Summary: Equities rebounded sharply yesterday, only to get partially knocked back again after hours as Amazon disappointed and Apple announced massive headwinds from supply chain constraints in China. The US dollar rally consolidated on the positive shift in sentiment and gold posted a strong bounce that has taken it back above one key support broken on the way down. Today sees the release of US March PCE inflation data, one of the last major data releases ahead of the FOMC meeting next Wednesday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - the rebound trade in Nasdaq 100 futures is still hanging in there, but we would like to see the index futures close above 13,500 in today’s session to be confident it has legs into next week. The negative outlook from Apple, Amazon, and from Caterpillar on China should dampen sentiment in equities and there is a real risk that risk-off could quickly kick in today with yesterday’s open at 13,191 being the key level to watch on the downside. Another event that could spook the market is the March PCE deflator (the Fed’s preferred measure of inflation) as higher inflationary pressures could tighten financial conditions even further.
Hang Seng TECH Index (HSTECH.I) surged 6% on a Bloomberg story reporting negotiation between the Chinese and American regulators on arranging the latter’s inspectors to do on-site inspection in China on the Chinese companies that are listed in the U.S. Alibaba (09988), Meituan (03690), Tencent (00700), JD.COM (09618) gained 6.6% to 9%. The Hang Seng Index (HSI.I) rose 2%. CSI300 (000300.I) rose 1%. After being dragged down by the weakness in the Japanese Yen yesterday to as much as to 6.675, offshore renminbi (CNH) recovered to 6.65 at the time of writing.
Stoxx 50 (EU50.I) - Stoxx 50 futures are trading around the 3,750 level getting ready for a retry of moving above the 50-day moving average, which sits around the 3,795 level this morning. More pressures on energy and food prices are impacting consumer confidence in the region and risk of a further energy shock if Russia cuts supply of oil and gas is still a major tail risk for European equities.
USDJPY – the aggravated move higher in USDJPY on the back of the Bank of Japan insisting on maintaining its yield-curve-control policy at its Thursday meeting peaked at 131.25 late yesterday. The price action has retreated since then, and one wonders how far the move can extend to the upside when global bond yields – a key indicator for JPY since Japanese yields “can’t” move due to BoJ policy – have yet to post a new high for the cycle, even if they have bounced back from recent lows. The US 10-year yield should remain a key coincident indicator for JPY traders, having recently peaked just shy of 3.0%.
USDCNH and CNHJPY – the USDCNH rate posted a new high overnight, a bit remarkable given that the USD was trading far off the highs elsewhere at the time. The pair managed a high above 6.69 before retreating about a percent as of this writing. The Chinese Politburo promised more economic stimulus in a statement after a meeting overnight. The CNHJPY exchange rate is worth a look as the huge rally in USDCNH that began less than two weeks ago came just as CNHJPY was reaching above the 20.00 level and therefore matching the highest levels from 2015, shortly before China significantly shifted its exchange rate regime and triggered a notable CNH weakening in the context of USD strength and pronounced JPY weakness.
Gold (XAUUSD) trades back above $1900 with focus on a band of resistance between $1915 and $1920. Despite seeing the dollar at multi-year highs, it managed to find support below $1880 driven by the US GDP surprise which showed the first quarterly contraction since 2020. In addition, silver has through its link to industrial metals found some support after China’s Politburo pledged to support and boost the economy. Against the dollar, gold is heading for a small monthly loss while it has stormed higher against others, most notably the euro (+6.4%) and Japanese yen (+5.5%), thereby highlighting its diversification credentials during a troubled month for both stocks and bonds.
Crude oil (OILUKJUN22 & OILUSJUN22) added to yesterday’s gains overnight after China’s Politburo faced with a deteriorating economic situation pledged to meet economic targets, fueling speculation for more stimulus supporting demand for commodities such as crude oil and industrial metals. In addition, a potential EU ban on Russian crude oil imports and a growing diesel supply crunch both provided some additional support. Yesterday, the May NY Harbor Diesel contract (HOK2) jumped to a record as shorts scrambled to cover positions ahead of today’s expiry. Diesel has become the world’s most in-demand fuel since Russia’s invasion of Ukraine as buyers compete for supplies as fast as refiners on the U.S. Gulf Coast can make them. As a result, WTI led the crude oil rally with the discount to Brent narrowing to a November low. Brent resistance at $110/b.
