US futures extended gains for a 5th straight day as investors weighed the outlook for the Fed's rate hiking path following weak US manufacturing data against inflation concerns from OPEC+’s plan to cut oil output to assess the path of interest rate increases, and after the Australian central bank officially paused its rate hike campaign overnight when it kept its rate unchanged at 3.6%. S&P 500 contracts rose 0.3% on Tuesday as 7:30 am ET after the underlying benchmark reached its highest level since mid-February on Monday. Nasdaq 100 futures were 0.6% higher, extending their bull market 20% rally while a gauge of volatility held near this year’s lows helping a benchmark for world stocks advance for a seventh day, its longest streak since Jan. 16. Europe's Estoxx50 advanced 0.8% as Asia dipped; the US dollar reversed an overnight drop and traded modestly green while TSY yields rose, pushing the rate on the 10Y to 3.46%. Oil built on the largest gain in a year after OPEC+ set out to punish short sellers with a surprise production cut; WTI was near $81 a barrel after closing more than 6% higher on Monday
In premarket trading, Virgin Orbit Holdings fell 24% extending its nearly 90% slump this year, as the satellite launch firm tied to British billionaire Richard Branson filed for bankruptcy. Tesla rose 1% in early New York trading after reporting increased deliveries in China that pain a more positive picture of the demand for electric vehicles in the world’s second-biggest economy and the strength of its reopening from Covid controls. The higher sales follows Tesla’s price cuts. In the meme-stock universe, AMC Entertainment fell 28% in premarket after it entered into a binding settlement term sheet with named plaintiffs in its stock conversion lawsuit. Here are the other notable premarket movers:
A bigger-than-expected contraction in US factory activity is tempering inflation worries as the Fed continues its policy-tightening campaign, with markets pricing one more interest-rate hike. While stocks are sharply higher on the year, the market recovery this year has been uneven, driven largely by a handful of long-duration outperformers such as the tech giants Nvidia, Meta and Tesla.
“It is this skew along with rising uncertainty about the economic outlook that is making it so tricky to call which way markets are likely to break next,” said Michael Hewson, chief analyst at CMC Markets in London.
Traders are overcoming their initial bearish reaction to the oil cartel’s plan and are now betting that the impact of higher crude prices on economic recovery won’t allow the Federal Reserve to speed up the pace of interest-rate hikes. The Reserve Bank of Australia’s pause in its tightening cycle as well as a decline in European consumers’ inflation expectations have emboldened markets to forercast more than 50 basis points of Fed rate cuts later this year. In the latest news on the inflation front, Fed Governor Lisa Cook said on Monday that US inflation has started easing but price pressures could keep emanating from a tight labor market, the war in Ukraine and the reopening of China.
“What’s backing up markets has a lot to do with the good news concerning inflation,” said Frederic Rollin, a senior investment adviser at Pictet Asset Management Ltd. in Paris. “This good news means that central banks have more flexibility to make a pause or to soften.”
Meanwhile, others joined our call for higher risk prices on the back entirely of technicals: Citi strategist said that about $20 billion of new long positions in the S&P 500 were added over the past week, with positioning turning clearly bullish. On the other end, JPMorgan strategist Marko Kolanovic warned that the risk-on mood is likely to falter, with headwinds from bank turbulence, an oil shock and slowing growth poised to send stocks back toward their 2022 lows.
“The Fed indicated no intention to cut interest rates this year, yet risk assets are exhibiting an unprecedented rally, with European stocks trading near all-time highs and US stocks recovering recent losses,” Kolanovic wrote in a note to clients Monday. “We expect a reversal in risk sentiment and the market retesting last year’s low over the coming months" echoing the exact same warning he has been repeating for months even as stocks are about to hit an 8 month high.
