Global Market Quick Take: Europe – August 11, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): It is still pointing down for equities

The US July CPI report became a non-event as the supposed low annualised inflation in the US is not taken at face value by investors given the latest signals in commodities suggesting price pressures are re-emerging. S&P 500 futures are trading at the 4,489 level this morning in early European trading hours and will soon hit the 50-day moving average at 4,467. Technically the equity market is negative and there are few fundamental drivers on the upside at this point. In our equity note yesterday we highlight that stagflation environments are bad for equity returns and during those periods defensive sectors outperform cyclical sectors.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Continued weakness on real estate concerns

The Hang Seng Index declined 0.6% while the CSI300 tumbled 1.4%. After missing coupon payments earlier this week, Chinese property developer Country Garden (02007:xhkg) tumbled further on pronouncing a record USD7.6 billion loss estimate for the first six months of the year, dragging down other Chinese developers listed in Hong Kong. However, developers traded in mainland bourses rallied on headlines that China's securities regulator is convening discussions with property developers and banks today.  Alibaba (09988:xhkg) gained 2.3% after reporting stellar June quarter results.

FX: Treasury sell-off weighs on yen, USDJPY resistance ahead

Higher bond yields after a poor 30-year Treasury auction underpinned weakness in the Japanese yen. USDJPY rose to fresh highs of 144.90, with resistance at 145 and June high of 145.07 approaching. Intervention fears may prompt some profit taking here, but the Japanese authorities may continue to be patient. NZD weakness also extending to target the 0.60 handle. AUDUSD dipped to lows of 0.6510 in Asian morning hours as RBA Lowe delivered testimony and tried to keep the door open for further tightening but was comfortable with the path of inflation. GBPUSD broke below 1.27 and may target early August lows of 1.2621 with Q2 GDP data eyed today. Overall, the Bloomberg Dollar Index trades up 0.5% on the week with gains seen against all its major peers, most notably JPY, CNH and AUD.

Crude oil: reversing from the top-end of the range

Crude oil prices trade little changed on the week despite US inflation data reaffirming the disinflation trend without spelling recession fears clearly. This suggests focus is still on tight supply, but technical levels as well as the stronger dollar may have prompted some profit-taking. OPEC data points to a 2mb/d deficit in the second half of the year and with Saudi Arabia extending its 1mb/d cut to September the downside risk, at least in the very short term seems limited. Later this morning, the IEA will provide their monthly snapshot of the market. CFTC’s weekly COT report will be watched as well after recent reports showed the bulk of the speculative buying had been short covering instead of fresh longs suggesting the rally may remain capped.

Gold: post-CPI spike erased

Gold trades near a one-month but above key support in the $1900 area after Fed’s Daly said the Fed despite easing inflation had ‘more work to do’. These comments together with a firmer dollar as US long-date bond yields rose helped erase a post-CPI gain. Today the attention turns to US PPI but given the continued reduction in ETF holdings and rising funding, or opportunity cost, gold bulls need to be patient as we await the eventual peak in US rates.  Resistance at $1925 with support at $1900, the 200-day moving average.

US Treasuries: weak demand at 30-year US Treasury auction drives yields lower (2YYU3, 10YU3, 30YU3)

Demand for yesterday’s 30-year US Treasury auction wasn’t strong, despite bonds pricing at the highest yield since 2011. That’s remarkable if we think that earlier during the day, the US CPI report was on screw showing monthly core inflation at 0.2%. It wasn’t enough to relieve worries concerning upcoming inflation and an increase in Treasury supply. The yield curve remains supported in the low -70bps.  We remain constructive of the front part of the yield curve, while long-term yields might rise higher as labour remain supported and the economy doesn’t step into a recession.

What is going on?

US CPI reiterates disinflation theme

US inflation for July came in softer-than-expected as headline rose by 3.2% YoY (exp. 3.3%), slightly above last month’s 3.0% YoY as base effects turned unfavourable. Headline MoM saw a steady gain of 0.2%. Core metrics were as expected as they came in at 4.7% YoY and 0.2% MoM. While the release continued to provide little reason for markets to start expecting another Fed rate hike in September, it was worth noting that shelter costs still contributed to 90% of the increase in July. The disinflation theme mostly rests on the assumption that shelter costs will come down amid the lagged effect of housing, while other components stay low. Rising oil prices may make the August print look uglier, and that is released just ahead of the Fed’s September meeting. However, if credit conditions tighten further in H2, then the disinflationary impulse will likely continue.

Luxury stocks basket rise 5%

Our luxury basket was the best performing theme basket yesterday as Tapestry (the parent company of brands such as Coach and Kate Spade) announced an agreement to acquire Capri Holdings (the parent company of the Michael Kors brand). The move is seen as a US luxury industry attempt to compete with the luxury giants from Europe and generally we expect acquisition activity to remain hot in the luxury industry. Capri shares rose 56% in yesterday’s session.

President Biden calls China a ticking time bomb as economic troubles mount

U.S. President Biden told the audient at a fundraiser event in Utah that China is a “ticking time bomb” because the country has “got come problems” due to weak growth and economic challenges. He further commented, “that is not good because when bad folks have problems, they do bad things”. It is important to note that this speech is for the domestic audience and thus, as in previous speeches for this audience, the rhetoric is harsher than actual real politics.

