MARKET WRAPS
Watch For:
N.Y. Fed Empire State Manufacturing Survey for May; Canada Housing Starts for April; Canada Manufacturing Survey for March; Canada Wholesale Trade for March; Joe Biden meets with Greek Prime Minister Kyriakos Mitsotakis
Opening Call:
Stock futures edged down Monday, suggesting major indexes will extend the selloff that has pushed the S&P 500 down for six consecutive weeks.
Investors, worried that the Federal Reserve has been too late to spot the risks from soaring inflation, fear the central bank will move too aggressively to fight it, a mistake that could tip the economy into a recession.
The resulting selloff, which has been compounded by the war in Ukraine and Covid-19 lockdowns in China, has been broad, affecting most assets from cryptocurrencies and stocks to government bonds, leaving investors unsure of where to seek safety.
After weeks of losses, some investors are holding on to stocks, or buying more, hoping declines are reaching their nadir. Others are settling in for a protracted period of volatility.
"We are moving into a more challenging time for markets. We need to see signs that inflation is not just peaking but actually decelerating before you find a sustainable bottom in the market. That is going to take at least a couple of months," said David Donabedian, chief investment officer at CIBC Private Wealth.
"That doesn't mean we won't have counter-rallies higher from day to day, but I think this is a long drawn-out process and it is largely data-driven," he said.
Overseas, European indexes weakened with the pan-continental Stoxx Europe 600 edging down 0.4%.
In mainland China, major stock indexes fell after weaker-than-expected data showed the economic cost of strict lockdowns imposed to control Covid-19 outbreaks. Retail sales fell about 11% year-over-year in April and industrial production contracted 2.9% on the same basis, while growth in fixed-asset investment slowed.
Mainland property stocks outperformed, however, after Chinese authorities lowered the minimum interest rate for mortgages extended to first-time home buyers.
"The April economic numbers have confirmed investors' concerns about a China slowdown," said Tai Hui, chief market strategist for Asia at J.P. Morgan Asset Management in Hong Kong. Although Shanghai has laid out a reopening plan and domestic Covid-19 cases have been declining, investors only expect a gradual recovery over the coming weeks and months, he said.
Still, U.S. markets have already sold off markedly in recent weeks, partly on concerns about Chinese supply-chain disruptions, so the weak data were unlikely to have much impact on broader global markets, Mr. Hui said.
Stocks to Watch:
Tesla has delayed by at least a week returning production at its plant in Shanghai to levels before the city's strict Covid-19 lockdowns, Reuters reported.
It plans to stick to one shift at the plant for the current week, with output per day of about 1,200 units, Reuters reported, citing an internal memo. The aim for Tesla now is to boost output to 2,600 units per day from May 23.
Tesla didn't immediately respond to a request for comment early Monday.
Forex:
If risk aversion continues to pick up, sending equity markets lower, the DXY Dollar Index could rise well above 105.00, said ING.
The dollar "has remained firmly in demand" as concerns grow about risks related to Russia's invasion of Ukraine and China lockdowns. "We doubt we are going to see a rapid and material unwinding of defensive dollar positions in the week ahead."
ING has raised its forecasts for U.S. interest rates and now expects three 50-basis point rate rises in June, July and September before a return to quarter-point increases in November.
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Barclays said the dollar has strengthened more than it had expected and sees room for further gains, lifting it to $1.02 per euro in three months' time, before weakening to $1.06 and $1.10 in six and 12 months. Barclays doesn't expect the euro to drop to parity, however.
"Expensive valuations, market expectations of European fiscal support, a partial and gradual reopening in Shanghai and moderating U.S. data are some of the key reasons why we are not calling for EUR/USD parity, and why we expect dollar strength to fade over time."
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Commonwealth Bank expects EUR/USD to consolidate this week after last week's tumble.
European Central Bank officials have made it clear in their speeches that an interest rate tightening cycle will come sooner rather than later and around 20 basis points of tightening is priced for July. However, the ECB is in a similar situation to the Bank of England, with inflation rising in large part due to the current energy price shock and continued supply constraints at the same time that there are a number of strong headwinds for economic growth.
Meantime, LBBW said the dollar "will remain strong against the euro for the time being" and EUR/USD could drop to 1.03 by the end of June.
"Forward contracts on currencies traded by speculators on the Chicago Stock Exchange still do not indicate any dollar euphoria crying out for a correction," said LBBW. Its technical analysis suggests the trend towards dollar appreciation remains fully intact.
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RBC has advised selling GBP/SEK, targeting 12.07, with a stop loss at 12.45, compared with a current level of 12.3158.
This is "primarily a bearish GBP trade" while the Swedish krona is the only G-10 currency against the pound that is neutral to general risk appetite, said RBC.
Reports that the U.K. government may start legislating to override aspects of the Northern Ireland Protocol agreed as part of the Brexit agreement take the U.K. "a step closer to a trade war with the EU," RBC said.
Sterling faces a heavy week for U.K. data while there is little on the calendar in Sweden and krona positioning is "close to neutral."
Bonds:
Ten-year Treasury and German Bund yields are likely to move sideways in the short term, around 3% for USTs and 1% for Bunds, said LBBW, adding for the next 12 months, it expect yields will continue to rise.
"Unlike the prior months, however, the balance between inflation and growth risks may improve," said LBBW, adding that the yield increase should be less extreme than in past months.
Energy:
Oil futures extended losses in Europe, after weak Chinese data that pointed to an economic hit from strict Covid-19 lockdowns, had dragged crude prices into the red in Asian trading.
China's strict Covid lockdowns have raised fears over economic activity, reducing demand for crude oil and the weaker-than-expected figures Monday suggested the hit to demand could also be worse than thought.
While concerns that the global economy is weakening are keeping a lid on oil prices, crude is still up more than 40% this year after Russia invaded Ukraine in February, raising questions about energy supplies. German officials announced over the weekend that Europe's biggest economy will stop importing oil from Russia by the end of the year even if the European Union cannot agree on a ban for all members.
Metals:
Gold and copper prices slipped as the bearish Chinese data and expected weakness from Europe continued to weigh on sentiment.
In addition, the worsening economic data continues to hit gold's place as an inflation hedge, said ANZ Research, adding that "a stronger dollar amid expectations of an aggressive rate hike cycle continues to weigh on investor demand."
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05-16-22 0539ET
