IG Morning Call

[MongiIG]

Hopes of economic stimulus in China prompted a recovery in stocks there, after days of heavy losses, and prompted a revival in other Asian markets as well. This comes after a rebound for Wall Street during Tuesday's session which was accompanied by continuing falls in the oil price. Fed decision day is finally here as well, with Jerome Powell and his team expected to announce a 25 basis point rise in interest rates, the first increase since the pandemic. Further rate increases are expected as the year goes on as the central bank attempts to normalise policy to an extent. This has been complicated by soaring oil prices and the disruption caused by the war in Ukraine, but a steady tightening over the year is still the base case. New economic projections will also be issued, but the rapidly-changing nature of the situation will mean these may have to be revised fairly soon.

 

[MongiIG]

The march to higher interest rates is firmly in progress now at the Fed, after last night's rate increase, the first since 2018. The FOMC expects to repeat the performance at every subsequent meeting for the rest of the year, marking a dramatic shift from expectations a year ago. Signs of progress in the Russia-Ukraine talks have meant that a much more risk-on atmosphere has prevailed despite the Fed's declared intentions, helped by a softer oil price and falling safe-haven demand for the US dollar. It is now the turn of the Bank of England, which is expected to raise rates by a third tranche of 25 basis points, continuing its hiking efforts of the last two meetings. 

 

[MongiIG]

Some of the shine came off the recent rally in Chinese stocks overnight, and once again tech stocks were hard hit. The Hang Seng tech index fell 1.9% after early gains were given up. The overall Hang Seng was down 1.2%, with property stocks hit as Evergrande suspended trading in its shares, raising fresh fears about the sector. After the strong gains for equity markets last week a more indecisive trading environment appears to prevail overall, with small losses expected for European markets on the open, heightened by reports that the Russian and Ukrainian presidents are not yet ready to meet to discuss the situation. Oil prices are on the up again, however, on reports that the EU was considering an embargo on Russian oil exports, ahead of a summit meeting this week which will be attended by President Biden.

 

[MongiIG]

Stock markets continue to gain, with the bounce accompanied by steep drops in bond prices. Investors seem to have taken plenty of heart from the confident outlook on the US economy issued by Fed chair Jerome Powell at the beginning of the week. Recession fears appear to have eased considerably, and even the continued rise in oil prices does not appear to be providing the same fear that it did earlier in the year. UK CPI hit a 30-year high this morning, as prices rose 6.2% for the year to February, driven by energy, food and fuel costs. This squeeze on consumer incomes will come into focus today with the UK Spring Statement by the chancellor, who will lay out spending plans for the next few months. 

 

[MongiIG]

A renewed surge for oil prices has revived the fears about inflation that had seemed to be diminishing in recent days. Both Brent and WTI gained sharply yesterday, and stock markets fell back in the US and Europe, and in Asia overnight, as investors fretted about a fresh rise for inflation numbers in the months to come. Fresh sanctions on Russia are likely to be announced, although a move to limit Russian oil exports continues to falter. Today sees the release of flash PMI numbers from around the globe; given the fears that higher inflation will lead to weaker growth, any downturn in today's PMI figures is likely to prompt further weakness in stocks, while bolstering safe havens like gold and Treasuries. Western leaders meet today and tomorrow for discussions around the Ukraine situation and further sanctions, so today has the potential for headlines that might prompt some volatility.

 

[MongiIG]

While US stocks managed to make some headway yesterday, in Asia the picture was less encouraging. Chinese tech stocks fell sharply, dragging the wider Hang Seng lower, while the Nikkei also retreated. The impact of last week's statement about additional stimulus from China's vice premier continues to wane, and the ongoing rise in oil prices and the battle against Covid cases in China continues. Attention remains focused on Fed members, with a number suggesting that the pace of rate increases needs to be speeded up, bolstering expectations that the next meeting may see a 50bps increase as the US central bank attempts to contain inflation. 

 

[MongiIG]

Asian markets, particularly in China, struggled as Shanghai began a nine-day lockdown to combat rising Covid cases. This ongoing battle in China has caused concern in markets, due to the potential for greater disruption to supply chains. Oil prices fell sharply on fears of weaker demand, although at least this will take some pressure off inflation in the short-term. Stock markets have held on to most of their gains from the lows of March, but as the quarter draws to a close and US earnings season looms on the horizon investors will begin to wonder whether equities can justify the recent recovery, given the concerns about the economic outlook and the impact of the war in Ukraine.

 

[MongiIG]

Hopes of progress towards peace in the Ukraine-Russia conflict have continued to support gains in equity markets, with Asian stocks outside Japan moving higher after a strong day for US and European markets. The latter were particularly strong, as was the euro, which rallied 1% yesterday. Signs of trouble were not entirely absent, as the US yield curve briefly inverted, signalling that investors are concerned about the impact of rate hikes on the US economy. Yield curve inversions tend to precede recessions, usually by at least a year, but so far other data such as unemployment figures have yet to turn conclusively higher. On that note, today sees the release of the monthly US ADP payroll report, along with German CPI and the weekly oil inventory figures from the EIA.

