Global Market Quick Take: Europe – April 24, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Headed lower inside April’s trading range

US equities have headed lower since the Tesla earnings disappointed the market last week and this morning S&P 500 futures are trading around the 4,137 level, which is still well within the established trading range for April. The key event in equities this week is the Q1 earnings season with major earnings expected from US technology companies Alphabet, Microsoft, Meta, and Amazon. The first test this week on earnings is already today with Coca-Cola reporting Q1 earnings ahead of the market open.

Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index dropped below 20,000

Hang Seng Index traded weak across the board, falling over 1% and going below the 20000 level. Tencent (00700:xhkg) shed 2.4% and Alibaba (09988:xhkg) slid around 2%. Banking, property, and Macao casino operator names were among the laggards. Digital healthcare platform name and selective auto stocks gained. Sentiment has been under pressure since last Friday following a Bloomberg report that the U.S. is planning to impose wider than previously reported restrictions on American businesses to invest in semiconductors, AI, and quantum computing in China. CSI300 retreated 0.8% in early Asia afternoon as the weakness in semiconductors, tourism, lodging, and precious metal names more than offset the gains in media and online gaming.

FX: Commodity FX in the dumps, JPY eyes first Ueda BoJ meeting

The US dollar was mixed and didn’t cut much of a profile last week, where the biggest movers where commodity related currencies, including the Australian dollar, which limped lower to start the week as key commodity prices like copper continued their slide. AUDUSD traded below 0.6678 for the first time in over a week, with more range to work with down to the early March pivot low at 0.6565. Similarly, CAD and NOK traded softer in another drop in oil prices, with USDCAD firming up above 1.3550 Friday and testing a more than three-week high. The trades slightly weaker after a bump in global yields Friday and as the market awaits the first Bank of Japan meeting with new governor Kazuo Ueda at the helm on Friday.

Crude oil trades lower on falling refinery margins

Crude oil prices traded lower in Asia overnight on a combination of technical factors, such as ongoing attempts to close the gaps down to $80 in Brent and $75.70 in WTI as well as long-liquidation from funds that bought futures contracts following the April 3 OPEC+ production cut announcement. The short-term fundamental outlook also continues to deteriorate with recession worries more than offsetting supply cuts as refinery margins remain under pressure across all the major trading hubs sending a warning sign about demand ahead of the peak consumption season. The drop in refinery margins can partly be explained by record production from top refiners in China and India taking advantage of cheap Russian oil, as well as increased refinery activity in the Middle East. Over time, rising refinery capacity leading to lower margins will be good for consumers

Gold and silver consolidating continues

Precious metals remain in consolidation mode ahead of the latest US figures on growth, inflation and wages this week as the market fears they could support further rate hikes from the FOMC. In gold the risk remains of a a deeper correction towards $1957 - the 38.2% retracement of the banking-crisis-led runup in prices while silver will likely look for support around $24.50, an area that offered resistance when during silvers failed rally back in January and early February. Funds cut their gold length in COMEX futures for a second week but again by a relatively small 3.3k lots to 134k lots. The net selling was primarily driven by a 23% increase in the gross short following two failed attempts to extend the recent rally in gold beyond $2050.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields rebound on firm US PMI’s

US treasury yields rose all along the curve in the wake of the firmer than expected US S&P Global preliminary April PMI, with the 2-year yield closing over 5 basis points higher from the day’s lows and near 4.17% as the market leans for a rate hike at next Wednesday’s FOMC meeting. The action was echoed in the 10-year benchmark yields as well the intraday low of 3.50% provided resistance and the strong data saw the benchmark jumping back above 3.55%.

What is going on?

The Eurozone services economy is doing quite well

The Eurozone April flash PMI were a positive surprise. The PMI Services showed an unexpected gain, coming out at 56.6 when a fall to 54.5 had been forecast. In France, it was out at a stunning 56.3 and in Germany at 55.7. This shows strong resilience of the services sector. This matters a lot from a macroeconomic viewpoint because the services account for 73 % of the eurozone economy. On the downside, the EZ manufacturing sector is still lagging with a print at 45.5. Overall, this indicates a quarterly GDP growth of about 0.5 % after 0.3 % in Q1. The EZ economy is clearly doing well. There is still no recession in sight.

US asks South Korea not to boost memory chip sales to China if Micron banned

According to the FT, the US asked major South Korean memory chip manufacturers Samsung and SK Hynix to hold back on boosting sales to China if Bejing were to ban US memory chip maker Micron from selling its products there. China has mobilized a national security review of Micron, with no announcement yet of its results.

Bill Gross bets on US regional banks

Bill Gross, the former CIO of PIMCO, says that he is bullish on some segments of the US regional banks after the banking crisis citing that many smaller banks have historically delivered 10% return on equity and are now trading at 60% of tangible book value.

COT on HG Copper explains some of the current (weak) price action

According to the latest Commitments of Traders report covering the week to April 18, the copper long jumped 230% to 19.8k lots in response to the failed, as it turned out, breakout that occurred during the reporting week. It highlights a market where traders are worried about missing the upside once it materializes, but also how failure turns to immediate long liquidation and with that fresh price weakness as seen last Thursday and especially Friday. For now, the metal remains rangebound having returned to the center of its current $3.8 to $4.2 trading range. However, with global visible exchange monitored stocks at the lowest seasonal level since 2008, the downside risks remain limited.

