Summary: Market sentiment improved further yesterday before dipping slightly overnight, as China Covid cases are on the rise, pushing back against hopes for a lifting of Covid restrictions. In the US mid-term elections, Democrats are slightly outperforming expectations, possibly set to retain control of the Senate even if Republicans look likely set to take narrow control of the House of Representatives.
US equities exhausted themselves yesterday pulling back from intraday highs to close around the 3,835 level. Sentiment has weakened overnight amid the ongoing impact from the US midterm elections, bad Disney and the fallout from the implosion of FTX in the crypto industry with S&P 500 futures trading down to the 3,829 level. Tesla shares continued lower yesterday, and Elon Musk announced overnight in a filing that he had sold 19.5mn shares in Tesla, and the negative momentum could broaden as many retail investors have sizeable exposure to the stock. The next big event for the US equity market is tomorrow’s October inflation figures which are expected to show core inflation is easing a bit.
Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)
The China reopening continued to fade as new Covid cases surged further to 8,176 yesterday. Hang Seng Index retreated 1.6% and CSI 300 slid 0.8%. China’s PPI declined 1.3% Y/Y in October due to falls in energy and materials prices and weaknesses in metal processing. CPI inflation was also weaker than expected and fell to +2.1% in October from 2.8% in September on weak consumer demand and property prices. Share prices of Chinese developers however surged, following the Chinese authorities pledged to provide credit support, including credit insurance and bond buying, to private enterprise developers.
The US dollar fell sharply yesterday, with EURUSD testing the pivot high of 1.0094 before pulling back slightly into this morning and USDJPY had a look toward the pivotal 145.00 level without breaking through. Elsewhere, AUDUSD tested above the 0.6522 pivot late yesterday before pulling back again, likely on concerns that rising China Covid cases are frustrating hopes that a shift away from lockdowns will provide a further boost to the commodity market. Lower US treasury yields yesterday helped drive the US dollar lower and are a key focus over the Thursday October US CPI release, as CPI releases have sparked considerable volatility in recent months.
WTI futures trade back below $90 and Brent near $95 after a fresh surge in China’s Covid cases sparked concerns over whether China will part ways with its Zero Covid policy. Also weighing on prices was the API reporting a 5.6m build in crude and 2.6m build in gasoline stocks. On the supply the EIA made another downgrade to its forecast for US 2023 production, down 0.7m b/d since March to 12.3m b/d driven by labor shortages, high equipment costs, supply-chain constraints and not least commitment to profits over production.
After pausing on Monday, gold, silver and copper all resumed their upside push yesterday with the moves being triggered by renewed dollar weakness and softer bond yields ahead of tomorrow’s US October CPI release. A selloff in cryptocurrencies potentially helped get the ball rolling, especially gold which found fresh momentum buying on the break above $1680/85 area. Technical resistance levels in silver at $21.50 and copper at $3.69 together with the EURUSD hitting resistance at the pivot high of 1.0094 paused the rally. Gold, up 83 dollars in three sessions, will be watching $1735 closely as a break above could be signalling an end to the month-long correction.
After a weeklong dispute between crypto exchanges Binance and FTX, a letter of intent was signed yesterday for Binance to acquire FTX, stating a significant liquidity crunch for FTX. The announcement was initially a brief relief for the crypto market, but it was followed by a steep crypto sell-off, likely dragging major equity indices such as S&P 500 down as well. Nervousness is spreading throughout the crypto markets in fear of further contagion as we saw earlier this year, and a higher degree of volatility should be expected in the crypto markets. Read more here.
US Treasury yields fell yesterday all along the curve ahead of the macro data point of the week – tomorrow's US October CPI release. Focus on the 3.90% yield on the 10-year treasury yield to the downside and 4.3% area cycle high to the upside in the wake of that release.
Disney+ delivered Q4 subscribers of 164.2mn vs est. 162.5mn but EPS came in at $0.30 vs est. $0.51 as energy costs and wage pressures are pressuring the operating margin. Disney+ is still on track to be profitable in the FY24 (two years from now). Disney’s Q4 revenue was $20.2bn vs est. $21.3bn. Shares were 7% lower in extended trading.
The rumours about the big losses at Twitter and that Elon Musk would be forced to fund its operations were true as he filed overnight that he had sold $4bn of Tesla shares pushing the price down by another 2% in extended trading. Negative momentum could easily extend here with Tesla shares sitting a crucial support area back from March and June 2021.
The final results are too early to call, but the Democrats may possibly retain control of the US Senate, with one race in Georgia possibly requiring a run-off as was the case in the 2020 election before any final outcome is known. Final tallies are not available for the House of Representative results, but the lean in the results makes it likely that the Republicans will take control of the House by a fairly comfortable margin (NYT estimates 225-210 this morning). Democrats losing the House means that the last two years of the Biden presidency will be “lame-duck”, with no real ability to shape new policy. At the same time, given the situation coming into this election, with soaring inflation and poor popularity for the sitting president, the Republican performance looks quite weak. As well, if the Democrats do retain control of the Senate, Republican-driven legislation will be unlikely to reach Biden’s desk, meaning he won’t have to formally veto their bills.
The combination between high inflation across the board (CPI hovering close to 6 % on a year-on-year basis), lower purchasing power and higher interest rates is pushing housing prices down in France. According to the real estate promoter Century21 (one of the leading players in this market), real estate prices went down under the threshold of 10.000 Є per square meter in Paris. The deceleration in prices is, however, limited so far. Contrary to Tel Aviv, Amsterdam and Hong Kong, the Parisian housing market is not in a situation of a speculative bubble. Prices are overvalued, however. Expect prices to go down a bit more due to a drop in solvent demand. But we won't see a large decrease in prices as it is currently happening in several major cities in the United States, for instance. The French housing market is more resilient for mostly two main reasons: fixed interest rates and a comparatively low household debt (it represents about 124 % of net disposable household income versus a peak at 249 % in Denmark).
Many recent US CPI releases have sparked considerable market volatility, not least the September release last month which strongly surprised by showing core inflation reaching a new cycle high of 6.6% year-on-year. Tomorrow’s October CPI release, ex Fresh Food and Energy is expected to come in at +0.5% month-on-month and +6.5% year-on-year, with the headline expected at +0.6%/7.9%, which would be the first sub-8.0% year-on-year print since February.
Earnings to watch
Today’s US earnings focus Rivian Automotive and DR Horton. The electric vehicle industry is in high growth phase and Rivian is also expected to report revenue of $561mn up from $1mn a year ago as the company ramps up production of its delivery vans. DR Horton is expected to deliver FY22 Q4 (ending 30 September) revenue growth up 25% as the tailwind from the backlog is still feeding through, but revenue growth y/y is expected to collapse to –6% y/y in the current quarter so the outlook is the key watch in this earnings release.
Economic calendar highlights for today (times GMT)
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Source: https://www.home.saxo/content/articles/macro/market-quick-take-nov-9-2022-09112022