 

[MongiIG]

Dwindling hopes of peace in the Ukraine-Russia conflict and 30-year high inflation at 7.3% in Germany snapped the rally in most European and Asian equity markets. In Europe the FTSE 100 remained positive, though, and in Asia the ASX, as indices mark the end of a wild month. The euro continues to rally amid rising European inflation which puts the European Central Bank (ECB) under pressure to start tightening its monetary policy.
Oil dived more than $5 a barrel as US president Biden mulls another big release of strategic reserves to combat inflation. On that note, at today's OPEC+ ministerial meeting the producer alliance - which includes Russia - is likely to stick to its path of gradually increasing oil production. The US sees the release of the monthly core PCE price index and initial jobless claims, along with German and Eurozone unemployment data ahead of Friday's closely watched US Non-Farm Payrolls (NFP).

 

[MongiIG]

The quarter finished on a poor note for markets yesterday, with US stocks enduring their worst quarter since the beginning of the Covid pandemic. After such a strong bounce from the lows of March, indices were vulnerable to a bout of profit-taking, especially given the still-gloomy backdrop. The conflict in Ukraine rumbles on despite peace talks, and inflation continues to take its toll on consumer spending. Markets fell in Asia overnight too, starting the new quarter on an uncertain note. Equities have taken little comfort from the fall in oil prices too, which, having fallen sharply from their recent highs, have also begun the quarter with losses. Today sees the release of the monthly non-farm payrolls report, and while jobs growth is expected to remain strong, it will rise at a slower pace than last month. In addition, a CPI reading from the eurozone will keep inflation at the forefront of investor minds. 

 

[MongiIG]

Asian stocks made gains, thanks partly to news that the Chinese regulator would make changes to rules regarding confidentiality, allowing US auditors to access sensitive financial information. This prompted a surge in tech stocks, which lifted the broader Hang Seng. South Korea and Australian indices made gains, while the Nikkei was broadly flat. A strong US jobs report on Friday reassured markets about the solidity of the US economy, while also boosting expectations of a 50-basis point rate hike at the next meeting. The Fed may well use this as cover for a more aggressive policy of hikes and balance sheet reduction, as it looks to gain some control over surging inflation. Today is a quiet day, with little of note on the economic or corporate calendars. 

 

[MongiIG]

Most Asian stock markets were muted following a second day of technology led gains in the US after news that Elon Musk has bought a 9.2% ‘passive’ stake in Twitter, which sent that company’s stock surging by nearly 30%. The Kospi and Nikkei 225 ended the day in slightly positive territory but the Shanghai Composite and Hang Seng made stronger gains of +0.91% and +2.1% respectively. Even though the Reserve Bank of Australia (RBA) kept the cash rate unchanged at a record low of 0.1% as expected at its April meeting, it dropped the "patient" pledge in its statement. This has sent the Australian Dollar climbing with local bond yields but dampened Aussie stocks which still ended the day just in positive territory. US trade balance data for February and US ISM non-manufacturing PMI for March are on the economic calendar for today, ahead of Wednesday's US FOMC minutes. 

 

[MongiIG]

Volatility in US bond markets, with the 10-year note climbing 15 basis points and the curve steepening as a result, had a negative impact on US and Asian stocks overnight. The trigger was one of the US Federal Reserves (FED) usually more dovish members, Vice Chair-elect Lael Brainard, who in yesterday's speech took a hawkish stance when she mentioned that she sees a balance sheet reduction soon and 'at a rapid pace...,if warranted.' On top of that came the Caixin China General Services PMI's first drop in seven months and sharpest fall since February 2020 and confidence being at a 19-month low amid the new wave of COVID-19 outbreaks and mobility restrictions. This pushed Asian stocks further into the red with European indices expected to open lower while investors await minutes from the latest Federal Reserve meeting for fresh insights into its tightening plans.

 

[MongiIG]

Asian markets continued the gloomy mood, falling across the region as investors turned more risk averse in the wake of the latest set of Fed minutes. Rate hikes and cuts in the asset purchase programme are expected for some time to come, as the Fed aims to control surging inflation. Global markets had seemed more relaxed about this policy shift, given their rally from the March lows, but stocks were looking vulnerable to at least a short-term pullback after recent gains. Yields continue to climb, while the US dollar has been strengthened by the minutes, especially as previous doves such as vice-chair Brainard have moved to back the tightening of policy. European and US markets remain under pressure, with futures pointing to further losses in the early part of the session. 

