Global Market Quick Take: Europe – June 30, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): The US 10-year yield breaks out

US equities range extended their rebound with S&P 500 futures increasing 0.4% and continuing higher again this morning despite the US 10-year broke out of its recent trading range. If the US 10-year yield goes to 4% and beyond then it could set in motion a repricing of equity valuations. But the backdrop for equities is still no recession, inflation is sticky and financial conditions are still loose, so unless some trigger, such as higher US 10-year yield, emerges then equities will remain bid. Key risks ahead for US equities remain potential expanded export controls on AI chips and the upcoming Q2 earnings season.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): stocks bounce following inline China PMIs

Investors were feeling relieved as China’s official NBS manufacturing PMI came in as expected at 49 in June (vs 48.8 in May) and the non-manufacturing PMI came in just a touch weaker at 53.2 than 53.5 expected. Investors have been worrying about negative surprises as confidence in the Chinese economy had taken a dive recently. The Hang Seng Index gained 0.6% and the CSI300 Index added 0.8%. Healthcare, energy, and telecommunication stocks outperformed. China Unicom (00762:xhkg) and Wuxi Biologics (02269:xhkg) each gained more than 5%. XPeng soared again by 11.8%, extending its streak of 3-day gain to over 25% as optimism around the EV maker’s new mid-sized electric SUV G6 launched this week.

FX: USD surges again on jobless claims, awaits PCE inflation

The US dollar surged yesterday on the much stronger than expected weekly initial jobless claims number, with sent US Treasury yields sharply higher all along the curve, with the long-end importantly threatening the range highs. EURUSD lurched back well below 1.0900 after an intraday rally before the data saw the pair trading north of 1.0930 on German inflation figures. The focus there is on the 1.0850 pivot low not far below the lows posted yesterday. USDJPY teased 145.00 for the first time since November and will remain sensitive to US yields if they continue higher. US May PCE inflation (more below) is the next incoming data focus.

Crude oil: a notch higher amid US data strength and inventory draw

A quarter that delivered two major OPEC production cuts did not prevent crude oil from extending its run of quarterly losses amid an ongoing rate hike cycle leading to growth and demand concerns, and combined with China’s sluggish economic recovery, the price of Brent remains anchored in the 70’s while Saudi Arabia would ideally have liked to see it back to the 80’s. Prices did rise slightly on Thursday in response to stronger than expected US economic data and a big drop in stocks the previous day. Against these supporting developments the market still worries that continued rate hikes may upend growth. While support was confirmed once again this week at $71.50 in Brent and $67 in WTI, both have struggled to move higher. Focus on the 21-day moving average in Brent, currently at $75

Gold: Bull versus bear battle raging ahead of US PCE

An impressive bull versus bear battle broke out in gold on Thursday after stronger than expected US jobless claims and GDP data triggered a sell-off below the key $1900 level in cash and $1910 in the futures. The break to the lowest level since March, however, awoke buyers and following a battle that saw more than 6 million ounces traded in GCQ3, the price recovered to force a fresh round of short-covering. In the short-term, the prospect for more US rate hikes combined with rising US real yields to or near cycle highs may pose a continued challenge to gold while there are several reasons to be bullish on gold in medium-to-long term. For now, gold remains stuck in a downtrend with a break above $1939, trendline and 21-day moving average, needed to change that. Focus today on US PCE, the Fed’s preferred inflation measure (see below).

US Treasury yields rose significantly amid strong economic and labour data. (2YYM3, 10YM3).

Two-year yields rose as much as 18bps yesterday to 4.89%, as markets began to price 50% chances of a second Fed rate hike by December. To ignite this sentiment were the better-than-expected Q1 GDP figures and lower jobless claims than anticipated. Today’s focus is on the PCE numbers, which should send yields even higher, with 2-year yields rising towards 5% and 10-year yields rising towards 3.9%. As economic data remain resilient, there is scope for the whole yield curve to move up, although maintaining a bear-flattening bias.

What is going on?   

Nike lower on disappointing outlook

Nike reported FY23 Q4 results after the US market close with revenue and inventory figures beating estimates while EPS of $0.66 vs est. $0.67 missed estimates. The company’s Q1 (ending 31 August) outlook included revenue to grow in mid-single digits and gross margin expanding 140-160 basis points during FY24. The outlook was only slightly lower than estimates, but still enough for shares to decline 4% in extended trading.

Strong US data begs the recession question

US initial jobless claims reversed lower to 239k (exp. 265k, prev. 264k), after three consecutive prints above 260k. This has once again raised concerns on whether the Fed has tightened enough to slow the economy and avoid the second round effects of a tight labor market. The data helped lift US treasury yields sharply and the US dollar as pricing for July rate hike rose to over 80%. The final Q1 GDP print was also revised up to 2.0% from 1.3%, well above expectations for a rise to 1.4%. The report noted that the updated estimates primarily reflected upward revisions to exports and consumer spending (revised up to 4.2% from 3.8%) that were partly offset by downward revisions to non-residential fixed investment and federal government spending.

Fed speakers remain divided

While Fed Chair Powell continued to push for an additional two or more rate hikes, some of the other Fed members sound less sure. Atlanta Federal Reserve President Bostic was on the wires yesterday and he said that he is not ready to rule out further rate hikes if required, but does not see need as he sees the Fed policy to be in place to bring inflation down to 2%. He also said that Powell sees more urgency to hike rates than he does.

