After the worst day for stocks in a long time, which saw the Dow plunge 800 points or 2.2% and the Nasdaq tumble almost 4% to the lowest level in nearly a year, it seemed that Wednesday would be another puke fest, with Google tumbling as much as 10% afterhours after reporting mixed earnings that missed on YouTube revenues and EPS, and dragging the Nasdaq with it. However, solid results from Microsoft as well as some long overdue stability in Chinese markets helped to reveres the dour mood, and aside for a brief but sharp selloff around the time Europe opened, US equity futures have been a diagonal line up, with the Nasdaq recovering from its lowest level in nearly a year, as dip buyers returned on corporate earnings and “all out” stimulus pledges by China. As of 7:00am ET, S&P 500 and Nasdaq 100 contracts each rose around 0.8%, 10Y yields rose 3bps to 2.77%, the dollar rose again and Brent was flattish around $105.
Fears that the Fed would tip the world’s largest economy into a recession have plagued markets all week, all while activity slows in China as Covid lockdowns bite. Sentiment got a modest pickup overnight after China’s President Xi Jinping made a commitment to boost infrastructure construction in Beijing’s latest bid to rescue economic grow. In Europe, the euro touched the weakest level versus the greenback since 2017 on Wednesday as Russia said it will stop natural gas flows to Poland and Bulgaria. European gas prices surged as traders weighed the risk of other countries being hit next, spurring worries over a further spike in inflation and a sharp slowdown in the economy. However, after initially sliding, European stocks staged a strong rebound.
“The backdrop for risk assets continues to be weak, and wasn’t helped by headlines of Russia halting gas supplies to Poland,” wrote Mizuho International Plc strategists including Peter Chatwell. “If we get closer towards the 4200 level on the S&P 500, this may bring some temporary relief for risk, especially with the potential for some earnings positivity today.”
“On U.S. earnings, there is a risk of high-profile idiosyncratic disappointments, most likely among beneficiaries of the Covid-19 pandemic,” said UBS Wealth Management chief investment officer Mark Haefele. “Facing geopolitical risks, threats to growth from China’s lockdowns, and uncertainty over the prospect of overtightening by the Fed, equity markets are likely to remain volatile.”
Microsoft, along with Google parent Alphabet, kicked off a big week of tech earnings yesterday with a mixed bag that won't fully soothe jittery tech investors. Alphabet posted a rare miss on slower European ad sales and lackluster YouTube performance. YouTube was hit by its rivalry with TikTok and Apple's privacy changes. But Microsoft beat estimates, fueled by robust growth in cloud-services demand. This comes after a big subscriber loss by Netflix last week. Facebook parent Meta Platforms reports later today. The recent selloff in FANG stocks looks more significant than those that preceded it. As a result, Microsoft jumped 5.6% in premarket trading while Alphabet and Texas Instruments dropped as their earnings disappointed, putting the Nasdaq on pace for a 12% loss this month, its worst performance since October 2008 during the global financial crisis. Technology shares have been under particular pressure this year on the risks from rising rates amid a hawkish shift in the Federal Reserve’s monetary policy. Twitter again fell in premarket trading, set to extend losses on Wednesday as shares drop further below Elon Musk’s offer price of $54.20 per share. Tesla Inc. advanced after slumping on Tuesday. Some other premarket movers:
- Bank stocks are mostly higher in premarket trading Wednesday as the U.S. 10-year yield rebounds to hit 2.76%.
- Robinhood stock rose after the company announced it is dismissing 9% of its workforce in a move that Morgan Stanley says boosts its chance to become profitable. Meanwhile, Visa shares jumped after the firm reported “impressive” second-quarter results
- Mattel shares rise 13% in U.S. premarket amid a WSJ report that the the maker of Barbie and Hot Wheels has held preliminary discussions with at least two private-equity firms about a possible buyout.
- NCR shares sink 20% in thin premarket trading Wednesday after the company cut its full-year outlook for revenue, adjusted EBITDA and non-GAAP earnings per share due to factors including the war in Ukraine and inflationary pressures.
- Robert Half rises 2% in premarket trading after the provider of staffing services reported earnings per share for the first quarter that beat the average analyst estimate. BofA lifts the stock’s rating while highlighting “labor market momentum.”