 

[MongiIG]

A choppy few days in global markets has continued to see small losses for equity futures, while the dollar has been given a lift by Fed policymaker comments. Holidays in key countries muddied the waters, but Asian markets were able to make some small gains overnight, with commodity prices helping to push the ASX 200 up 0.6%. China was less enthused, and managed to only eke out small gains despite a decision to cut reserve requirements for banks in order to boost the economy. Mixed economic data from China yesterday have not helped matters. James Bullard, St Louis Fed president, said that a 75 basis point increase in US rates could be needed, a comment that pushed the dollar basket to a two-year high. He added that rates should reach 3.5% by the end of the year, as inflation remains 'far too high'. US earnings season is now in full swing, and Netflix, Halliburton and Johnson & Johnson all report today, compensating for a quiet economic calendar. 

 

 

[MongiIG]

US stocks rebounded yesterday, led by tech and small caps, even as real yields moved into positive territory for the first time since the early weeks of 2020. This came despite a loss of subscribers for Netflix, the first in ten years, which prompted the shares to come under heavy pressure late on in the session. Asian markets posted gains too, although Chinese stocks lost some of their gains as investors fretted about the impact of Covid lockdowns. The rout in the yen continues, with the greenback hitting Y129 against the Japanese currency as the divergence between US and Japanese monetary policies became more stark. Today's earnings calendar includes Tesla, with the company's premium status potentially a hindrance as consumer spending suffers thanks to higher inflation. 

 

[MongiIG]

It seems that stocks are not as comfortable with a more aggressive pace of Fed tightening as previously thought. Stocks in the US fell back sharply yesterday,  after making headway in the early part of the session, as Jerome Powell said a 50 basis point increase in rates was appropriate for the upcoming FOMC meeting in early May. Asian markets took their lead from the poor US finish and headed lower too, with a sharp rise in Japanese CPI adding to the prevailing caution. Powell also noted that avoiding a recession in the US would be difficult, providing another reason for stocks to give up some of their gains. Today is flash PMI day, with economies around the world providing an update on their performance in April.

 

[MongiIG]

European stocks look set to follow Asian markets lower this morning, after a poor session for equities overnight that came hard on the heels of the losses seen on Friday. Worries about interest rates and a possible recession are back on the table, driving investors out of both stocks and bonds. With inflation already hitting consumer spending, the fear is that a faster pace of Fed tightening will put additional pressure on the US economy. Earnings season has already flagged some of these concerns, and with a broad swathe of companies reporting this week, investors are likely to remain nervous. Macron's emphatic win in the French presidential election helped to steady the euro, removing one point of concern for markets. Along with the German IFO index, earnings from Coca-Cola mark a quieter start to a busy few days for corporate reporting on both sides of the Atlantic.

 

 

[MongiIG]

US markets came to the rescue yesterday, rallying from the lows of the day and helping to steady the battered ship of global equity markets. The news that Elon Musk and Twitter had agreed to a buyout deal seemed to provide the spark for a bounce, but with plenty of big tech earnings still to come this week sentiment remains fragile. Asian markets bounced back from one of their worst days in two years, although concerns about lockdowns in China and their effect on economic growth in that economy and throughout the region continued to weigh on investors. The Shanghai lockdown is now entering its fourth week, as authorities there attempt to implement a 'zero Covid' policy. The dollar was stronger once again yesterday, making headway against most major currencies as investors looked towards the next Fed rate hike, although it did struggle against the yen as the Japanese currency recovered some lost ground. Today sees the release of US durable goods orders data, but also marks the start of a cluster of big tech earnings, as Microsoft and Alphabet report quarterly numbers. 

 

[MongiIG]

Investors are back to worrying about inflation, interest rates and economic growth, prompting losses once more across global markets. Yesterday saw tech shares in the US fall sharply, and both Alphabet and Microsoft fell around 4% in the wake of their latest results. A growing Covid outbreak in Beijing has prompted fears of a strict lockdown there, putting further pressure on economic growth. Further earnings from Boeing, Ford and Meta provide an outlook into a broader swathe of the US economy, but Meta will face a tough environment for its stock, given the caution surrounding tech names, even after its heavy losses for the year so far. 

 

[MongiIG]

It continues to be a volatile week for markets, but overnight saw modest gains in Asia, following on from a recovery in the US. A beat on forecasts from Meta helped to steady tech names, while Chinese stocks received support after reports that officials would be looking at ways to boost employment as part of a package to support the economy. However, China's 'zero Covid' strategy, the Russia-Ukraine war and the backdrop of further tightening from central banks, continues to provide a worrying set of problems for equity markets to navigate. Firmer commodity prices also pose the risk of higher inflation, although it continues to be a boon for the FTSE 100, which has fared much better of late than some of its peers. More tech earnings come through today, this time from Apple and Amazon in particular, and we also get the first reading on US Q1 GDP, along with weekly jobless claims.