Summary: US President Biden slapped sanctions on a pair of Russian banks, some political elites connected to Russian President Putin and on Russian sovereign debt, a move the market assessed as relatively measured as US equities pulled away from close to new cycle lows yesterday and closed only slightly below the opening level before edging a bit higher overnight. The UK and EU also announced sanctions that were seen as far from the most severe options.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - yesterday saw an extension of existing trends with bubble stocks and e-commerce leading the declines in the US technology sector while defence, financial trading and the commodity sector themes did well. Nasdaq 100 futures briefly touched new lows for the cycle before bouncing higher touching the 23.6% retracement level measured on the recent selloff from the peak on 2 February. If risk sentiment can instead despite sanction risks and potential escalations in the Ukraine conflict the 14,222 is the next level to watch on the upside while yesterday’s close at 13,862 is the key level on the downside.
Hong Kong & China A equities. Both Hang Sang Index and CSI 300 stabilized after the fall yesterday and gained 0.5%. Hang Seng Tech Index rose over 1.3%. Meituan rallied over 5%. Lenovo reported Q4 net income growth of 62%YoY, beating expectations and operating margin expansion across business segments. Galaxy Entertainment reported better than expected Q4 results and announced a special dividend. The Chinese Government’s reiteration of its determination to promote the farming industry and the wellbeing of people in the rural area boosted farming related shares in the A share market. According to Beke Research, banks in 87 out of the 103 cities covered in their survey lowered mortgage lending rates in February.
EURCHF and EURSEK – two barometers of risk sentiment in Europe as the market gauges the ongoing impact of the situation in Ukraine, with the EURSEK correcting sharply back lower yesterday as the market felt perhaps that the sanctions assessed by Western powers were fairly measures, while EURCHF rallied hard off the fresh new lows in a similar dynamic as the impetus to seek safe harbor in the Swiss franc eased. The next support area in EURSEK around 10.50-55 is technically important for EURSEK as a drop and close below there would suggest a technical reversal, while EURCHF needs to sustain a move well above 1.0500 to suggest a reversal.
AUDUSD – we continue to watch the AUD with interest as AUDUSD remains very firm within the range and seem unfazed by the recent geopolitical distractions, and yet has failed to power through the next key layer of resistance into 0.7250-0.7300+ that suggests a more significant breakout. Higher short yields in Australia continue to support the currency. The next RBA meeting is next Tuesday.
Crude oil (OILUSAPR22 & OILUKAPR22) traders remain on the edge of their seats with multiple uncertainties keeping the market guessing about the next move. After almost hitting 100 dollars per barrel on Tuesday, Brent trades softer today after the US penalties against Russia were milder than feared, and as Iran nuclear talks have reached the endgame. A deal could see the return of 1 million barrels of sorely needed oil per day which would go some way to offset several OPEC+ countries struggling to meet their quotas with many members already stymied by declining mature fields, unstable oil infrastructure, an exodus of industry investment or civil unrest. Resistance at $100 on Brent with support at $95 and $92.50.
Gold (XAUUSD) has settled into a wide 30-dollar range around $1900 with some consolidation expected following a strong run up in the price. From a technical perspective gold has reached a wall of resistance between $1917 and $1923, with a break above the latter leaving the road to $1960 open. Gold has so far this year shown its credential as a haven asset and a diversifier amid political tensions and turmoil across other asset classes and continued geopolitical and growth concerns into a rate hike cycle are likely to keep prices supported with recently established tactical longs looking for support between $1880 and $1865.
US Treasuries (IEF, TLT). Uncertainty in the bond market remains extremely elevated. As tensions in Ukraine escalate, the market is evaluating a rise in inflationary pressures and a slowdown in growth. Therefore, markets advance interest rate hikes, and now 35bps rate hikes are priced in future markets versus 25bps yesterday morning. That caused short-term yields to soar before the 2-year US Treasury auction, increasing investors’ appetite for such maturity. The auction was strong, leaving dealers with 15.6% of the issuance, the lowest on record. However. It failed to provide support for the front end, which continued to slide. Today’s focus is on the 5-year US Treasury auction.
