Market movers today
Today’s key releases are the preliminary S&P Global PMIs (formerly known as Markit PMIs) for the euro area (including country-specific indices for Germany and France), the UK and the US covering April.
Besides that it is another quiet day in terms of economic data releases. This morning, UK retail sales for March are due out.
On Sunday, the French presidential election run-off takes place, which will be important for market developments Monday. Polls still favour Macron, but it’s going to be a tight race with left-wing voters as the kingmakers. A Le Pen win would trigger a negative market reaction in our view, but even if Macron is re-elected, France is facing increasing headwinds, both from the economy and political fragmentation.
Also notice that the Fed’s blackout period begins tomorrow, so it is the last day that the Fed can send any new signals ahead of the meeting in early May. While it seems like a 50bp rate hike is a done deal by now, the Fed has not really talked about a bigger 75bp rate hike, which seems unlikely at this point.
The 60 second overview
Market sentiment: Risk sentiment soured yesterday evening as concerns over a monetary-policy-triggered recession dominated. A 50bp hike by the Fed at its upcoming May 4 meeting now seems like a done deal, but yesterday, Powell abstained from suggesting that a more aggressive 75bp hike would be on the table. About 80% of the US firms reporting earnings thus far have beaten estimates but the strength in earnings seems to be outweighed by recession concerns, yet again reflected by the US 5s30s inversion yesterday. China’s COVID-lockdowns also continue to weigh on Asian markets. On Thursday, China’s securities regulator issued guidance urging institutional investors to buy more domestic shares.
Two months of war: On Sunday, it will be two months since Russia started its large-scale attack on Ukraine. Against expectations by many, Ukrainian resistance remains strong, and despite broad-based devastation, Russia has failed in achieving any remarkable victories. The battle over Mariupol continues. Yesterday, President Putin declared that Russia had secured control over the city, but Defence Minister Shoigu said more than 2,000 opposing troops remain holed up in the Azovstal plant. Russia’s new strategy regarding the plant seems to be to seal it off, instead of storming in. Yesterday, the World Bank estimated that physical damage in Ukraine’s infrastructure amounts to USD 60bn and will continue to rise as fighting continues. Ukrainian estimates are far more substantial. At the WB/IMF spring meetings, Ukraine’s prime minister said that the country would need USD 4-5 billion per month in funding, and that reconstruction after the war would cost USD 600bn.
Equities: What looked like a risk on session turned to the opposite at the US opening bell. Rising short end rates (more below) challenged US equities, with all sectors lower. Investors sold off all cyclicals, but specifically growth and rich valued ones. S&P 500 -1.5%, Dow -1.1%, Nasdaq -2.1% and Russell 2000 -2.3%. US futures are slightly lower this morning.
FI: It has been a volatile week with global bond yields trading in a wide range such as 10Y US Treasuries which have moved up and down between 2.80% and 3.00% during the week. Bunds have traded between 0.80% and 1.00%. Yesterday, yields rose again on the back of hawkish central bank comments from ECB, Federal Reserve and BoE. ECB’s Lagarde will round off central bank speeches in the afternoon today. The market is now pricing 50bp from the Federal Reserve at the next three meetings and the US yield curve is again inverting between 5Y and 30Y after it had begun steepening.
FX: Initially, EUR/USD moved higher to above 1.09 supported by hawkish ECB comments suggesting a rate hike may come as early in July but it did not last long, as the cross ended the day nearly where it started. We are sceptical as to the ECB’s ability to strengthen broad EUR to dampen imported inflation, as EUR remains overvalued from a medium-term valuation perspective. Oil moved sideways around USD108/barrel.
Credit: Yesterday, credit markets had a mixed session and concluded in a mild risk-off mode. CDS indices were both wider with iTraxx Main 0.7bp higher at 78.8bp, while Xover was 4.3bp higher at 376.1bp.