Japan’s Tokyo CPI comes in softer than expected

Japan reported June Tokyo CPI this morning, and the print was largely cooler than expectations. Headline CPI came in at 3.1% YoY vs. 3.4% expected and 3.2% previous, while core core CPI (ex-fresh food and energy) was at 3.8% YoY vs. 4.0% expected and 3.9% previous. This is a leading indicator for nationwide CPI and suggests room for cooling inflationary pressures, thereby leaving little scope for BOJ policy tweaks as against market conditions where pressure continues to ramp up.

US Treasury’s draw on liquidity mostly offset by fall in Fed repo facility usage.

As of June 28, Treasury brought its cash balances at the Treasury General Account (TGA) to USD408.6 billion, approaching its target end of June target of USD425 billion. This USD116.5 billion increase, which represents a liquidity drain from the banking system was 79% offset by a fall of USD 91.8 billion in the overnight reserve repurchase agreement balances held by the money market funds at the Fed. During the same period, the Fed’s holding of securities dropped by USD15.8 billion in the ongoing process of quantitative tightening. The reserves held by US banks at the Fed fell by a modest USD27.9 billion to USD 3,176 billion. You can find more details about how the TGA and reverse repos work in this Saxo article.

Grains: Focus on data following rain and speculative-driven slump

The most intense drought to hit the U.S. Midwest farm belt since 2012 deepened over the past week, sapping soil moisture and threatening crop yield potential in the heaviest corn and soybean production areas of the United States. Grain prices nevertheless gave up most of their recent strong gains amid the outlook for a series of rainstorms forecast over the next two weeks potentially stabilizing and improve crop conditions. The +6% rain-driven slump in the Bloomberg Grains Index this past week has likely been accelerated by selling from speculators exiting recently established and now loss-making longs. Apart from watching grain conditions, the next update is due Monday, the market will also be turning its attention to key acreage and stocks data today.

What are we watching next?

US PCE to be the next big test after Powell’s hawkish tilt

This week we have seen an increasingly hawkish stance from Powell and other central bankers, and economic data has also suggested a resilient US economy. This has meant that market is now starting to absorb the risk of those two additional rate hikes that the median Fed “dot plot” update from the June FOMC meeting suggested could materialize before year-end. The May PCE inflation numbers are the next key incoming data. While headline PCE is expected to cool to 0.1% MoM from 0.4% in April, the core measure is still expected to tick up to 0.3% MoM from 0.4% in April. As long as there is no upside surprise (although also depending on what the particular drivers of inflation are in the details of the report), markets will continue to challenge the Fed’s projection of two additional rate hikes. But if the data is firmer, we could see yields and US dollar pushing higher as pricing for more rate hikes picks up for this year.

Eurozone’s core inflation rebound may not bring EUR higher

The Eurozone is set to release preliminary inflation data for June on Friday after German CPI on Thursday remained hot (+0.3% MoM and 6.4% YoY vs. 0.2%/6.3% expected). The harmonized reading came in at 6.8% YoY from 6.3% YoY previously in May. Eurozone’s headline rate of inflation is expected to moderate, but underlying inflation is expected to tick higher. Expectations are for YoY HICP to fall to 5.6% from 6.1%, but with the core metric expected to rise to 5.5% from 5.3%. ECB policymakers remain hawkish and make a case for more rate hikes, and a July rate hike is priced in with ~90% probability. A firmer core inflation print could bring that higher and bring 4% terminal rate in play, but may not necessarily mean a push higher for EURUSD as growth concerns have escalated after the disappointing flash PMI for June reported last week.

Technical update

• S&P500. Seems to be resuming uptrend. Potential to 4,546
• Nasdaq 100 possible correction to 14,500-14,300
• DAX key support at 15,625. Above 16K uptrend likely to resume
• AEX25 back above rising trend line. Could re-test 777 resistance
• US 10-year Treasury yields resuming uptrend. Eyeing 4%
• EURUSD Range bound between 1.08 and 1.10 but overall uptrend intact. Resistance at 1.11
• GBPUSD below support at 1.2667. Could correct to 1.2515. Uptrend intact
• USDJPY above key resistance at 142.25. Uptrend to 146.60. Uptrend stretched
• EURJPY above resistance at 157.00. Uptrend very stretched but could continue to 160 Correction should be expected
• Brent Oil key support around 71.25
• Gold retraced 0.618 testing 1,900. Downtrend could lead to support at 1,870
• Copper bouncing from 0.618 retracement around 370
• Wheat Dec 2023. Seems to be bouncing just above 0.618 correction at around 675.

Earnings to watch

Our next earnings focus is Constellation Brands reporting FY24 Q1 (ending 31 May) before the US equity market opens with analysts expecting revenue growth of 5% y/y and EBITDA at $912mn up from $885mn a year ago. The expectations going into the earnings release are mostly pinned on a rebound in beer demand. There are no earnings releases next week.

• Friday: Constellation Brands

Economic calendar highlights for today (times GMT)

0800 – Poland Jun. CPI
0900 – Eurozone Flash Jun. CPI
1230 – Canada Apr. GDP
1230 – US May PCE Inflation data
1345 – US Jun. Chicago PMI
1400 – US Final University of Michigan
1600 – USDA Quarterly Stocks and Acreage Planted Reports