Europe's Stoxx 600 traded at the highest level since March 9 led by the insurance, real estate and auto sectors as the banking subgroup led by BNP Paribas SA contributed 22% of the gauge’s increase. Glencore Plc rose amid a recovery in copper prices. Investec Plc increased 3.6% after Rathbones Group Plc agreed to buy the company’s UK wealth management business at a deal value of £839 million ($1.05 billion). Here are the most notable movers:
Earlier in the session, Asian stocks slipped, on course for their first drop in six sessions, as Chinese tech names declined and investors parsed weak US factory data and inflation risks from a surge in oil prices. The MSCI Asia Pacific Index lost as much as 0.4%, dragged down by Alibaba and Meituan. Hong Kong’s benchmark gauge ended its own five-day winning streak on profit-taking ahead of a holiday. The Hang Seng Tech Index dropped 1.6%, weighed down by Chinese electric-vehicle makers. Australian stocks erased earlier losses after the central bank decided to pause its nearly yearlong tightening cycle. India and Taiwan markets are closed for holidays. Investors weighed the implications of unexpectedly weak US factory data and a surprise output cut by OPEC+ on the Fed’s rate-hike path. Federal Reserve Bank of St. Louis President James Bullard said an increase in oil prices could challenge the central bank’s job of lowering inflation. Still, many strategists and fund managers remained positive on Asia’s stock market outlook. “While there are concerns all the uncertainty will hit exports to the US or Europe, the impact on Asia’s profits should be limited” because demand for its products come mostly from within the region, HSBC strategists including Herald van der Linde said in a report. They moved Indonesia to overweight from neutral while reducing Hong Kong to neutral from overweight. “Still, we acknowledge 2023 will likely be marked by bouts of volatility as financial stress ebbs and flows.”
Japanese equities advanced for the sixth time in seven sessions, boosted by gains in bank and automaker stocks. The Topix rose 0.3% to close at 2,022.76, while the Nikkei advanced 0.4% to 28,287.42. Nintendo contributed the most to the Topix gain, climbing 4.6% as Jefferies maintained its buy rating on the stock. Out of 2,160 stocks in the Topix, 1,003 rose and 1,036 fell, while 121 were unchanged
In Australia, the S&P/ASX 200 index rose 0.2% to close at 7,236.00, after the RBA paused its almost yearlong tightening cycle on Tuesday. The benchmark extended gains for a seventh day, the longest winning streak in over a year. The Reserve Bank kept the cash rate unchanged at 3.6%, while also making clear the board stands ready to resume raising borrowing costs should the economy require it. The result reinforces the RBA’s status as an international outlier, adopting a more dovish approach than the Federal Reserve and the European Central Bank.
In FX, the dollar reversed earlier losses and was trading modestly in the green. The AUD/USD declined 0.5% to 0.6754 after the Reserve Bank of Australia held the cash rate at 3.6%, as expected by about two-thirds of 30 economists surveyed by Bloomberg. The pound rose to its highest level against the greenback since June, eclipsing a high touched in January, amid broad-based dollar weakness; GBP/USD +0.7% to 1.2502
In rates, treasuries drifted lower, paring a portion of Monday’s post-ISM gains, led by deeper losses in core euro-zone rates. Stocks are extending recent rally while European debt sales also weigh. Treasury losses were led by belly of the curve with yields cheaper by at least 4bp, lifting 2s5s30s fly by 3bp into early US session; Two-year Treasury yields rose 3bps to 3.99%; 10-year yield around 3.46%, cheaper by 4bp on the day with bunds and gilts lagging by 2bp and 4bp in the sector. IG dollar issuance slate includes World Bank 5Y, IADB 10Y and KfW 3Y; four firms priced $3.55b Monday, with at least two FIG issuers standing down and likely to look again Tuesday. US economic data slate includes February JOLTS job openings and factory orders at 10am New York time along with three scheduled Fed speakers.
In commodities, oil built on the largest gain in a year after OPEC+ set out to punish short sellers with a surprise production cut that tightened the global market and widened key timespreads. Short sellers who had expected the group to hold its production levels rushed to cover their positions, pushing both West Texas Intermediate and Brent futures by 0.6% each; WTI was near $81 a barrel after closing more than 6% higher on Monday. The surprise reduction wrong-footed the market, and prompted many banks to raise price forecasts, although some bears remain. The gap between the nearest two December contracts for Brent rose to $5.72 a barrel in backwardation — a bullish pattern — from $3.80 on Friday. Copper edged higher, while zinc and aluminum extended Monday’s declines. Metals trading was mixed as investors weighed weaker factory data and the impact of OPEC+’s cut to oil supplies. Spot gold is little changed around $1,983.
Cryptocurrency-exposed stocks rise as Dogecoin extended its gains after Twitter users noticed their home buttons changed into the dog meme after which the cryptocurrency is named. Bitcoin also rose on Tuesday.
