Summary: Risk-off is coming back into markets this morning as fresh July figures show that China exports are worse than expected highlighting the slowdown in the global manufacturing sector. Equities are lower with JPY under pressure while oil is mixed and bond yields lower. The next focus point is to what extent the bond market will begin pricing a recession.
The positive start to the week yesterday in equities is reversing this morning driven by worse than expected China export figures for July highlighting the slowdown in the global manufacturing sector. S&P 500 futures are down 0.3% in early trading and STOXX 50 futures are down 0.5%.
Hong Kong’s Hang Seng Index dropped by 1.4% in early Asian afternoon while the mainland’s CSI300 was flat. China property stocks plummeted as investors were concerned about the liquidity of leading developer Country Garden (02007:xhkg). Pharmaceutical shares extended the decline last week due to investor retreat following increased Chinese authorities' anti-corruption efforts in the industry.
Large funding auction kept the long-end of the US yield curve under pressure and that saw yen being the G10 underperformer once again. USDJPY rose back above 143 from lows of 141.52 in the US session as focus turns to US CPI this week to gauge how far Treasury yields could go. A stronger dollar was the key theme of the Asian session with NZDUSD back below 0.61 and AUDUSD testing 0.6540 with China imports also remaining under pressure. GBPUSD was back higher to test the 1.28 handle in the US session with BOE likely remaining as the last hiker in the G7 pack but reversed lower in Asia. BoE Pill, in a Q&A, said inflation remains much too high and he has seen a lot of news on inflation persistence, but caveated that there are risks on both sides on UK inflation. Pill warned there are risks the UK hasn't raised rates enough.
Brent crude reached a fresh four-month high on Monday at $86.73 in response to voluntary production cuts and potential risks to Black Sea supplies before trading lower towards support in the $85 area after the general level of risk appetite faded. China’s commodity imports weakened last month, including crude imports which fell 16% from the three-month high set in June, as refineries ran down inventories. While traders continue to focus on potential supply disruptions, they will also be watching EIA’s short-term energy outlook due later today and CPI releases later in the week.
Spot gold prices remain under pressure from the recent rise in US bond yields and after Fed’s Bowman (a voting member) said more rate hikes may be needed. Following the mid-July rejection below $2000 gold has retraced 61.8% currently providing some support in the $1930 area. While Central banks recorded a record first half in terms of gold demand, traders and investors in futures and ETFs remain sceptical about the current upside potential. ETF investors have been net sellers for the past 10 weeks, in the process cutting holdings to a 40-mth low, leveraged futures funds in the last two weeks cut length by 27% to 99k lots, a 4-wk low. We maintain a positive outlook for gold as global growth slows, bond yields peak, and the FOMC ability to hike rates becomes increasingly challenged.
The US Treasury will sell $103 billions in 3-, 10-, and 30-year bonds this week, the largest increase in size for these auctions in two and a half year. The question is whether demand remains supported despite the increase in auction size. Inflation data will also be a focus this week, as the monthly CPI is expected to come at 0.2% for the second month on a row, the lowest in more than 2 years. It could accelerate the steepening of the yield curve which started last week, with the only exception that this steepening might be bullish for Treasuries as markets push back on the bets of another interest rate hike.
German Schatz gained yesterday as the Bundesbank stopped paying interest on bank deposits. However, Bund yields soared as yield rise in the US. Consequently, the German yield curve steepened by 7bps to -39bps, the highest since May. The steepening may continue until September, when inflation concerns will be renewed, and the front part of the yield curve will be in peril again.
The Italian government has approved a new tax package aimed to bring in €2bn in tax revenue with the biggest surprise being an extra tax on banks’ profits. The move is likely to put pressure on Italian banks (Intesa Sanpaolo and UniCredit) in today’s trading.
China's exports fell 14.5% in July year-on-year, while imports contracted 12.4%, customs data showed on Tuesday, in the biggest decline in outbound shipments from the world's second-largest economy since February 2020. A Reuters poll of economists had forecast a 12.5% fall in exports and a 5.0% drop in imports. China's economy grew at a sluggish pace in the second quarter as demand weakened at home and abroad, prompting top leaders to promise further policy support at a meeting of the Politburo last month.
Palantir, the US based data analytics software maker, reported slightly better than expected revenue for Q3 at $553-557mn vs est. $554mn and increased its shares buyback to $1bn. Investors liked the earnings report from Palantir sending its shares up 3% in extended trading. Glencore is reporting 1H EBITDA this morning down 50% from a year ago due to falling commodity prices while adding a new buyback program worth $1.2bn.
Moody’s announced to downgrade 10 US regional banks, including M&T, Amarillo National Bank, Old National Bancorp, Commerce Bank, Associated Banc-Corp, BOK Financial Corporation, Webster Bank, Prosperity Bank, Fulton Bank, and Pinnacle Financial Partners. Additionally, Moody’s put Bank of New York Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade. Moody’s said the rationale for the actions is to reflect the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses. For some of these banks, Moody’s also cited rising risks associated with commercial real estate exposures as an additional reason for the actions.
US used vehicle prices decreased by 1.6% MoM in July to the lowest levels since April 2021, and registered a decline of 11.6% YoY. With a weight of 2.7% in CPI, the sustained decline in used car prices continues to push downward pressure on inflation due this week. However, it is worth noting that price declines are slowing month after month and suggests that the pace of slowdown in inflation may moderate as well.
Japan’s wage growth slowed in June with nominal wages rising 2.3% YoY from 2.9% YoY in May while real wage growth saw a sharper contraction of 1.6% YoY from -0.9% YoY previously. Household spending, meanwhile, slumped by 4.2% YoY in June from -4.0% YoY in the previous month. The deeper decline in real earnings may weigh on consumption and puts more weight on the BOJ’s case that inflation is supply driven. This continues to make a case for the Bank of Japan to continue with its easy monetary policy.
CBOT soybean futures dropped 2.3% on Monday as rainy weather across much of the key U.S. crop belt and forecasts for good growing conditions for August pushed prices to their lowest in more than five weeks. Wheat futures gained 3.9% as global supply concerns intensified, spurred by fears of an escalation of attacks on Black Sea shipping after a Ukrainian strike on a Russian tanker. The good crop weather, resulting in a 2% weekly improvement in crop conditions, also pressured the corn market, which notched its ninth losing session out of the last 10, but losses were kept in check by the gains in wheat.
Fed officials continue to emerge from their silence this week after hiking rates another 25 basis points at their last meeting. Investors betting the Fed has reached the end of rate increases will have another chance to gauge their theory when Philadelphia Fed President Harker and Richmond Fed President Barkin speak on Tuesday. Their remarks will be top of investor watchlists after mixed messages about the future rate path from New York Fed President John Williams and Fed Governor Michelle Bowman on Monday. Bowman's comments suggesting more rate hikes gave markets a jolt.
Earnings to watch
Today’s US earnings focus is on EV makers Li Auto and Rivian. Eli Lilly will also be tightly watched by the market given the pharmaceutical company is playing catchup with Novo Nordisk in the huge market for the new generation of obesity drugs. UPS is naturally also interesting given its large footprint in global logistics and with Maersk’s subdued expectations in last week’s earnings report the market should be prepared for potentially bad news.
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Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
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Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy