US Earnings, ECB Decision, China’s Trade Data

Big US names publish earnings report this week; US retail sales and CPI on the wire

The major US corporate names publish earnings reports this week and the equity market’s performance will be mostly driven by corporate results throughout the week. The macro focus will be on US March retail sales on Tuesday and CPI data on Friday. Traders will be closely monitoring Johnson & Johnson (NYSE:JNJ), JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Intel (NASDAQ:INTC) on Tuesday; US Bancorp (NYSE:USB), Charles Schwab (NYSE:SCHW), Kinder Morgan Inc (NYSE:KMI) and PNC Financial Services Group (NYSE:PNC) on Wednesday; Citigroup (NYSE:C), Philip Morris International Inc (NYSE:PM), Schlumberger NV (NYSE:SLB), United Health Group and Goldman Sachs (NYSE:GS) on Thursday and General Electric Company (NYSE:GE), Honeywell International Inc (NYSE:HON) and Reynolds American (NYSE:RAI) on Friday.

The UBS comment on a recent client note attracted our attention. The UBS strategists say their “thoughts on the impact of zero rates imply that the first few rate hikes may lead to acceleration in economic activity rather than acting as a restraint […] higher rates are unlikely to derail US equities as increased mergers and acquisitions should continue to be supportive of equity markets. At the same time, moving the economic and credit cycles more into sync could yield longer-term benefits even if they create some short-term stresses across markets.” Instead of writing off gains on decreasing cheaper liquidity, would the US equities have more reason to rally, alongside with the USD and despite the USD strength walking into the Fed normalization? Given the unusual NFP reaction of the US stocks, we do not rule out a change in market reaction in the coming months. This would imply some solid two-way market volatility on equities.

EUR-bears in charge walking into the ECB decision

We are heading into the ECB’s decision week. The ECB’s balance sheet expanded to 2.334 trillion euros (more than 9%) since March 6th pushing the Eurozone sovereign bond yields to record lows. The sovereign debt purchases are been amplified by investors as they are now racing with the ECB to purchase the targeted papers (short-term core and long-term peripheral debt). Given the QE setting, there is little appetite to go long on the short-end of peripheral bonds and the liquidity for short-term core debt should soon dry up and push demand toward longer maturity German, French and Dutch papers. The Germany 10-Years pay about 0.15% as of today; negative yields will soon be on the table. The anticipation for lower rates is a fundamental weight on euro’s valuation, which is not ready to dissipate any time soon.

Even if the speculative EUR short positions on futures decreased slightly amid Greece’s payment to the IMF on week to April 10th, the strong negative fundamental positioning weighed heavier. The ECB meets on Thursday and is expected to maintain the status quo. Given the aggressive QE being conducted, there is little chance for the EUR-bulls to reverse trend before Mario Draghi’s press conference. The market remains strongly short EUR. EUR/USD hit our technical target at 1.0655, the stronger bearish momentum now points at mid-March lows (1.0458). Verse the Sterling pound, the bias remains negative with support at 0.70/0.72.

European equities open sluggish on shrinking Chinese trade surplus

Weakness out of China is having an early dampening effect on European trade, as slowdown fears continue. Imports fell by 12% and exports by 15% in March, calling in to question the government’s 7% sustainable GDP growth target. The AUD/USD took a dive to 0.7553 amid Chinese trade deficit sharply narrowed to $3.08 billion in March from $60.62 billion (vs. $40.10 billion exp.). The soft commodity markets combined to the narrowing demand from China increase the probability that the RBA will need to react sooner rather than later. The resistance remains strong at 50-dma (0.7738) with large put expiry sitting at 0.76 for today expiry.