Summary: Recession angst remains the key focus across markets low on liquidity due to the current holiday season. Stocks traded lower on Tuesday after a fake 10.2% YoY CPI number circulated on Wall Street before being denied. It shows the markets nervousness ahead of today’s US inflation report, which is expected to show an acceleration to a fresh four-decade high just below 9%, thereby supporting another big rate hike from the FOMC on July 27. The IMF downgraded US growth for the second month in a row with a deepening inversion of the US yield curve pointing to a recession. Commodity prices across all sectors remain under pressure, with crude oil and copper plunging to fresh lows for the cycle.
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US equity futures trade defensively ahead of today’s US CPI overnight after slumping late in the session on Tuesday after a fake 10.2% YoY CPI number circulated on Wall Street. The BLS quickly denied an early release, but it highlights the markets nervousness in thin trading conditions with today’s numbers seen as critical as market fear a print close to 9%. Weakness was led by megacap technology stocks and energy shares after oil plunged below $100 per barrel. As mentioned, it is worth noting that the trading volumes across the US equity market remains low, reflecting the current holiday season where liquidity dries up, thereby raising the risk of higher volatility. Into the earnings season, traders will be watching whether corporate America is resilient enough to pass on higher costs to consumers.
Modest gains were seen overnight following recent losses with the Hang Seng TECH Index (HSTECH.I) rallying 1%. Bilibili (09626:xhkg) and iDreamSky (01119:xhkg) surged more than 3% after getting licenses (Banhao) for new games. Oil and gas, and mining stocks all fell in response to the continued drop in commodity prices. New energy stocks, such as Longi Green Energy (601012:xssc) and Xinjiang Goldwind (02208:xhkg) gained over % and 8% respectively.
The dollar’s continued push higher against most major currencies saw it briefly print parity against the euro on Tuesday, a twenty year low for the common currency before it bounced back. However, with US rate hikes continuing and the ECB stuck in neutral amid a sharp European economic slowdown, the market has not yet given up the idea of a break lower towards the next key support level around €0.96. For now, a wall of derivatives bets is keeping the euro above with traders holding options defending the parity strike which has steadily become the most traded options strike. Apart from US CPI and a hawkish FOMC, the market will be watching developments in the European gas market, not least whether supplies on the Nord Stream 1 pipeline will resume next week following maintenance.
Crude oil (OILUKSEP22 & OILUSAUG22)
The current battle between tight fundamentals and financial traders trying to position for an incoming recession took a step up on Tuesday with WTI and Brent crude oil both plunging below $100 a barrel as escalated fears about an economic slowdown sent ripples across a holiday thinned market. The inversion of an important part of the US yield curve sent a recession signal and it helped drive speculative selling, however, with both contracts managing to find support at the lower end of the range that has been in play since March. OPEC and the IEA in separate announcements both highlighted the risk of tight supply driving prices higher. This battle between “paper” and physical oil traders will keep volatility elevated but, in our opinion, we are unlikely to see an industrial metal styled correction. Focus today on IEA’s monthly Oil Market Report, EIA’s weekly inventory report and US CPI.
The US 10-year yield held below 3% on Tuesday while recession angst helped drive the 2-year yield sharply lower, a move that helped invert a key part of the yield curve to minus 12 basis points, a level not seen since 2007 another sign of increased recession risks. The market sees this as confirmation of an incoming recession which will pressurize bank margins while raising debt provisions
What are we watching next?
The RBNZ became the first to officially apply the economic brakes by boosting its key rate above neutral. New Zealand hiked by 50 bps to 2.5% and said it's appropriate to keep tightening conditions "at pace." South Korea meanwhile hiked by the same amount — its biggest-ever increase — to 2.25%, as expected.
Financial markets have traded nervously ahead of today’s report which is expected to show consumer inflation sped up to 8.8% last month, the fastest rise since 1981, while the core gauge may decelerate to 5.7%. Last month, the jump to 8.6% helped trigger a chain reaction starting with the FOMC’s aggressive 75 basis point rate hike leading to raised concerns about recession, thereby driving the dollar sharply higher and commodities sharply lower. An 8.8% print will support another bumper rate hike from the FOMC when they meet on July 27.
Earnings Watch
A preview of Q2 earnings releases over the next two weeks can be read on the trading platform or at analysis.saxo.
Economic calendar highlights for today (times GMT
0800 – IEA's monthly Oil Market Report
1330 – US June CPI
1400 – Bank of Canada Rate Decision
1430 – EIA's Weekly Inventory Report
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