Global Market Quick Take: Europe – 22 May 2024

Key points:

• Equities: Mixed sentiment ahead of key earnings releases from Nvidia and PDD
• Currencies: Sterling rises on CPI miss
• Commodities: Metal rallies show signs of cooling
• Fixed Income: UK inflation data beats expectations, causing upheaval in sovereign bond markets
• Economic data: US Home Sales & FOMC minutes

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

Equities: Mixed session in Asia with Japanese equities down 0.8% and Hong Kong equities up 0.3% after a sharp drop yesterday. US and European equity futures are flat this morning ahead of two important earnings releases from Nvidia (aft-mkt) and PDD (bef-mkt). Analysts expect Nvidia to deliver revenue growth of 243% YoY and EPS growth of 546% YoY and with the recent strong outlook from TSMC expectations are set high going into this earnings releases. PDD, which is the parent company of the successful e-commerce platform Temu, is expected to report Q1 earnings before the US market opens with analysts expecting revenue growth of 104% YoY. Fed speeches from Collins, Mester, and Waller all painted a picture the Fed needs more good inflation data points before it can begin cutting the policy rate forcing the market to reprice less certainty of two rate cuts this year by December. The upside surprise to UK core inflation this morning is also raising the stakes that the ECB is maybe premature in its eager to cut in June.

FX: The Bloomberg Dollar Index trades a tad softer on the day but still up on the week with gains seen against all its major peers, except GBP which trades higher after UK CPI fell by less than expected, thereby raising doubts about the timing of the first UK rate cut. The Fed speeches from Collins, Mester, and Waller yesterday have all added to less certainty of two rate cuts by the market and added to the momentum in USDJPY which trading around the 156.40 level this morning looking to test the high levels from earlier this month.

Commodities: Wheat prices hit 10-month high on concerns that adverse weather in Ukraine and not least Russia, the world’s top exporter, will lead to further downgrades of harvest, already down to 83.5m tons from above 90m tons a few weeks ago. The strong rally across metals show signs of cooling amid fears of overbought market conditions combined with continued weak copper fundamentals, especially in China where inventories remain high. Silver meanwhile has settled into a 31 to 32.50 range with gold edging lower, despite a sixth daily increase in ETF holdings, after Fed’s Waller said more data softness was needed to justify rate cuts while China’s gold imports slumped 30% m/m in April to the lowest of the years. Crude oil trades lower for a third day amid softness in the physical market and after the API reported increases in crude and gasoline stocks.

Fixed income: The European morning begins with news that UK headline inflation has decreased significantly, though not as much as economists had forecasted. UK headline inflation dropped to 2.3% year-on-year in April from 3.2% in March, but it remains above the consensus estimate of 2.1%. The progress in Core and Services CPI is even less impressive, with Core CPI falling to 3.9% and Services CPI to 5.9%, casting doubt on the possibility of an early rate cut by the Bank of England with bond futures estimating 39bps rate cuts by the end of the year versus 55bps yesterday. UK inflation data have caused turmoil in the European sovereign bond markets, with yields soaring across the curves. Italian and Portuguese sovereign bonds are notably underperforming compared to their peers. Across the Atlantic, Atlanta Fed's Bostic remarked yesterday that the neutral interest rate might rise above the current 2.6% indicated by the dot plot. In contrast, Waller described the latest CPI report as "reassuring," leading to a sharp decline in yields across the yield curve. Consequently, bond futures are now pricing in a potential 40 basis point rate cut by the end of the year, starting in November. Today, market attention shifts to the 20-year note auction and the release of the FOMC minutes. Looking ahead, focus will also be on the upcoming UK inflation data due on Wednesday, expected to decrease to 2.1% annually from 3.2%, largely due to lower energy bills. We continue to favor the front end of the yield curve while maintaining a cautious stance on duration.

Volatility: The VIX closed at $11.86 (-0.29 | -2.39%), marking its lowest close since November 27, 2019. The VVIX also saw a decline, finishing at 77.62 (-1.83 | -2.30%), while the SKEW, an indicator of the probability of outlier events, rose to 149.52 (+4.98 | +3.45%), suggesting an increasing likelihood of such events. With the VIX at such low levels, options volume in VIX contracts has surged, with daily volumes exceeding 1 million contracts. Today, we may observe some volatility due to the release of the FOMC Meeting Minutes and Nvidia's highly anticipated earnings report, which could significantly impact the AI sector and the broader markets. VIX futures remained stable overnight at 13.40 (+0.01 | +0.08%). Meanwhile, S&P 500 and Nasdaq 100 futures are trading at 5346.00 (+0.75 | +0.01%) and 18813.25 (+14.00 | +0.08%) respectively. Yesterday's top 10 traded stock options, in order: Tesla, Apple, Nvidia, Amazon, Microsoft, AMC Entertainment, GameStop, Advanced Micro Devices, Warner Bros. Discovery, and Palo Alto Networks.

Macro: UK inflation fell less than expected last month, fueling doubt about when the Bank of England can start cutting interest rates. The April CPI rose 2.3% from a year ago in April, down from 3.2% the previous month, but above an expected 2.1%. Services inflation, which the BOE is watching carefully for signs of domestic pressures, remained little changed at 5.9% versus 5.4% expected. The Reserve Bank of New Zealand kept rates unchanged at 5.5% for a seventh straight meeting, but the NZD jumped, and government bond yields rose after the bank  signaled  that interest rate cuts may start later in 2025 than previous expected. Fed Govenor Christopher Waller said that developed nations are finally getting a grip on inflation while saying that the recent US CPI report was “a reassuring signal”, and he went onto say that continued softening in the coming months would allow the Fed to consider lowering interest rates at the end of 2024.

In the news: US on track to establish domestic rare earths supply chain for defence, official says (Reuters), New Covid FLiRT variants spark concerns of a summer spike (CNBC), China has finally unveiled its property rescue plan. Will it be enough? (FT)

Macro events: US Existing home sales (Apr) exp 4.23m vs 4.19m (14:00), EIA’s Weekly Crude and Fuel Stock report (14:30), FOMC minutes from May 1 meeting (18:00)

Earnings events: This week’s big earnings event is Nvidia reporting FY25 Q1 (ending 30 April) earnings today with analysts expecting revenue at $24.7bn up 243% YoY and 11.8% QoQ as demand remains extremely high for GPUs used in generative AI modelling and applications. The key is the outlook and with the recent positive outlook from TSMC the bar is set high for Nvidia. PDD, the parent company of Temu, is also an important earnings release to watch reporting Q1 earnings before the US market opens with analysts expecting revenue growth of 104% YoY.

• Today: Analog Devices, TJX, Nvidia, Synopsys, Snowflake, Kuaishou Technology, PDD, Target, SSE
• Thursday: Meituan, Xiaomi, Toronto-Dominion Bank, Medtronic, Ross Stores, Intuit, Workday, NetEase, National Grid
• Friday: Autodesk, Dollar Tree

For all macro, earnings, and dividend events check Saxo’s calendar