Alibaba reports strong June quarter results: adjusted net profit soars 48% Y/Y, exceeding forecasts

Alibaba released robust financial results for Q1 FY24. The company's total revenue rose 14% Y/Y rise, reaching RMB 234.2 billion and significantly surpassing the market consensus forecast of RMB 223.8 billion. The e-commerce giant’s adjusted EBITDA grew 32% Y/Y, to RMB 45.4 billion, exceeding the consensus estimate of RMB 39.6 billion by 15%. Adjusted net profit soared 48% Y/Y to RMB 44.7 billion, 16% ahead of the consensus forecast of RMB 38.4 billion. Noteworthy margin improvements were evident as well, with the adjusted EBITDA margin rising to 19% from the previous quarter's 12%, while the adjusted net profit margin increased to 19% from 13%.

The growth of Taobao-Tmall's Customer Management Revenue (CMR) outperformed expectations, registering a 10% increase. This result was attributed to merchants' heightened willingness to invest in advertising. Meanwhile, Taobao and Tmall's EBITDA increased by 9% Y/Y, reaching RMB 49.3 billion.  Cloud revenue demonstrated a positive upswing, marking a 4% Y/Y growth.

Additionally, in Q1 FY24, Alibaba spent USD 3.1 billion in share repurchases, which exceeded the preceding quarter's amount by over 50%. This development has heightened investor expectations of an enhancement in the company's share buyback plan.

US jobless claims see a modest rise

Initial jobless claims rose to 248k from 227k, above the expected 230k while continued claims dipped to 1.684mln (prev. 1.7mln) underneath consensus of 1.707mln. The increase however remains modest compared to the pace of tightening we have seen, and risks remain tilted towards further loosening of the labor market if credit conditions deteriorate.

EU and US Natural gas soften

Natural gas prices eased on Thursday with Dutch TTF back below EUR 38 after surging 40% the previous day on now cooling LNG strike fears in Australia, and inventories that are 88.3% full compared with the 74% five-year average. US natural gas also reversed lower after failing to break resistance in the $3 area, amid forecasts for milder weather next week reducing demand for cooling and after the EIA reported a bigger than expected stock build of 29bn cubic feet.

Grain markets await US supply and demand report

CBOT corn and wheat futures traded higher on Thursday ahead of a USDA’s monthly report on supply and demand. Overall, the recent price action has been subdued with wheat the only contract up on the week on continued worries about Black Sea supply. The BCOM Grains index surged 13% last month on weather and supply worries, before slumping to a two-year low last week from where it has since tried to recover. The WASDE report will give a fresh update on the government's estimates for yield, production and 2023/24 ending stocks and surveys point towards a lowering of corn and soybean yield and production by around 1%.

What are we watching next?

Technical Analysis

• S&P 500. Downtrend. Support at 4,455. Likely to drop below 4,400. Support at 4,340
• Nasdaq 100. Correction down to 14,750 likely
• Hang Seng broken bullish. Likely move to 20,155 and 20,865.
• DAX Bearish. Rejected at 16K.  Likely to drop to 15,482 support area
• AEX25 Closed below support at 768 i.e., downtrend to 748 support
• BEL20 uptrend but likely minor correction
• CAC40 Key support at 7,251. If broken downtrend to 7,100 
• EURUSD Finding support at 0.786 retracement. Likely bounce and uptrend to resume
• Dollar Index rejected at 0.786 retracement at 102.41
• GBPUSD bounced just above key support at 1.2590. RSI bullish 
• USDJPY above resist at 143.40. Likely to test 145. Could be too strong to penetrate 
• EURJPY above strong resist at 158. Likely to move to 160.60
• Gold below support at 1,929. Now at 0.786 retracement. Could test June low at 1,892
• Copper below support at 382. Next 370   
• Brent rejected at resistance at 88.20. Expect correction possibly down to 83-82
• Dutch Gas resistance at 50.30
• US 10-year correction but uptrend intact. Support at 3.90. Resistance at 4.22

Earnings to watch

The earnings calendar is light today. Looking ahead for next week’s earnings releases the key focus will be on Home Depot (home improvement in the US), Nu Holdings (banking in Brazil/Latin America), Sea Ltd (e-commerce in Southeast Asia), Tencent (digital economy in China), Cisco (network equipment), Adyen (payments), Nibe Industrier (demand for air-to-water heat pumps), Walmart (US consumer), Deere (agriculture demand), and Palo Alto Networks (cyber security).

• Friday: Constellation Software, Wilmar International

Next week’s earnings releases:

• Monday: CSL, PetroChina, Meituan, Xiaomi, COSCO Shipping, KE Holdings, Trip.com
• Tuesday: Suncor Energy, Alcon, Home Depot, Agilent Technologies, NU Holdings, Sea Ltd
• Wednesday: Carlsberg, Tencent, JD Health, JD Logistics, Cisco, TJX, JD.com, Target
• Thursday: Telstra, Coloplast, CNOOC, Adyen, Nibe Industrier, Geberit, Walmart, Applied Materials, Ross Stores
• Friday: Kingspan, Deere, Palo Alto Networks, Estee Lauder, XPeng

Economic calendar highlights for today (times GMT)

• 0800 – IEA's Monthly Oil Market Report
• 1230 – US July PPI
• 1400 – U. of Michigan Sentiment
• 1600 – USDA's World Agricultural Supply and Demand estimates
• 1930 – CFTC's Weekly Commitment of Traders Report