One trading day after epic carnage shook global markets, US index futures staged a modest recovery on Monday after Wall Street’s worst selloff in almost two years. S&P 500 Index contracts rose 0.1% from an 11-month low, while Nasdaq 100 futures gained 0.4% with volumes thinned by holidays in several markets including the UK, China and Hong Kong. European and Asian stocks fell as disappointing corporate earnings, expectations of global monetary tightening, poor data from China and the prospect of sanctions on Russian oil weighed heavily on risk appetite. The VIX remained elevated, trading above 33, as investors braced for a week that’s likely to see a global round of monetary-policy tightening that will add to concerns about global growth. 10Y Treasury yields pushed higher again, rising to 2.94% before easing ahead of this week's key event, the Fed's upcoming 50bps rate hike. The dollar gained as worries over high inflation and China’s Covid lockdowns contributed to investor caution, and sent the offshore yuan sliding to just shy of 6.69m the lowest since November 2020. Gold extended its slump and Brent oil dropped about $2 to trade around $104.50.
Focus has shifted back to the Fed’s policy outlook after last Friday's pledge by China to boost economic stimulus damped demand for havens on Friday. The week's main event will take place on May the 4th (be with you), when the Fed is expected to lift rates by 50bps, the first "double-hike" since May 2000, and will announce it will let its balance sheet start to shrink at a pace that will quickly step up to $95 billion a month. Odds of 75bps rate hike in June remain at 50%. Bond yields may stay “elevated for the foreseeable future” due to inflation and the Fed’s sharp rate hikes allied with balance-sheet reduction, Seema Shah, chief global strategist at Principal Global Investors, wrote in a note. Japanese institutional managers - known for their legendary U.S. debt buying sprees in recent decades - are now fueling the great bond selloff just as the Federal Reserve pares its $9 trillion balance sheet.
In premarket trading, Activision Blizzard gained 2% after Warren Buffett snapped up more of the stock in a merger arbitrage bet (yes, Berkshire is a merger-arb powerhouse now, how long until Berkshire does Twitter). Here are some other notable movers:
- Comerica (CMA) upgraded to overweight and KeyCorp (KEY) cut to underweight at Piper Sandler as the broker shuffled ratings to reflect its post-earnings preferences
- Piper Sandler analyst Alexander Twerdahl cut the recommendation on Community Bank System (CBU) to underweight, becoming the first broker to downgrade the company with a sell-equivalent rating since July 2020
- Piper Sandler analyst Arvind Ramnani raised the recommendation on Epam Systems (EPAM) to overweight, citing healthy demand for digital IT services
In Europe, the automotive and tech sectors led the Stoxx Europe 600 Index down 1%, extending its losses this year to 8.6% with focus on the potential for the European Union to propose a ban on Russian oil by year-end as well as concerns over China’s economy. Vestas fell 5.9% in Copenhagen after the Danish maker of wind turbines cut its revenue outlook for the full year and forecast its first loss in a decade. Confidence in the euro-area economy fell to the lowest in a year as the impact of the war in Ukraine drained overall sentiment from industry to consumers.
Among individuals moves in Europe, Adler Group SA shares plunged more than 40% after KPMG said it was unable to give an audit opinion and Vestas Wind Systems A/S slumped after forecasting its first loss in a decade.
Earlier in the session, Asian stocks slid on delayed reaction to the Friday carnage after underwhelming earnings guidance from U.S. tech giants fueled worries about a further slowdown in a global economy already smarting from the Federal Reserve’s policy tightening and China’s lockdowns to curb the coronavirus. The MSCI Asia Pacific Index dropped as much as 0.8%, weighed down by losses in financials and technology. The key gauge in Australia fell the most ahead of Tuesday’s local central bank policy meeting that is expected to raise rates for the first time since 2010.
Markets in China, Hong Kong, Taiwan and Singapore were closed for holidays. Chinese economic activity contracted sharply in April, data released Saturday showed, weighing on regional investor sentiment even after the Politburo pledged to meet economic targets. Fed Chair Jerome Powell has as good as promised that U.S. officials will deliver a 50 basis-point interest-rate increase this week.