European Sovereigns (VGEA, IGLT). As tensions in Ukraine escalate, and the west imposes sanctions on Russia, the market advances interest rate hikes expectations. Two hikes are now priced in by the end of the year. The Bund yield curve bear-flattened with 2-year yields rising by 10bps before paring half of the gains. In the UK, yields rose across the curve as the 10-year breakeven rate rose to the highest since 1996. Today’s focus is on Italy’s 1-year note sales and Germany’s 15-year Bund sale as well as ECB and BOE’s speakers.
Junk Bonds (HYG, JNK). It’s time to reconsider credit risk. Junk credits have overperformed investment-grade bonds since the beginning of the year. However, there are signs that credit risk might start to crumble. It has been more than a week that high yield bonds have not been priced in the primary market nor in the US, or in Europe. Leverage loan indexes are falling on both sides of the Atlantic and real rates continue to rise. At this point, it’s going to be challenging for the Federal Reserve not to spark a selloff in markets as it could be seen as too aggressive if it hikes by 50bps or not serious enough about inflation if it hikes only by 25bps.
What is going on?
US, UK and EU sanction Russia for recognizing breakaway Ukraine regions and moving Russian troops in. The sanctions were seen as relatively measured as they avoided sanctioning Putin personally and did not sanction the most significant Russian banks. The US also sanctioned “future purchases” of Russian sovereign debt. The UK made similar moves and the EU sanctioned hundreds of Russian parliamentarians, while German Chancellor Scholz halted any further progress on the approval for the Nord Stream 2 gas pipeline from Russia. A meeting possibly set to take place tomorrow between Russian foreign minister Lavrov and US Secretary of State Blinken was cancelled by Blinken. NATO Secretary General Stoltenberg and US President Biden continue to suggest that Russia intends a full-scale invasion of Ukraine.
US earnings recap. Home Depot posted strong revenue figures, but they were more driven by price gains than volume gains suggesting demand destruction is taking place at these current inflation levels. As a result, Home Depot saw lower than expected gross margin spooking investors sending the shares down 10%. The South American e-commerce retailer MercadoLibre posted strong Q4 revenue growth but saw significant negative impact of its operating margin due to rising inflation.
US Feb. Consumer Confidence slightly higher than expected at 110.5 vs. 110.0 expected after the January number was revised lower to 111.1 from 113.8. The Expectations component of the survey is near the low of the range since 2016 at 87.5 (low of 84.3 in November of 2020.)
New Zealand RBNZ hikes as expected, guides hawkish. The RBNZ hiked the Official Cash Rate 25 basis points as expected to 1.00% but guided more hawkish than expected by predicting a higher terminal rate than previously (suggesting that the OCR will rise to 3.25% by the end of next year versus only 2.50% previously. This raised 2-year NZ rates more than ten basis points and saw the NZD strengthen overnight.
What are we watching next?
The Ukraine-Russia headlines will remain in the spotlight, with the ongoing tension driven in part by high level predictions from NATO and US President Biden that Russian intends further action in Ukraine.
Central bank policy expectations continue to press rates higher, with the RBNZ impressing overnight in raising its forecast (see above), an ECB member Holzmann called for two rate hikes this year and short EU rates rising sharply yesterday, and after comments from Michelle Bowman late last week on the potential for the Fed to move 50 basis points at the March 16 FOMC meeting if the data suggests this is appropriate.
Earnings Watch. Today’s key earnings to watch in the US are Lowe’s, Booking and eBay. Lowe’s will likely mimic Home Depot’s results showing margin pressure. Booking is key to watch for clues on how travel activity is holding up given rising energy costs and finally eBay is extra colour headwinds e-commerce companies are facing.
Economic calendar highlights for today (times GMT)
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