S&P Global US PMI data stronger than expectations

The S&P Global US Manufacturing PMI rose to 50.4, back to the expansion territory in April, from 49.2 in March and above the 49.0 expected. The S&P Global US Services PMI also came in stronger than the consensus estimate, bouncing to 53.7 in April, above 52.6 in March and beating the consensus 51.5. The composite measure was 53.5 in April, versus 52.3 in March and 51.2 expected. According to S&P Global Market Intelligence, new orders jumped to the highest rate in 11 months and output prices rose at the fastest rate in seven months.

The Biden administration is taking a more expansive approach in curbing US investments in Chinese tech industries

Bloomberg reports that US President Biden is going to issue an executive order in the coming weeks to curb American businesses from investing in China’s semiconductors, AI, and quantum computing industries. The ban, according to Bloomberg, will be bigger than what the other media previously reported. In February 2023, Politico reported that the Biden administration was scaling back the scope of the contemplated restrictions to new investment in China’s semiconductors industry only. Meanwhile, US Treasury Secretary Yellen took on a more hawkish tone saying that “even though these policies [against China] may have economic impacts, they’re driven by straightforward national security considerations, and we will not compromise on these concerns even when they make those tradeoffs with our economic interests”.

BOJ Ueda reiterates the continuation of YCC ahead of his first policy meeting

BOJ Governor Ueda reiterated on Monday his commitment to keep the loose monetary policy for now and hinted that there would be no change to the YCC policy this Friday when the central bank concludes two-day monetary policy meeting under his reign. Many investors, as suggested in various surveys, are expecting no change to policies, including the yield curve control (YCC) policy at this meeting. Investors are expecting some sort of changes to the YCC policy later this year but are divided in the forms of policy changes ranging from widening the current +/- 50bps band, shortening the tenor of the Japanese Government bond (JGB) yield that is targeted from currently 10-year to the 5-year or even the 2-year JGB, or even completely abolishing it. A change to the YCC policy is likely to make the Yen stronger.

Chile announces plans to gain controlling stake in future lithium projects

Chile’s president Boric in a television address last week said he would create a National Lithium Company that would participate in the whole production cycle. While the proposal fell short of a full nationalisation in the world’s second largest producer of the metal essential in electric batteries, to boost its economy and protect its environment, it nevertheless sent shares of major Chilean Lithium companies tumbling on Friday with Chilean Sociedad Quimica y Minera (SQM) falling 18.6% and Albemarle (ALB) down 10% both hitting fresh one-year lows. Chile holds the world’s largest Lithium and copper reserves, and the announcement is likely to make it more challenging and harder to invest in Chile at a time when demand for green transformation metals look set to accelerate in the coming years.

What are we watching next?

US debt ceiling concerns intensifying in the background

Lower than expected incoming tax revenues are raising concerns that the debt ceiling issue could come to a head as early as early June rather than in late July or August as originally anticipated. The political dysfunction in US Congress, particularly House Republicans that are sending all of the wrong signals on the willingness to accept default if their demands aren’t met. Prices for Credit Default Swaps CDS to insure against US treasury default for the next 1-year rose to a record level of 130 basis points last week, with 24 basis points of that rise coming on Friday alone. Four-week T-bill yields, which mature before the timing of a feared US default scenario, have dropped to 3.25% even as the Fed’s policy rate band is 4-75-5.00%

Earnings to watch

The most important week during the earnings season is upon investors starting already today with Coca-Cola reporting Q1 earnings before the open. Analysts expect Coca-Cola to report Q1 revenue growth of 3% y/y and EPS of $0.65 up 1% y/y. First Republic Bank was in focus during the short-lived banking crisis and therefore there will be a lot of focus on its Q1 earnings today with analysts expressing gloomy estimates with net revenue and earnings severely down in the coming quarters. Later during the week, the key earnings are from the US technology majors such as Alphabet (Tue), Microsoft (Tue), Meta (Wed), and Amazon (Thu).

• Monday: Coca-Cola, Whirlpool, Cadence, First Republic Bank
• Tuesday: UPS, Danaher, PepsiCo, General Motors, Halliburton, Biogen, McDonald’s ADM, 3M, PulteGroup, GE, NextEra Energy, Chipotle Mexican Grill, Alphabet, Microsoft, Texas Instruments, Illumina
• Wednesday: Boeing, Meta, eBay, ServiceNow, Teradyne,
• Thursday: Linde, Caterpillar, Valero Energy, Honeywell, AbbVie, Merck, Newmont, Rockwell Automation, Mastercard, Eli Lilly, Mondelez, VeriSign, L3Harris Technologies, Intel, First Solar, Gilead Sciences, Amazon, Amgen
• Friday: Exxon Mobil, Colgate-Palmolive, Chevron

Economic calendar highlights for today (times GMT)

0800 – Germany Apr. IFO Business Climate

1230 – US Mar. Chicago Fed National Activity Index

1430 – US Apr. Dallas Fed Manufacturing Activity