“Overall earnings are not that bad and that should come as a support to the market right now,” said Barclays Plc strategist Emmanuel Cau. “It’s essential to focus on earnings to figure out what you want to buy and what you want to sell.”
European equities started off in the red but inched higher bouncing off six-week lows, as investors assessed the economic implications of cuts in gas supplies from Russia. Euro Stoxx 50 rises 0.6% having traded down as much as 1.2%. CAC 40 and FTSE 100 outperform slightly. Miners, autos and chemicals are the best performing sectors. Mercedes-Benz jumped 3.4% after the German carmaker published better-than-expected earnings and an upbeat outlook. Michelin also reported earnings beats, helping to turn around an earlier loss in the Stoxx 600 Europe Index and propelling automakers to session leaders. Meanwhile, perennial disappointment Deutsche Bank slumped 5.2%, falling for a fourth consecutive session. Here are some of the other notable European movers today
- SEB rises as much as 9% after 1Q earnings showed beats across the board, with outperformance on net interest income, fees and trading.
- Handelsbanken gains as much as 6.3% after the lender’s quarterly results beat analyst estimates on several points, including net interest income, net income and commission.
- Clariant climbs as much as 12% after the conclusion of investigations into 2020-21 accounting of non-cash reserves proved “positive,” Zurcher Kantonalbank says in a note.
- Umicore rises as much as 6.3% after the company signed a long-term supply agreement for electric vehicle high-nickel cathode materials with Automotive Cells Company.
- Deutsche Bank shares fall as much as 6.7% after quarterly results as higher costs offset a better-than-expected performance at its investment banking business.
- Credit Suisse drops as much as 1.8% as 1Q results fail to ease concerns about the bank’s momentum and provide another negative surprise after its warning earlier in the month.
- Stoxx 600 Automobiles & Parts Index gains as much as 2.6% and is the second-best performing subgroup on the wider equity gauge after slew of positive 1Q results. Valeo +3%, Mercedes-Benz +3.7%, Michelin +3.1%
- Aveva slides as much as 21% after the engineering software firm said it ceased new operations in Russia and anticipates its FY23 revenue will be hit by the war in Ukraine.
- Bank of Ireland drops as much as 8.6% after its 1Q trading update was overshadowed by the announced departure of its CEO Francesca McDonagh.
- Schneider Electric falls as much as 3.8% following 1Q results as analysts said the beat from the electrical-goods group wasn’t a surprise following recent peer reports.
Earlier in the session, Asia’s stocks benchmark declined to the lowest level since July 2020 as caution prevailed in a busy week of earnings. The MSCI Asia Pacific Index slumped as much as 1.3% Wednesday, with all but two sectors in the red. Tech was the biggest sectoral loser, dragged down by giants TSMC and Samsung Electronics. Earnings reports from chipmakers including Texas Instruments and SK Hynix disappointed investors, hurting sentiment in an industry already hammered by rising global interest rates and supply-chain woes. The overall growth outlook for the region remains weak, with China’s Covid-19 outbreaks and lockdowns in the spotlight.
“As bond yields continue to face upward pressure it’s going to be a very, very difficult situation for tech,” Eli Lee, head of investment strategy at Bank of Singapore, told Bloomberg Television. “Value will still outperform growth, large cap will outperform mid cap in the next two to three months. There will be a strong bid for energy and commodity names.” Equity benchmarks with heavy tech weightings such as those in Taiwan, South Korea and Japan underperformed, with each dropping about 1% or more. China stocks advanced following President Xi Jinping’s pledge to boost construction and infrastructure. READ: Xi’s Pledge Boosts Hopes Among Jaded China Stock Traders
Japanese equities dropped, as disappointing earnings at home and abroad added to concerns on inflation, U.S. monetary policy and China lockdowns. The Topix Index fell 0.9% to close at 1,860.76, while the Nikkei declined 1.2% to 26,386.63. Shimano Inc. contributed the most to the Topix Index decline, decreasing 13%. Out of 2,170 shares in the index, 768 rose and 1,352 fell, while 50 were unchanged.