“The U.S. economy appears to be peaking while markets expect almost four 50-basis-points rate hikes by the Federal Reserve in upcoming policy meetings,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “China’s PMI announced over the weekend was terrible. When you have the world’s two largest economies in conditions like this, there will be pressure on corporate earnings.”
Asian tech stocks were weak after Amazon.com Inc. plunged on Friday by the most since 2006 on a sales forecast that fell short of analyst estimates. IPhone maker Apple Inc. warned last week of a hit of up to $8 billion in its second-quarter revenue as China’s Covid-19 lockdowns undermine the world’s supply lines
Japanese equities fell slightly ahead the Federal Reserve’s planned interest-rate hike this week and amid continued concern over the impact of China’s lockdowns to curb the coronavirus. Japanese markets will be closed Tuesday through Thursday for Golden Week holidays. The Topix fell 0.1% to close at 1,898.35 Monday, while the Nikkei declined 0.1% to 26,818.53. Nintendo Co. contributed the most to the Topix decline, decreasing 2.4%. Out of 2,172 shares in the index, 1,110 rose and 973 fell, while 89 were unchanged.
India’s key equity gauges fell on Monday, dragged by information technology stocks and index heavyweight Reliance Industries while corporate earnings performance for March quarter remains mixed. The S&P BSE Sensex fell 0.2% to 56,975.99 in Mumbai, while the NSE Nifty 50 Index also retreated by an equal measure. The key gauges fell 2.6% and 2.1% in April, respectively and have retreated in three of four months this year. Indian markets will be shut on Tuesday due to a local holiday. Ten of the 19 sector sub-indexes compiled by BSE Ltd. declined, led by consumer durables. Metal and basic material companies were the best performers.
Foreign investors, who have been net sellers of Indian stocks since end of September, dumped about $3.4 billion in month through April 28. The global funds have sold a total of $21.7 in the preceding 7 months as surging inflation and a war in Ukraine dented global risk-appetite for equities. Infosys contributed the most to the index decline, decreasing 1.7%. Out of 30 shares in the Sensex index, 11 rose and 19 felf.
In rates, Treasuries reopened slightly richer across the curve when trading resumed following holiday closures across Europe. 10-year TSY yields were around 2.915% is richer by ~2bp vs Friday’s close, vs 2.5bp for German 10-year. U.S. 10-year sector slightly outperforms front-end where 2-year yields are lower by 1bp on the day; curve spreads remain within ~1bp of last week’s close. Bunds outperform with gilts closed for U.K. bank holiday. Dollar issuance slate empty so far; estimates for the week are around $25b, and some expect a historically busy month with $125b-$150b of IG credit supply.
In FX, a gauge of the dollar’s strength advanced, outperforming most other Group-of-10 currencies. Trading volumes thinned with holidays in countries including the U.K. China’s manufacturing and services activity plunged to their worst levels since February 2020, according to purchasing managers surveys. The Bloomberg Dollar Spot Index gains 0.1%; cash Treasuries are closed until U.S. hours. “There’s a good chance that we would go towards parity in euro-dollar,” Union Investment’s Christian Kopf said in an interview with Bloomberg Television on Monday. Elsewhere, the yen underperformed all its G-10 peers/ The Australian and New Zealand dollars dropped amid momentum selling and liquidation of longs by leveraged funds, traders said. “As long as the Fed doesn’t blink, the dollar stays bid,” ING Groep NV analysts including Chris Turner wrote in a note. The offshore yuan weakened in the wake of data signaling a sharp contraction in Chinese economic activity amid idled factories and snarled supply chains.
In commodities, WTI and Brent fell with downside occurring alongside the pressure in equities; downside was exacerbated by the loss of multiple psychological support levels. Newsflow has been heavily focused on a potential Russian oil/gas embargo, with Hungary remaining heavily opposed; however, Politico reports of a potential compromise for such member nations.
A missile attack on an oil refinery in Iraq's Erbil hit an oil tank and caused a fire although the fire was put under control, according to Reuters citing security forces. Iraq’s oil exports reached a total of 101mln bbls in April which raised USD 10.55bln in revenues, while exports averaged 3.4mln bpd.
Bitcoin prices are marginally higher and rebounded from beneath the 38,500 level.
Looking at today's calendar, we get the April manufacturing PMI and US ISM Manufacturing data, new car registrations, US March construction spending. We also get earnings from NXP Semiconductors, Devon Energy, Expedia, MGM resorts, SolarEdge.
- S&P 500 futures down 0.1% to 4,125.75
- STOXX Europe 600 down 1.4% to 444.02
- MXAP down 0.6% to 167.87
- MXAPJ down 0.6% to 556.31
- Nikkei down 0.1% to 26,818.53
- Topix little changed at 1,898.35
- Hang Seng Index up 4.0% to 21,089.39
- Shanghai Composite up 2.4% to 3,047.06
- Sensex down 0.5% to 56,783.95
- Australia S&P/ASX 200 down 1.2% to 7,346.99
- Kospi down 0.3% to 2,687.45
- German 10Y yield down 3bps to 0.91%
- Euro down 0.2% to $1.0526
- Brent futures down 2.6% to $104.32/bbl
- Gold spot down 0.8% to $1,881.25
- U.S. Dollar Index up 0.41% to 103.38
Top Overnight News from Bloomberg
- A gauge of the dollar advanced as traders positioned for the Federal Reserve to deliver its biggest rate hike since 2000 this week.
- Australian bonds sold off as investors anticipate the nation’s central bank will raise interest rates on Tuesday for the first time since 2010.
- In times of Treasury turmoil, the biggest investor outside American soil has historically lent a helping hand. Not this time round.
- Oil slipped at the start of the month as investors weighed the impacts of China’s measures to contain the coronavirus and moves by Europe to cut its reliance on fuel from Russia
- In times of Treasury turmoil, the biggest investor outside American soil has historically lent a helping hand. Not this time round
- China’s factory activity fell to the lowest level in more than two years in April, underscoring the economic damage caused by Covid outbreaks and lockdowns and escalating concerns about further disruption to global supply chains
- A widespread sell-off in China is rippling through emerging markets, threatening to snuff out growth and drag down everything from stocks to currencies and bonds
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks declined amid mass holiday closures, weak Chinese PMIs and upcoming key risk events including central bank meetings. ASX 200 underperformed with all sectors pressured as yields edged higher ahead of an expected rate lift-off by the RBA tomorrow. Nikkei 225 was subdued after stalling on approach to the 27,000 level and with participants tentative ahead of a three-day closure. Hang Seng and Shanghai Comp remained shut due to Labour Day holidays but will reopen on Tuesday and Thursday, respectively.
Top Asian News
- Billionaire Cannon-Brookes to Seek Stake in Australia’s AGL
- Asian Factories Defy China Slowdown as Euro Area Loses Momentum
- Marcos Jr. Keeps Lead Ahead of Philippine Presidential Poll
- Australia Yields Hit Highest Since 2014 With RBA, Fed Hikes Seen
European bourses are lower across the board, Euro Stoxx 50 -1.60%, following a subdued APAC handover amid holiday thinned conditions, soft data and COVID concerns. US futures are firmer across the board, ES +0.3%, but relatively contained ahead of the FOMC and an expected 50bp hike. US and Japan are to increase cooperation in constructing supply chains for cutting-edge semiconductors, via Nikkei. Nasdaq has decided to call for stressed market conditions on all Swedish equity and index derivatives until further notice or at the longest until close of business as of May 2, 2022.
Top European News
- Deutsche Bank AGM Shouldn’t Absolve Leaders, Advisor Says
- Spanish Prime Minister’s Phone Hacked With Spy Software in 2021
- Credit Suisse Falls Most in 2 Months; Outpaces Drop in Swiss SMI
- Partners Group Declines 9.3%, Most in Two Years
- Specs add to Buck longs before FOMC and NFP, but DXY slips a tad further from 103.930 peak into range above the round number - index meandering from 103.530-100.
- Euro hampered by mixed Eurozone manufacturing PMIs and weaker than forecast sentiment indices as it retreats from 1.0550+ and 0.8400+ vs Dollar and Sterling respectively.
- Recoil in oil undermines Loonie and Norwegian Crown, USD/CAD elevated mostly above 1.2850 and EUR/NOK 9.9000+.
- Aussie underpinned ahead of anticipated RBA hike, AUD/USD straddling 0.7050 and AUD/NZD cross pivoting 1.0950.
- Offshore Yuan weak amidst clean sweep of contractionary Chinese PMIs, USD/CNH not far from retest of 6.7000.
- Holiday-thinned trading volumes compound choppy price action as bonds brace for big week to begin May.
- Bunds whipsaw within 154.12-153.25 range, BTPs and Bonos undermined by sub-forecast Italian and Spanish PMIs with 10 year debt futures flattish between 130.71-129.71 and 143.05-140.50 parameters.
- USTs mostly softer and curve steeper awaiting Fed and NFP following the final manufacturing PMI, ISM and construction spending; T-note just under 119-00 vs 119-01 high and 118-22+ low.
- WTI and Brent are pressured with downside occurring alongside the pressure in equities; downside was exacerbated by the loss of multiple psychological support levels.
- Newsflow has been heavily focused on a potential Russian oil/gas embargo, with Hungary remaining heavily opposed; however, Politico reports of a potential compromise for such member nations.
- A missile attack on an oil refinery in Iraq's Erbil hit an oil tank and caused a fire although the fire was put under control, according to Reuters citing security forces.
- Iraq’s oil exports reached a total of 101mln bbls in April which raised USD 10.55bln in revenues, while exports averaged 3.4mln bpd. It was also reported that Iraq’s Basra Oil Company said a third oil pipeline at the Khor Al-Amaya oil terminal in southern Iraq will be operational by end-2023 with a capacity of 600k bpd, according to Reuters.
- Libya’s NOC announced a temporary resumption of work and lifting of the force majeure at the Zueitina oil terminal to reduce stock and free up storage capacity, according to Reuters.
- Spot gold has lost the USD 1900/oz mark, as yields continue to climb ahead of the FOMC.
US Event Calendar
- 09:45: April S&P Global US Manufacturing PMI, est. 59.7, prior 59.7
- 10:00: March Construction Spending MoM, est. 0.8%, prior 0.5%
- 10:00: April ISM Manufacturing, est. 57.6, prior 57.1
- April ISM Employment, est. 55.0, prior 56.3
- April ISM Prices Paid, est. 87.4, prior 87.1
- April ISM New Orders, est. 54.1, prior 53.8
DB's Jim Reid concludes the overnight wrap
Filling in on the May Day bank holiday as we enter a new month. Despite the holiday, the industrious Henry Allen on our team has put out the April month asset performance review, link available here. The US dollar was among the best performing assets on the month, following the Fed’s anticipated supercharged tightening combined with fluttering risk sentiment, making it the top performing G10 currency YTD. Elsewhere, brent and WTI crude gained for the fifth month in a row, the latest run aided by growing speculation that Europe is prepared to countenance Russian energy embargos. Agricultural goods rounded out the top performers. On the downside, equities and sovereign bonds both lost ground over the month, with the S&P 500 posting its worst monthly return since covid seized markets in March 2020. Credit and EM assets were also down over the volatile month.
