Global Macro and Stock Markets Analysis
US stocks finished higher in choppy trading, buoyed by a tech-name rally as 10-year yields slumped, which provided a relief conduit for growth stocks. Indeed, the tilt to the tape favoured growth over value as UST 10y yields fell.
The FOMC meeting scheduled for May 4 is expected to display a hawkish Fed that remains steadfast in bringing inflation back down to its 2% target; it is debatable how long of a reprieve growth stock will get.
The drawdown in China/Hong Kong continued triggered by ongoing economic weakness in Mainland. It turned contagious, with Covid concerns escalating to fears of a Beijing lockdown that spurred broader de-grossing globally, fueling concerns of global growth slowdown and for further supply-chain snarls to only exacerbate already rampant inflation.
But we have been down this bumpy Covid road many times before, and it is improbable that mainland powers do not have a flood-like policy contingency plan when lockdowns are removed.
In China, the credit impulse has been a good leading indicator of the PMIs. Once again, the PMIs are significantly weaker than implied by the credit impulse. If history is any guide, the PMIs may have a further downside as lockdown will extend through Golden Week but should recover sharply once restrictions are eased.
And while China property could shift out of the short seller’s gaze when lockdowns are eased, the steady drumbeat of online regulation catching up to innovation will continue to be painful.
Oil Fundamental Analysis
Crude prices are down at the start of the week due to concerns around Covid-19 outbreaks in China, leading to a more protracted lockdown. While a quick return of Libyan production also fueled the bears. Libya’s Oil Ministry said that the closed fields, shutting in >500kb/d of production, could reopen within days.
Given Omicron’s less-lethal footprint, traders had expected some easing of lockdowns before the Golden Week. And with this unlikely to happen, traders were then forced to revalue oil prices lower on a more protracted consumption slump than expected. China’s economy was quite normal last year. So, we are set to see abysmal consumption data post the Golden Week.
Still, reports are rampant that the EU will have some form of the Russian oil embargo in its sixth sanctions, according to EU Commission Executive Vice President Valdis Dombrovskis. While the details have yet to be agreed upon, the sanctions could be a gradual phasing-out of Russian oil or tariffs on exports beyond a sure price cap. And this continues to support the downside.
In addition, Macron has been vocal in calling for an escalation of sanctions against Russia, including a ban on oil and coal imports. On the back of a Macron election win, these calls should grow louder despite German reluctance.
Energy inflation hedges continue to dwindle with the CFTC data released on Friday showing that money managers cut their net long US crude futures and options positions by 15,963 contracts to 246,481 on April 19. Cleaner positioning is suitable for oil bulls as it can elevate downside risks
FOREX Fundamental Analysis
Japanese Yen and the BoJ Meeting
The US yields moved lower overnight, undoing much of last week’s move, on risk aversion related to China’s inability to contain covid cases (more lockdowns) and how this will impact global growth. Cross JPY selling was the main driver, with AUDJPY and EURJPY, in particular, getting hit. USDJPY topped out in the early Asian session near 128.80/90 before falling to a low of 127.89.
USDJPY opens today’s Asia session near 128.00/10, and support in USDJPY rests at 127.80/90 (overnight low) and 127.30/40 (200-hour MA). Buying dips remains the preferred way to play the pair despite the recent price action. It is unlikely the Bank of Japan changes tack at its meeting later this and, given next week is Golden Week in Japan, local USD buyers will need to get their USDs in before heading on holiday.
Even after Kuroda seemed to dismiss any chance of intervention with his remarks on Friday evening, the market remains wary of a downside. BOJ options climb steadily as the market adds a risk premium for the upcoming policy meeting. The USDJPY curve is now pricing an 80bp gap move. The market will be looking for any changes to policy rate forward guidance and inflation outlook adjustment in the medium to long term
PBOC Cuts Forex RRR Rate By 1%
The PBoC has cut the Forex RRR rate by 1% to 8%. This is the rate that governs firms foreign exchange reserve requirements, and the last move saw them hike it by 2% to 9% back in December 2021.
I think the PBOC FX RRR rate cut is a reaction o the increased volatility and the pace of the weakness. And I suspect the PBOC is still okay with a weaker CNH/CNY, but the FX RRR cut could put a lid on USDCNH speculative topside fervor for now, and we could trade within current levels for a bit.
And easing of topside USDCNH momentum due to the PBoC RRR FX cut and a softening of US 10 y UST yields should offer the beleaguered MYR some relief today. By no means do I suggest donning the rally caps just yet, as we have a pregnant hawkish FOMC meeting lying in wait for any USD bears on the first week of May
USDTHB spot is now trading at 33.10, near the highest level since mid-2017. The consensus view is that this is a combination of general risk-off sentiment, yield differentials, and glum China covid lockdown outlook (and the associated impact of the Tourism sector) weighing on THB. Hard to disagree.
But there were also $425 mn of dividend outflows last week. THB is most sensitive to periods when dividend flows are more considerable than $350 mn. Thailand companies will pay around $1.5 bn of dividends to non-residents in April-May this year. (That’s in the price now) I think THB longs as a tourism recovery play are getting close and would look to cross it with local low yielder TWD as opposed to typical funders like JPY or EUR a
During periods of market fear, there is a typical inter-week pattern that stock markets often follow. Markets do not always follow this pattern, but they do follow it a surprising proportion of the time.
The most reliable part of this pattern is “Turnaround Tuesday.” Indeed, stocks tend to rip higher on Tuesday if they sold off the Thursday, Friday, and Monday before. It is a simple human pattern because when the news appears bad, traders get nervous into the weekend and sell some of their holdings on Friday. Then they read all kinds of adverse media reports about China’s lockdown, which scares them to sell more on Monday.
Investor selling pulls in momentum traders who go short on Monday and adds to the selling pressure. The shorts get squeezed into the Monday close, which triggers Turnaround Tuesday. Then, Tuesday comes, and there is nobody left to sell so short covering set in, and stocks go up.
For a look at all of today’s economic events, check out our economic calendar.