Australia stocks also fell: the S&P/ASX 200 index fell 0.8% to 7,261.20, capping a third day of declines, after Australia’s core inflation accelerated to the fastest pace since 2009, intensifying pressure on policy makers to raise interest rates during an election campaign. Life360 dropped by a record after releasing a 1Q trading update and saying it’s halting plans for a U.S. dual listing. Downer EDI was a top performer after saying it sees strong demand in 4Q. In New Zealand, the S&P/NZX 50 index fell 0.7% to 11,726.39
In FX, the Bloomberg Dollar Spot Index rose as the greenback advanced against most of its Group-of-10 peers and the three-year Treasury yield added 8bps, The euro extended its drop against the dollar to touch 1.0588, while bunds reversed opening losses, sending yields as much as 3bps lower. Australia’s front-end bond yields rose and the Australian dollar advanced for the first time in five days versus the greenback after trimmed mean CPI climbed to hit 3.7%; swaps traders are now fully pricing in a 15bps hike by the Reserve Bank of Australia on Tuesday that would push up the cash rate to 0.25%. Sweden’s currency fluctuated against the dollar; it rose against the euro and overnight volatility in the euro-krona pair touched the highest level in six weeks as it captured tomorrow’s Riksbank decision where some expect it to raise the repo rate for the first time since 2019. The yen resumed its decline after a two-day gain amid a surge in U.S. Treasury yields on expectations of aggressive policy tightening by global central banks. Benchmark 10-year yields rose near the Bank of Japan’s upper limit ahead of the bank’s policy decision Thursday.
In rates, Treasuries bear flatten as stocks recover a portion of Tuesday’s losses, leaving underperforming front-end yields cheaper by up to 7bp into early U.S. session. U.S. 10-year yields around 2.77%, with bunds and gilts outperforming by 4bp and 1.5bp in the sector; front-end led losses flattens 2s10s, 5s30s spreads by 3.1bp and 1.8bp. Bunds, gilts outperform Treasuries; bunds bull steepen, richer by ~1.5bps across the short end. Gilts seen a roughly 1bps parallel cheapening move. Peripheral spreads are wider to core with 10y Bund/BTP spread hitting the widest since June 2020. U.S. session includes 5-year note sale, follows strong 2-year auction on Tuesday.
In commodities, crude futures hold a relatively narrow range. WTI is up ~50c near $102.20.
Spot gold fades a small dip by remains below $1,900/oz. European gas surged 20% after Russia blocked flows to Poland and Bulgaria. Base metals trade well with LME zinc outperforming.
Bitcoin attempts to recover from yesterday's slide and meanders around 39k.
Looking to the day ahead now, and US data releases include preliminary wholesale inventories for March, pending home sales for March, and the advance goods trade balance for March. Over in Europe, there’s also Germany’s GfK consumer confidence reading for May, and France’s consumer confidence for April. Central bank speakers include ECB President Lagarde, the ECB’s Muller and Bank of Canada Governor Macklem. Finally, earnings releases include Meta, T-Mobile, Qualcomm, Amgen, American Tower, Boeing and PayPal.
- S&P 500 futures up 0.9% to 4,209.25
- MXAP down 1.0% to 164.75
- MXAPJ down 0.7% to 541.64
- Nikkei down 1.2% to 26,386.63
- Topix down 0.9% to 1,860.76
- Hang Seng Index little changed at 19,946.36
- Shanghai Composite up 2.5% to 2,958.28
- Sensex down 0.8% to 56,885.14
- Australia S&P/ASX 200 down 0.8% to 7,261.17
- Kospi down 1.1% to 2,639.06
- STOXX Europe 600 up 0.2% to 441.88
- German 10Y yield little changed at 0.80%
- Euro down 0.2% to $1.0612
- Brent Futures up 0.3% to $105.31/bbl
- Gold spot down 0.5% to $1,895.06
- U.S. Dollar Index up 0.26% to 102.57
Top Overnight News from Bloomberg
- Russia said it stopped natural gas flows to Poland and Bulgaria on Wednesday, making good on a threat to cut off buyers if they refuse President Vladimir Putin’s demand to pay in rubles. European gas prices surged more than 20% on the move and the euro fell to its lowest against the dollar since April 2017
- Ten European gas companies have opened the accounts at Gazprombank needed to meet Russia’s demand to pay in rubles and four have already made payments, according to a person familiar with the matter
- New Zealand’s central bank said it will design a framework to impose debt-to-income mortgage lending restrictions, but indicated they may not be needed anytime soon as the housing market cools
- Shanghai hinted at an easing of lockdown measures as coronavirus infections dropped to the lowest in three weeks, while case numbers in Beijing stabilized, in a potential sign authorities are starting to bring the twin outbreaks under control.