From the month gone to the packed week ahead. The highlight is Wednesday’s FOMC meeting, which our US economics team has previewed in full, here. They believe the Fed will kick tightening up a notch, lifting the fed funds target range by +50bps. The market agrees, and then some, with +51.8bps of tightening priced for the meeting, suggesting some market participants believe there’s still some risk of an even larger hike. Our US econ team believes the Chair will signal this is but the first of a series of potential +50bp hikes, as the Fed tries to get policy to neutral as quickly as possible in light of historic inflation. With the question of how fast the Fed needs to raise rates generally understood (answer: very), focus will shift to how far they need to hike rates to tighten financial conditions adequately.
That task will be augmented by balance sheet rundown, as the Fed has also signaled they will announce the beginning of QT, with the first assets likely rolling off the Fed’s portfolio in June. Our estimates are that QT will proceed through next year, adding around three additional +25bp hikes of tightening, only to stop once the economy careens into recession at the end of 2023.
The BoE is similarly expected to raise rates and signal tighter balance sheet policy on Thursday. Our UK economist full preview can be found here. The team expects the MPC to continue wrestling with the trade-off between slowing growth and intensifying inflation, with the latter winning out and bringing a +25bp Bank Rate hike, along with two more hikes coming this year. On the balance sheet, our team thinks the MPC will confirm its intention to sell gilts later this year, with more guidance coming over the next few meetings and sales beginning in September.
There’s no rest for the weary, as the week ends with the US employment situation report, where our US economists expect nonfarm payrolls to gain +465k, the unemployment rate to tick down to +3.5%, and average hourly earnings to gain +0.2%. Unemployment figures from Europe are also due this week. Production data, starting with ISM manufacturing out later today, also feature this week.
After last week’s mega-cap deluge, this week’s earnings are a sample platter drawing from travel, hospitality, and energy firms.
Available Asian stock markets are trading lower after China’s downbeat PMI data released over the weekend is weighing on the regional investor sentiment. The Nikkei (-0.53%), Kospi (-0.60%) are both trading in negative territory.
The Chinese official manufacturing PMI for April worsened to a level of 47.4 (v/s 49.5 in March), a second straight month of contraction and notching its lowest level since February 2020 as the nation has been severely challenged by the resurgence of Covid-19, leading some firms to reduce or halt production. Additionally, the official non-manufacturing segment slumped by 6.5 percentage points to a level of 41.9 in April, with 19 of the 21 sectors surveyed in the contraction range. Also, a private survey also showed further deterioration in Chinese factory activity with the Caixin manufacturing PMI for April coming in at 46.0, declining from 48.1 in March. This follows last week’s reports that President Xi vows to step up government support in response to the slowdown.
Wrapping up last week’s action. The intensification of China’s lockdowns to stanch the most recent covid outbreak pushed the offshore renminbi -1.72% lower (+0.27% Friday) against the US dollar. The anticipated slowdown in Chinese activity drove global growth fears, prompting cross-asset volatility as investors layer in slower growth into the anticipated central bank reaction function.
US equity volatility reached levels not seen since Russia’s initial invasion of Ukraine, with the Vix picking up +5.18pts to 33.39 (+3.41pts Friday). The macro backdrop interacted with mega-cap tech earnings which painted a mixed outlook, that saw the S&P 500 down -3.27%, a full-3.63% lower on Friday’s month end trading. The STOXX 600 proved more resilient, retreating just -0.64% (+0.74% Friday).
Crude oil prices started the week lower on global demand fears, but eventually recovered following tensions around Russian energy exports to Europe ratcheting higher. Brent crude finished the week +6.92% higher (+1.63% Friday) at $109.34/bbl.
In data, the US employment cost index increased +1.4% versus +1.1% expectations, while core PCE gained +0.3% month-over-month, in line with expectations. Nominal 10yr Treasury yields were up a relatively tame +3.5bps over the week, but the on net figure masks intraweek volatility. 10yr yields were -18.8bps lower intraweek on the growth fears, before selling off more than +11bps on both Wednesday and Friday to finish the week. 10yr bunds were -3.4bps lower over the week (+3.8bps Friday), after hitting much lower troughs as well. Italian spreads widened +14bps to +184bps over 10yr bunds.