Global Market Quick Take: Europe – 6 June 2024

Key points:

• Equities: New all-time high in US equities on strong
• Currencies: Dollar trades near range bottom
• Commodities: Precious metals bounce back
• Fixed Income: US yields drop as rate cut wagers rise
• Economic data: The ECB is expected to cut rates today

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

Equities: Strong session in equities with a new all-time high in US equities driven by strong performance among US semiconductor stocks with strong gains across Nvidia (+5.2%), Broadcom (+6.1%), and AMD (+3.9%). In Europe, we also saw big moves across ASML (+8.1%) and ASM (+4.7%). The session is Asia was positive extending the gains from the US session and European equity futures are indicating a higher opening (+0.5%). A stronger than expected ISM services figure yesterday also added to the positive sentiment. Lululemon shares rose 10% in extended trading swinging back into a positive surprise on its earnings after the last quarter’s disappointment. The positive reaction in Lululemon happened despite the revenue outlook was a bit below estimates indicating that investors were significantly more nervous about Lululemon earnings than what analyst estimates indicated.

FX: The USD trades near the lower end of recent established ranges with mixed US data creating choppy trading but overall keeping goldilocks hopes alive. Japanese yen erased Tuesday’s gains with USDJPY returning higher to trade near the 156-handle from lows of 154.55 as haven currencies underperformed. USDCAD jumped on BOC’s expected rate cut before reversing back below 1.37. EURUSD has been steady around 1.0880 ahead of the expected ECB rate cut today, but the risk of a less hawkish tone could push the pair back lower towards 1.08.

Commodities: Crude oil trades higher for a second day, partly reversing an eight-dollar slump and most likely excessive reaction to recent growth and demand concerns as well as an OPEC+ decision (market conditions permitting) to increase supply from October. We maintain the view crude oil will likely remain range bound with focus on summer peak demand and the general level of risk appetite. Gold remains rangebound having found support from buy-on-dip demand well ahead of key support in the USD 2280-area amid rising rate cut expectations, while silver trades back above USD 30 having found fresh demand on the brake below earlier in the week. Copper trades higher for a second day with support once emerging in the USD 4.50 area despite continued concerns about Chinese demand after SHFE monitored warehouse stock levels last seen during the pandemic in 2020.

Fixed income: Treasuries rallied for the fifth consecutive day, pushing yields to their lowest since early April, amid market bets on a bolder Federal Reserve rate-cutting strategy for this year and the next, even as the May ISM services report presented a mixed picture. The market gained additional support from a substantial block trade in 10-year note futures following the release of the data. The yield on the 10-year US Treasury benchmark trades down 20 bp on the week to 4.29% while short-term futures contracts now price in more than two 25 bps cuts by December with the chance of a September move put at 62%.

Technical Analysis Highlights: Top and reversal patterns cancelled in US indices. New uptrend established. S&P500 upside potential to 5,50. Nasdaq 100 potential to 19,500. EURUSD closed above 1.0885 now likely move to 1.0980. GBPUSD above 1.28 potential to 1.29. USDJPY correction unfolding support at 155.47 and 154.09. EURJPY below 169 correction down to 166.65 likely. AUDJPY key support at 102.80. GBPJPY support at 197.20, resist at 200.65. USDCAD key resistance at 1.3745, if broken uptrend likely to 1.39 broken resist at 0.6650 upside potential to 0.6750. USDCHF key support at 0.8880. EURCHF key support at 0.9675. Gold testing minor resist at 2,365, key support at 2,314. US 10-year T-yield below 4.30 key support, will it drop to 4.18?

Volatility: The VIX closed at $12.63 (-0.53 | -4.03%) on Wednesday, as tech stocks propelled the markets to new all-time highs, causing volatility to fade. Short-term and immediate-term volatility is anticipated to remain low, with the VIX1D and VIX9D both showing significant declines of -11.33% and -2.03% respectively. With few economic releases scheduled in the US today, market attention will be focused on the European Central Bank's interest rate decision. As earnings season winds down, there are no major earnings reports today. VIX futures are currently at 13.400 (+0.050 | +0.36%). S&P 500 and Nasdaq 100 futures are showing minimal movement, at 5365.25 (-0.75 | -0.01%) and 19079.50 (-5.25 | +0.02%) respectively. Yesterday's top 10 most traded stock options, in order: Nvidia, Tesla, Apple, Advanced Micro Devices, GameStop, Meta Platforms, AMC Entertainment, Palantir Technologies, Amazon, and Marathon Digital Holdings.

Macro: US ISM services PMI was hotter-than-expected, with the headline coming in back in expansion at 53.8 vs. expected 50.8. Business activity accelerated to 61.2, the highest level since November 2022; New Orders rose to 54.1 from 52.2; while employment remained in contraction at 47.1. The report is an indication that some sections of the US economy remain resilient and that could keep the ‘bad news is good news’ sentiment in play. The ADP’s gauge of private payrolls reported additions of 152k jobs in the month, missing expectations (exp. 175k), with the payrolls services provider stating that both jobs gains and pay growth are slowing going into the second half of the year. This puts the focus on claims data due today, but more importantly, the non-farm payrolls out on Friday. The Bank of Canada cut interest rates by 25bps, taking the key rate to 4.75%. Governor Macklem's noted it is reasonable to expect more rate cuts if inflation continues to ease, indicating more rate cuts are likely. Markets have been sceptical about how far the Fed and the BOC can diverge, and Macklem repeated that there is a limit to this, but they are currently not near that limit – perhaps giving the BoC more leeway ahead, even in the event of a more hawkish Fed. The European Central Bank is also expected to cut rates today for the first time since September 2019. This comes despite inflation not having reached the 2% target and the economy showing some signs of tentative stability, which raises the question if the start of easing may be premature. In recent weeks, the ECB narrative has turned more neutral from dovish to signal data-dependency post the likely June cut. This suggests that President Lagarde’s press conference will be more important to watch than the decision itself. Market has pushed out the expectation of a second ECB rate cut this year to October, so the bar to surprise hawkish is high. Key risk going into this meeting, therefore, is if the ECB hawks fall short of the high bar or signal further rate cuts in a clear manner. The market can perceive this to be a policy mistake as a series of rate cuts can potentially exacerbate inflation in the medium term. Read Althea Spinozzi’s, Saxo’s Head of Fixed Income Strategy, ECB preview from last week for more insights.

In the news: Nvidia is now worth more than $3 trillion — and worth more than Apple (MarketWatch), Gold rises as yields retreat after softer U.S. jobs data (CNBC), European markets close higher as investors look ahead to ECB meeting; ASML jumps 8% (CNBC), CrowdStrike shares jump as AI boosts cybersecurity demand (Yahoo), Stock Market News: S&P 500, Nasdaq Close at Fresh Highs (Barron’s), Mortgage demand falls for the second straight week, but all eyes are on Friday’s jobs report (CNBC), Further drop in oil prices may spark OPEC+ to walk back phasing out of cuts: Roth (Investing).

Macro events (times in GMT):  ECB Meeting, exp. a 25-bps rate cut (1215), US Weekly Initial Jobless Claims, exp 220k vs 219k (1230), EIA’s weekly natural gas storage change exp. 92 bcf vs 84 bcf prior (1430)

Earnings events: Today’s key focus is earnings releases from Chinese based companies Meituan and NIO. Negative dynamics are still in play in the electric vehicles industry so there is a lot of pressure on NIO to improve profitability. Analysts expect only 1% revenue growth YoY and another loss-making quarter with estimated EPS of $-2.27.

• Today: Sekisui House, J M Smucker, Meituan, Samsara, DocuSign, NIO

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