A more detailed look at global markets courtesy of Newsquawk
Asia-Pacific stocks were mostly negative after the losses in the US where participants braced for the large-cap tech results including Alphabet which disappointed, while the region also navigated through a deluge of earnings. ASX 200 was dragged lower by underperformance in tech and the consumer-related stocks, while mostly firmer than expected CPI data added to the pressure for the RBA to hike as early as next week. Nikkei 225 retreated with the worst-performing stocks in the index pressured by earnings updates. Hang Seng and Shanghai Comp were choppy as Beijing lockdown fears were stoked after Chaoyang district was classified as high-risk and the Tongzhou district halted schools, although participants also digested firmer Industrial Profits and President Xi’s recent announcement to step up infrastructure construction.
Top Asian News
- Malaysia Scraps Covid Tests for Travelers, Outdoor Mask Mandate
- Hong Kong’s New Travel Easing Leaves Business Still Wanting More
- HKEX Outlook Weak as Stock Market Activity Sluggish: Street Wrap
- China’s Covid Outbreak Hits Profits of Foreign Firms
European bourses recovered from the losses seen at the cash open, with the region currently posting board-based gains. Sector performance in Europe is mostly firmer but with no clear theme; Basic Resources is the clear outperformer. Stateside, US equity futures see slightly more pronounced gains vs Europe following yesterday’s hefty losses. Alphabet Inc (GOOG) - Q1 2022 (USD): EPS 24.62 (exp. 25.96), Revenue 68bln (exp. 68.1bln); authorised to buyback additional 70bln. (Newswires) Shares fell 3.0% after market. Microsoft (MSFT) - Adj. EPS 2.22 (exp. 2.19), Revenue 49.4bln (exp. 49.05bln). Co. guides Q4 intelligent cloud rev. USD 21.1bln-21.35bln, productivity and business process rev. USD 16.65bln-16.9bln. (PR Newswire) Shares rose 5.4% after market
Top European News
- Moldova’s Transnistria Says It Was Fired Upon From Ukraine: IFX
- Twitter Extends Losses to Dip Further Below Musk’s Offer Price
- Private Equity Firms Set Sights on Battered IPO Stocks in Europe
- Mercedes Sees Strong Returns Persist Through War, Supply Turmoil
- Greenback continues to grind higher in its guise of global reserve and prime safe haven with DXY inching closer to 103.000, at 102.780 vs 2020 peak of 102.990.
- Aussie inflated as sizzling CPI metrics up the RBA rate hike ante amidst calls for liftoff next week.
- Yen hits resistance and importer offers after probing 127.00 vs Dollar.
- Euro hits new sub-1.0600 multi year low as Russia threatens to suspend gas supplies from more unfriendly nations and Pound flounders mostly under 1.2600 with little help from dire CBI Survey.
- Yuan loses RRR cut momentum as spread of Covid continues in China - Usd/Cny closes at highest in a year around 6.5500+, Usd/Cnh eyeing 6.6000 again.
In Fixed income
- Choppy midweek session for bonds, so far, as recovery momentum fades amidst a raft of issuance
- Bunds fade after topping Tuesday's peak at 155.77 in wake of a lukewarm reception for new 2038 benchmark
- Gilts top out at 119.72 before much worse than feared UK CPI sales survey
- Treasuries edgy ahead of 5 year supply with T-note probing 120-00 vs 120-18+ overnight high
- WTI and Brent June futures have been moving horizontally since yesterday's settlement, US Private Energy Inventory Data (bbls): Crude +4.8mln (exp. +2.2mln), Gasoline -3.9mln (exp. +0.5mln), Distillates +0.4mln (exp. -0.6mln), Cushing +1.1mln
- Russian Economy Ministry expects Russian oil exports to fall this year to 228.3mln tonnes (vs 231mln in 2021) in its baseline scenario and to 213.3mln tonnes in its conservative scenario.