Looking to the day ahead, we have a number of key data releases from the US including the February JOLTS report and factory orders. In Europe, the Eurozone February PPI will be out today, and in Canada data for February building permits. Finally, we will hear from the Fed’s Mester, and the BoE’s Tenreyro and Pill will speak.
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Asia-Pac stocks traded mostly positive but with gains limited following the indecisive mood stateside amid higher oil prices and weak ISM data, while participants in the region also turned their focus to the central bank updates. ASX 200 eventually eked mild gains after the RBA paused on rates but kept the door open for future hikes. Nikkei 225 gained but with upside capped in the absence of pertinent macro drivers and key data from Japan. KOSPI was underpinned by softer inflation as March CPI Y/Y decelerated to its slowest pace in a year. Hang Seng and Shanghai Comp. were mixed ahead of tomorrow’s holiday closures across the Greater China region for Tomb Sweeping Day and following another substantial liquidity drain by the PBoC, with underperformance seen in Hong Kong amid notable weakness in tech stocks. Interbank market dealers' association has conducted self-regulatory investigations on ICBC (601398 CH); pricing of several issues of debt financing instruments underwritten by ICBC seriously deviated from reasonable market levels.
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European bourses are firmer across the board, Euro Stoxx 50 +0.6%, as the complex picks up to fresh highs most recently after a relatively contained European morning. Specific updates/drivers have been sparse ahead of the US docket; Stateside, futures are marginally firmer after initially languishing somewhat. In Europe, sectors are bolstered given the above action but again individual movers are light in limited newsflow.
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DB's Jim Reid concludes the overnight wrap
April has started with a couple of surprises, the first was the OPEC+ cut we discussed yesterday and then the US March ISM manufacturing index, a timely gauge of economic activity, slowed further than expected to 46.3 (vs 47.5 estimated), sinking to its lowest levels since May 2020 when Covid shutdowns were rampant. US 10yr Treasuries initially started the day lower, due to higher oil prices weighing on inflation expectations, however the negative data release caused yields to quickly reverse course and end the day down -5.6bps to 3.411%. US equity markets initially fell on the weak data as well, however an afternoon rally saw the S&P 500 finish near the highs of the day (+0.37%).
The ISM manufacturing readings have been steadily weakening over the last few months, but has now hit its weakest level in 3 years. There are only four instances where the ISM manufacturing reading was this low without a recession in the following 12-18 months – the early 1950s, 1967, the mid 1990s and right after the 2000s recession. Looking a little closer into the details of the print, employment was at 46.9, its lowest since July 2020, and the new orders component missed expectations badly and erased roughly half of its rise over the prior month to come in at 44.3 (vs 47.5 expected). The one good note in the data was that prices paid did soften, falling from 51.3 to 49.2 (vs 51.1 expected). We should also note that the commentary in the report was not necessarily as dire as the numbers might suggest, thus it will be interesting to see how the tone shifts in upcoming reports and as we enter Q1 earnings season in a couple of weeks.
With the softer than expected data revealing a business investment squeeze as lending standards tighten, 10yr US Treasury yields erased their earlier +7.5bp increase overnight to the news of potentially higher oil prices to end -5.6bps lower at 3.4114%. This morning in Asia, 10yr yields are fairly stable as we go to press. The more interest-rate sensitive 2yr US yields fell -6.2bps to 3.96%. Bunds curves bull flattened yesterday following the US data. 10yr German bund yields also retraced an early pickup to fall back -3.9bps to 2.255%, whilst 2yr yields dropped just -0.8bps to 2.67%.
This reversal in US rate markets occurred even as the Fed’s Bullard highlighted that the continued strength in the US labour market “gives (the) Fed headroom to fight inflation.” Bullard also commented on OPEC+’s surprise decision on Sunday to cut output by 1.16 million barrels per day, emphasising that a resulting increase in oil prices could potentially make the Fed’s challenge of lowering inflation a lot more difficult. Bullard said that market was putting “too much probability” on the banking crisis worsening and dramatically slowing the economy when discussing the expected path of the fed policy rate. After the US close Federal Reserve Governor Cook also highlighted the continued tightness in the labour market saying, “we are still going to see inflation from that but we’ve seen wage gains moderating quite a bit.” She also acknowledged that there is uncertainty about how much the recent banking concerns will slow the economy but said that the Fed is “focused on high inflation because the job market seems to be doing okay.”
