Silver (XAGUSD) is holding above its 21-day moving average at $21.82 but has yet to find a bid strong enough to challenge resistance in the $21.50 area.
US natural gas (NATGASUSJUL22)
US natural gas trades down by 14.5% from yesterday’s 13-year high after a fire broke out at Freeport LNG’s terminal in Quintana, Texas. A spokesperson said the terminal, one of seven US facilities exporting gas to overseas markets, will remain closed for at least three weeks, thereby halting roughly 16% of total US LNG export capacity. Dutch TTF benchmark gas (TTFMN2) trades up 12% in early trading with Europe receiving around 75% of those shipments. US gas stockpiles remain around 13% below normal levels with limited production growth at a time of surging export demand. The EIA publishes its weekly storage change later today
US Treasuries (TLT, IEF)
Yields rose modestly as energy prices galloped to a new cycle high, with the US 10-year benchmark trading above 3.00%, but still not posting a new highs this week, much less trading anywhere near the 3.2% high water mark from early May (which in turn is just shy of the late 2018 cycle high of 3.26%), while bond yields nearly everywhere else in DM (Japan excepted, naturally) have traded to new cycle highs recently. Demand at yesterday’s 10-year treasury auction was tepid. One of the next important event risks for the treasury market is today’s 30-year T-bond auction, followed by tomorrow’s US May CPI release.
What is going on?
ECB monetary policy meeting and new forecasts today
Expect the ECB to announce an end to its bond buying program. This will open the door to an interest hike in July – the first time since 2011. While pressure is building to speed up the monetary policy tightening, we believe the ECB will favor a safe option next month – meaning a 25-basis point interest hike. New forecasts will be released too. Expect a clear downward revision to GDP growth and core inflation above the target longer out. The next statistic to look at closely will be the first estimate of the June eurozone HICP inflation on July 1. This will be painful. There will certainly be discussions about the creation of a facility to manage sovereign spreads too. This is a needed tool if the ECB wants to avoid financial fragmentation and be free to be more aggressive in tightening monetary policy (see our ECB review).Credit Suisse is in focus the day after its profit warning
Credit Suisse issued a profit warning yesterday as capital is eroding due to losses from the hedge fund blowup of Archegos and the collapse of its supply chain partner Greenshill Capital. The Swiss bank says it will cut the number of employees, but the bank is also blaming the geopolitical situation and significant monetary tightening on its problems. A Swiss blog Inside Paradeplatz says according to one insider that State Street might be in play for a takeover.Meta halts development of smartwatch with two cameras
This is another sign that technology companies are focusing on costs and dropping products that are not part of the core business. The smartwatch market is already quite competitive with Apple and Garmin having large market share.
Exxon Mobil hits new all-time high
The shares hit a new all-time high if one does not adjust for splits or other corporate actions. The US-based oil and gas giant has hit a market value of $440.6bn and $484.4bn including net debt reclaiming the energy sector’s importance in financial markets. Analysts expect free cash flow at $45.4bn this year translating into a roughly 9-10% free cash flow yield.The UK construction sector is still in expansion. But risks are tilted to the upside
The PMI construction was out at 56.4 in May, slightly below expectations of 56.6 and a previous reading of 58.2. This is the slowest increase since January. The main point of worry is the stagnation in residential homebuilding, resulting mostly from higher cost of living and interest rates which become a strong constraint on demand. Expect further slowdown in the near term.What are we watching next?
Ongoing JPY volatility as Jim O’Neill says a further yen weakening could lead to a financial crisis
Jim O’Neill, famed former Goldman Sach Asset Management head, said that “if you told me that yen [USDJPY] hits 150, this could be a rerun of the Asian Financial Crisis.” He suggests that further JPY weakening ratchets up the pressure on China “which might have the influence to force Japan to change its policy.” and that it was China that was partly responsible for bailing out Asia during the late 1990’s crisis by “signaling to the US Treasury to reverse its strong dollar policy or China would devalue its currency”. O’Neill says that he can’t see Japan sticking with the YCC policy, even if “it will be painful for financial markets [for the BoJ to end the policy], but it’s the right thing to do.”The recent rise in Chinese equities may have been a tradable bear market rally that may soon wane
The prospect of concluding cybersecurity investigations into Didi and other tech companies, the approval of second batch of online games, and U.S. Treasury Secretary Yellen’s repeated signals, including the latest one from yesterday, to reduce or rollback tariffs on some goods from China to lower inflation in the U.S., contributed to this week’s strong performance in Chinese stocks, in particular tech stocks listed overseas. It is important to note that the slope to climb is still steep for the Chinese economy and valuation of Chinese stocks in general is inexpensive but not cheap once we take into consideration of the plausibility of earnings downward revisions and misses. Common prosperity and stability remain key focus of the Chinese leadership, instead of economic growth.
Earnings Watch
Today’s focus is on DocuSign, Vail Resorts, and NIO. DocuSign is still sporting a high equity valuation with revenue growth coming down, so the pressure is on to show improving profitability to justify the valuation. Vail Resorts is part of the travel segment and thus the reopening trade. Analysts expect revenue growth of 30% y/y as consumers are coming back to leisure and travelling; expectations show that Vail Resorts will hit a new all-time high on revenue in FY22 (ending 31 July). NIO is reporting Q1 earnings today ahead of the US market open, but with figures being delayed by over two months relative to the reporting period we expect a muted reaction.
- Today: Acciona Energias Renovables, Nuance Communications, Dollarama, Brown-Forman, Five Below, Inditex, Campbell Soup, Aveva Group, Full Truck Alliance
- Thursday: Chow Tai Fook Jewellery, Sekisui House, China Resources Power, Saputo, DocuSign, Vail Resorts, NIO, Bilibili
Economic calendar highlights for today (times GMT)
- 1100 – Mexico May CPI
- 1145 – ECB Rate Announcement
- 1230 – ECB President Lagarde Press Conference
- 1230 – US Weekly Initial Jobless Claims
- 1300 – Poland Central Bank Governor Glapinksi holds news conference
- 1400 – Canada Bank of Canada issues Financial System Review
- 1430 – EIA's Natural Gas Storage Change
- 1500 – Bank of Canada Governor Macklem press conference
- 1700 – US 30-year T-Bond Auction
- 2245 – New Zealand May Card Spending
- 0130 – China May PPI/CPI
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