- Spot gold saw some selling pressure in which the yellow metal fell below the 25th April low (USD 1,891.20/oz) and tripped stops below USD 1,890/oz.
- Base metals markets are relatively mixed, with nothing interesting standing out.
US Event Calendar
- 07:00: April MBA Mortgage Applications -8.3%, prior -5.0%
- 08:30: March Retail Inventories MoM, est. 1.4%, prior 1.1%; Wholesale Inventories MoM, est. 1.5%, prior 2.5%
- 08:30: March Advance Goods Trade Balance, est. -$105b, prior -$106.6b, revised -$106.3b
- 10:00: March Pending Home Sales YoY, est. -8.1%, prior -5.4%; Pending Home Sales (MoM), est. -1.0%, prior -4.1%
DB's Jim Reid concludes the overnight wrap
Staying in advertising mode, yesterday saw DB’s Head of Research and Chief Economist David Folkerts-Landau publish an important piece alongside Peter Hooper and myself. In our World Outlook earlier in the month, we became the first bank to forecast a US recession by the end of 2023, but in this note we argue that if anything, the risks are skewed towards a much more significant recession. Indeed, we find it bizarre that consensus forecasters expect us to believe there’ll be a soft landing from a starting point at which a soft landing has never been achieved. We outline the full rationale in the report, but our view is that the Fed is behind the curve in a manner unseen in a generation, that inflation is going to prove a lot stickier than expected, and hence monetary tightening will push the US economy into a significant recession, with unemployment ultimately rising several percentage points. The link is here.
Speaking of growth concerns, yesterday saw global equities return to the sell-off mode they were in before the second half bounce back yesterday. The S&P 500 gave up a further -2.82%, it’s worst daily return since the Ukraine invasion in early March, to keep the index on track for its worst monthly performance (-7.84%) since the pandemic chaos of March 2020. There wasn’t one single catalyst, but the widespread collection of risks are giving investors serious pause right now, including Chinese lockdowns, persistent inflation, selected corporate earnings weakness, the risk of a hard landing from the Fed, as well as the ongoing geopolitical worries given Russia’s invasion of Ukraine. Some of the media commentary even blamed our note for the market falls.
We’ll start with the geopolitics, since there were several negative headlines on that front that dampened risk appetite significantly. First, there were reports from Moldova of a further attack on a military unit yesterday in the breakaway region of Transnistria. The Kremlin said it was following events closely and it was a cause for serious concern, whilst Moldova’s President Sandu said the government would resist “attempts to drag Moldova into actions that may endanger peace within the country.” Then we also saw European gas futures surge in the afternoon after it was reported by the Onet.pl website that gas flows to Poland had been halted, before falling back somewhat to end the day up “only” +6.64%. After European energy markets finished trading, it was revealed Russia would stop flows to Bulgaria as well, so the risk is more countries get added to the list as the payment currency becomes weaponised. This could be a big story today. With energy remaining a significant geopolitical tool right now, we also heard from German economy minister Habeck, who said that an embargo on Russian oil would be “manageable”, with Germany having cut its share of Russian oil in its imports from 35% before the invasion to around 12%.
This darkening backdrop saw the selloff gather pace as the day went on, with major equity indices including the S&P 500 (-2.82%), the NASDAQ (-3.95%), the STOXX 600 (-0.90%) and the DAX (-1.20%) all seeing significant losses. The pullback led to the VIX spiking +6.5ppts higher to 33.52, its third highest closing level of the year, only pipped by two days around the invasion of Ukraine in early March. As mentioned, it was the worst day for the S&P 500 since early March, but for the NASDAQ it was the worst day since September 2020, bringing the index into correction territory for the month alone, down -12.16% in April – and that was before mixed mega-tech earnings after the close (more below). The declines in the main index were incredibly broad-based, though Tesla (-12.18%) was the worst performer in the S&P 500 following the move by their CEO Elon Musk to acquire Twitter, whilst General Electric (-10.34%) was the second-worst performer as the company released its earnings and warned of supply-chain challenges. Energy was one of the few outperformers on both sides of the Atlantic, and indeed the only sector to close above flat in both the S&P 500 and STOXX 600, aided by higher prices that included a rebound in Brent Crude (+2.61%) to $104.99/bbl. They are +0.35% this morning.