The Fed rate expected for the next meeting was largely flat against this backdrop, climbing a modest +1.6bps to 4.973% with a 63% chance priced in for a +25bps hike next month. The expected policy rate through the December meeting is 4.30%, which continues to imply two full -25bps cuts by year-end after reaching a terminal rate next month.
Staying with central banks, the ECB’s Simkus yesterday stated that the ECB was “not there yet” in terms of interest rate increases. However, Simkus emphasised that the “larger part” of the rate-hike path for the central bank has now been covered. Such statements are consistent with the moderate hawks at the ECB changing their tune to become explicitly more open to slowing the pace of rate hikes. Later in the day, the ECB’s Holzmann stated that a 50bps hike was “still on the cards” for the next meeting in May. Holzmann particularly emphasised that if the ECB were to decrease its pace to a 25bps increase, “it’s hard to go back” to 50bps increments if needed. Similar to the US, there was only a modest response to the central bank speakers in the European overnight index swaps market, with the rate priced in for the ECB’s May meeting climbing just +1.3bps to 3.11% - implying a 88% chance of a 25bp hike.
Although fixed income was trading higher off the back of the weak ISM print, the S&P 500 saw a lot of dispersion under the surface despite the index finishing the day up +0.37%. Energy was by far the best performing sector as the higher oil prices buoyed the sector (+4.91%). However outside of energy, other cyclical sectors such as autos (-4.99%), real estate (-0.97%) and transportation (-0.83%) were the largest laggards yesterday. Tesla in particular underperformed, down -6.12%, after announcing just a 4% increase in sales from the previous quarter despite cutting prices of its EVs to stimulate demand. The NASDAQ closed down -0.27%, whilst the STOXX 600 was just slightly worse than unchanged (-0.03%) yesterday.
Asian equity markets are trading between small gains and losses this morning even as US equities closed in the green overnight. As I type, the Nikkei (+0.24%) and the KOSPI (+0.22%) are trading in positive territory while the Chinese equity indices, namely the Hang Seng (-0.93%) and the CSI (-0.12%), are losing ground in early trade. Elsewhere, the S&P/ASX 200 (+0.02%) is struggling for clear direction ahead of the Reserve Bank of Australia’s (RBA) monetary policy decision, which will come out shortly after we go to print.
Ahead of that, US stock futures are indicating a slightly negative start with the S&P 500 (-0.08%) and NASDAQ 100 (-0.22%) futures edging lower.
Early morning data showed that South Korean inflation for March softened to a one-year low of +4.2% y/y, from February’s figure of +4.8% and slightly lower than market expectations of +4.3%, thus easing pressure on the Bank of Korea (BOK) to resume policy tightening with the central bank’s policy meet scheduled on April 11.
Turning back to commodities, WTI and Brent crude contracts finished up +6.28% and +6.47% to hit $80.42/bbl and $84.93/bbl respectively as the news of OPEC+’s cuts were more fully absorbed. Overnight President Biden said the cut is “not going to be as bad as you think” when speaking with reporters, and that the administration would look for ways to ease the burden on consumers. His National Security Council spokesman said earlier in the day that the administration had received advanced warning of the cuts. Gold was up +0.78% yesterday after the soft ISM data, reversing its fall earlier in the session. On the other hand, copper futures fell back -1.20% on the day as growth concerns came to the fore.
We had several other data releases yesterday, including the final revised PMIs from the US and the Eurozone, which came in at 49.2 (vs the preliminary 49.3) and 47.2 (vs the preliminary 47.1) respectively. We also had the flash PMI’s for Italy which marginally beat expectations but fell to 51.1 (vs 51 expected), and Spain at 51.3 (vs 50 expected). Finally, the Swiss March CPI came in at +0.2% (vs +0.4% expected) month-on-month.
Now to the day ahead. We have a number of key data releases from the US including the February JOLTS report and factory orders. In Europe, the Eurozone February PPI will be out today, and in Canada data for February building permits. Finally, we will hear from the Fed’s Mester, and the BoE’s Tenreyro and Pill will speak.