What is going on?
First estimate of US Q1 GDP shows contraction. The first Q1 GDP estimate came in at –1.4% annualized versus +1.0% expected, while the GDP price index rose at an 8.0% annualized rate versus 7.2% expected. As an enormous inventory build in Q4 took US growth to an unsustainable growth rate of 6.9% annualized, a mean reversion in inventories was a key driver of the weak figure.
Apple faces China lockdown constraints. Shares were down a couple of percent in extended trading driven by the more uncertain outlook on China’s lockdowns, while previous quarter’s figures were mostly in line with estimates. The company said that global supply chains could cost Apple $4-8bn in the current fiscal quarter due to supply constraints.
Amazon investment spree bites. Amazon shares were down 9% in extended trading as Q1 operating profits disappointed at $3.7bn vs est. $5.4bn as rising input costs are pressuring retailers such as Amazon. AWS was of course solid as expected given the results from Microsoft and Alphabet. But the kicker for investors was the Q2 guidance on operating profits at $-1bn to $3bn vs est. $6.8bn. Amazon said that it has too much space and people in a sign that it overinvested during the pandemic which we also highlighted in our research notes three months ago on Amazon around its Q4 earnings release.
Caterpillar sees Chinese demand below 2019. The world’s largest maker of construction machinery delivered Q1 revenue in line with estimates and better than expected EPS at $2.88 vs est. $2.61. Caterpillar is still not providing an outlook but is looking into reinstating guidance going forward as visibility has increased. The company also said that Chinese demand is slightly lower than 2019 and construction demand weakened in Q1.
China rolled out another round of piecemeal supporting measures to the economy. The PBoC launches a relending program to provide RMB 200 billion to 21 banks to fund the latter’s loans to innovative medium and small technology companies. The China Securities Depository and Clearing Corp. cut clearing fees by half to 0.01% for transactions in the Shanghai and Shenzhen exchanges. China also suspends charging custom duty on coal import from May 1, 2022, to March 31 next year aiming at easing feedstock costs of electricity generation utilities.
Sweden’s Riksbank hikes 25 basis points as many expected, provides hawkish guidance. Most observers were looking for the rate hike, but the forecast of two to three more rate hikes this year and a policy rate forecast to reach “somewhat below 2%” in three years’ time, together with plans to halt bill purchases and reduce the balance sheet starting in Q3 was a hawkish surprise. Swedish 2-year rates jumped nearly 15 basis points in the wake of the decision, and the Swedish krona rose sharply, but oddly retraced much of its intraday gains.
What are we watching next?
US Mar. PCE Inflation data today is one of last big inputs ahead of next Wednesday’s FOMC meeting. The PCE inflation data is the Fed’s preferred measure of inflation and comes after the BLS CPI data showed a rise of 8.5% YoY in March. The headline PCE Deflator is expected at +0.9% MoM and +6.9% YoY (after +6.4% in Feb.), with the core expected at +0.3%/+5.3% (vs. +5.4% YoY in Feb.) We also get a look at the final April US University of Michigan sentiment survey and, importantly, inflation expectations, which are one of the inputs into Fed inflation models. The initial inflation expectations figures for April showed longer term inflation expectations remaining anchored, if near long term highs around 3.0%, while the short-term year-ahead inflation expectations have spiked to 5.4%, the highest level since the early 1980’s.
Possibility of Japan intervention is increasing. As the pressure on the yen mounts and USDJPY broke above 131, a Japanese finance ministry official said recent forex moves warrant extreme concern. With verbal intervention becoming more frequent and harsh, the pressure on the currency is likely to stay in the wake of the yield differentials, but the possibility of an actual intervention is increasing. Either way, volatility in the Japanese yen is likely to stay high.
Earnings Watch. Today’s focus is on the two US oil and gas majors Exxon Mobil and Chevron. European oil and gas majors have failed to indicate higher capital expenditures despite an energy crisis and high energy prices potentially because of lack of projects in Europe. The US has more oil and gas reserves, and the question is whether US oil and gas majors are more keen to invest in oil and gas.
Economic calendar highlights for today (times GMT)
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Head of Fixed Income Strategy
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Head of Commodity Strategy