On those aforementioned tech earnings, Alphabet missed revenue expectations on a combination of slower-than-expected ad growth as well as some impact from the war in Europe, sending shares -2.84% lower in after hours trading. Microsoft shares, meanwhile, were supported by growth in their cloud-computing business, which saw shares +4.64% higher after the close.
In contrast to the last 3 weeks when US equities and Treasuries sold off side-by-side, the risk-off tone has seen a significant rally back in sovereign bonds over the last couple of days, not least since markets are now assuming that central banks won’t move quite as aggressively as they were expecting at the end of last week. For instance, fed funds futures have taken out -14.5bps of tightening this calendar year relative to Friday, even if they continue to expect +50bp hikes at the next 3 meetings, whilst they’ve also taken out -4.6bps from 2022 ECB tightening this week, too. That helped yields on 2yr Treasury yields fall -14.8bps, while 10yr Treasuries fell a further -9.9bps in yesterday’s session to 2.72%, in another day pocked with rates volatility, as 10yr yields went from +4.1bps higher before the US open to -9.8bps lower around the European close, selling off again before finishing the day at their lows. The decline in 10yr yields was roughly split between real yields and breakevens in line with fears of global growth and the commensurate shallower path of Fed tightening. In Europe it was much the same picture, with yields on 10yr bunds (-2.2bps), gilts (-4.5bps), and BTPs (-2.1bps) all falling back too, while OATs (+0.4bps) underperformed. Other safe havens benefited also, with the dollar index (+0.58%) strengthening for the 17th time in the last 19 sessions, leaving it at a 2-year high, just as gold (+0.42%) rallied as well. The treasury market yo-yo continues this morning with 10yr yields back up c.+5bps and 2yrs +9bps.
Asia is playing catch-up to the global sell/off but DM futures are up so there is a circuit breaker for now. The Nikkei (-1.88%) is leading losses across the region with the Kospi (-1.05%) also falling. Stocks in mainland China are attempting to bounce back with the Shanghai Composite (+0.38%) and CSI (+1.05%) higher after President Xi in a statement yesterday pledged to ramp up infrastructure construction to bolster domestic demand and drive economic growth going forward. Outside of Asia, stock futures in the US are indicating a positive start with contracts on the S&P 500 (+0.52%) and Nasdaq (+0.41%) trading up after their poor showing yesterday.
In terms of overnight data, China’s industrial profits advanced +8.5% y/y in the January-March period compared to a + 5.0% rise in the preceding three-months. Elsewhere, Australia’s CPI surged by +5.1% y/y for the March quarter, its fastest pace in 21 years and easily topping market estimates of a +4.6% gain, following a + 3.5% increase in the previous quarter. The dramatic rise in the inflation has prompted market participants to price-in an interest rate hike at the Reserve Bank of Australia’s (RBA) next meeting scheduled on May 03. DB now expect a 15bps hike next week with an additional 50bps in June. See their report here.
In terms of yesterday’s data, the US Conference Board’s consumer confidence reading for April came in a bit below expectations at 107.3 (vs. 108.2 expected). Otherwise, in the more backward-looking data, preliminary durable goods orders in March rose by +0.8% (vs. +1.0% expected) and core capital goods orders were up +1.0% (vs. +0.5%). Finally in February, there was still significant momentum in house prices, with the FHFA’s house price index rising by +2.1% (vs. +1.5% expected), which is the fastest monthly pace since the index begins in 1991. The year-on-year growth in the Case-Shiller national home price index also moved back up to +19.8% that month.
To the day ahead now, and US data releases include preliminary wholesale inventories for March, pending home sales for March, and the advance goods trade balance for March. Over in Europe, there’s also Germany’s GfK consumer confidence reading for May, and France’s consumer confidence for April. Central bank speakers include ECB President Lagarde, the ECB’s Muller and Bank of Canada Governor Macklem. Finally, earnings releases include Meta, T-Mobile, Qualcomm, Amgen, American Tower, Boeing and PayPal.