Global Market Quick Take: Europe – 3 June 2024

Key points:

• Equities: Strong start to the new week. Focus on French banks.
• Currencies: Yen weaker despite overall dollar softnes
• Commodities: OPEC+ signals plan to return barrels
• Fixed Income: US yields record a May drop
• Economic data: US ISM Manufacturing

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

Equities: Positive session in Asia with Japanese and Chinese equities up 1.3% and 2.4% respectively as the private PMI survey from Caixin showed an acceleration in manufacturing growth diverging from last week’s official measures showing contraction. As we have pointed several times, the current focus on exports from China is not sustainable and as a result, we remain cautious on the outlook for China. European equity markets are poised to open 1% higher as investors await the expected ECB rate cut on Thursday. Today’s main macro focus is US May ISM Manufacturing where the interesting sub-index is the ISM Prices Paid because this measure of pricing pressure was relatively high in April. French banks could come into focus today as France’s credit rating was lowered by S&P Global Ratings highlighting missed fiscal goals to rein in spending.

FX: The US dollar opened the week on a soft note after ending last week showing a small decline with CHF leading the G10 pack higher and JPY underperformed. USDJPY trades back above 157.20 this morning as buying interest continues below 157 amid carry interest despite intervention threat as we noted here. Election outcomes in India and Mexico could signal policy continuity, and further fuel interest in carry trading strategies, pressuring funding currencies such as Yen. EUR is heavily in focus this week with ECB expected the start cutting rates, but Eurozone inflation came in higher-than-expected for May at 2.6% YoY and may mean that the ECB will have to take a data-dependent approach post this week’s rate cut. EURUSD trades around 1.0850 with immediate resistance at 1.0880 and a series of supports near 1.08 and just below that. For more on our ECB preview and impact on bonds and EUR, read this article. GBPUSD was neutral last week as equity sentiment was weak, but pair trades above 1.2740. USDCAD also in focus as it approaches 1.36 despite oil prices taking a hit after OPEC meeting, and BOC meets this Wednesday.

Commodities: Oil prices trade lower after OPEC+ announced a plan to gradually restore some suspended production starting in October. Concerns within the group about demand and strong supply from others may weigh on prices unless we see robust summer demand towards cooling in Asia and the Middle East and driving in North America. Gold slumped to a three-week low on Friday despite a soft PCE-related decrease in the dollar and Treasury yields with silver once again drifting towards the key USD 30 area. Chicago wheat and corn futures fell on Friday as news of beneficial rain in Russia and profit-taking dented wheat prices, leading to corn selling as well. Overall, the commodities sector recorded gains last month with gains in metals and grains being partly offset by weakness in energy and softs.

Fixed income: U.S. Treasury securities advanced on Friday, following the release of encouraging inflation figures that sustained forecasts of a potential Federal Reserve interest rate reduction within the year. Yields on two-year Treasury notes declined to sub-4.87%, marking the lowest point in over a week. Earlier last week, yields on these shorter-term securities neared the 5% threshold, driven by waning anticipation of Fed rate reductions that had previously dampened demand for newly issued notes and bonds. The yield on the 10-year Treasury note ended the month down 18 basis point to 4.5%, this after topping 4.63% earlier in the week.

Technical Analysis Highlights: S&P500 bouncing from support at 5,194. Could resume uptrend.  Nasdaq 100 bouncing from 18,168. DAX correction finding support at 18,409, could drop to 18,191. EURUSD rejected at resistance at 1.0885, expect range bound between 1.09-1.0785. GBPUSD rejected at resistance at 1.28, support at 1.2670. USDJPY uptrend potential to 158.45. EURJPY potential to 171.70 but uptrend stretched, bearish below 169. USDCHF testing key strong support at 0.90. Gold below key support at 2,326 at 0.786 retracement at 2,314. Silver sell-off could drop to 28.50  US 10-year T-yield bullish but correction possible down to 4.43

Volatility: On Friday, the VIX closed sharply down at $12.92 (-1.55 | -10.71%) following favorable PCE Price Index figures. This drop significantly impacted overall market volatility, with even steeper declines observed in the short-term indices (VIX1D and VIX9D). With numerous economic releases scheduled this week, expected moves based on options pricing are considerably higher than last week. The S&P 500 has an expected move of plus or minus 58.83 (+/- 1.11%), up from +/- 39.71 the previous week. Similarly, the Nasdaq 100 has an expected move of plus or minus 288.65 (+/- 1.56%), compared to +/- 210.83 (+/- 1.12%) the prior week. Key volatility drivers for the upcoming week include today's ISM Manufacturing PMI, JOLTS Job Openings on Tuesday, a slew of reports on Wednesday (ADP Nonfarm Employment Change, S&P Global Services PMI, ISM Non-manufacturing Prices, and more), and additional employment data on Thursday and Friday. These reports will be closely monitored ahead of next week's Fed interest rate decision. Notable earnings this week come from CrowdStrike (CRWD), Hewlett Packard Enterprise (HPE), GameStop (GME), and DocuSign (DOCU). VIX futures are currently at 13.600 (-0.190 | -1.37%). S&P 500 and Nasdaq 100 futures are at 5306.75 (+11.25 | + 0.21%) and 18637.75 (+45.75 | + 0.25%). Friday's top 10 most traded stock options, in order: Nvidia, Tesla, Apple, Advanced Micro Devices, Amazon, Dell, Salesforce, Microsoft, Meta Platforms, and Palantir Technologies.

Macro: US PCE deflator, the Fed’s preferred inflation metric, sent a dovish signal to markets. We had previously highlighted the asymmetric risks going into the release, and in-line prints were a relief for markets waiting for more signals on the Fed’s first rate cut. Headline PCE rose 2.7% YoY and 0.3% MoM, same as expected and prior. But core PCE cooled to 0.2% MoM from 0.3% previously while remaining unchanged on a YoY basis at 2.8%. Personal spending was weaker-than-expected at 0.2% MoM in April and March print was also revised lower to 0.7% from 0.8% earlier. The market currently expects 60% odds of a September rate cut, and further signs of inflation cooling could increase this further. The Fed starts a quiet period this week ahead of the meeting next week. Eurozone inflation for May surprised to the upside, coming in at 2.6% YoY from 2.4% prior and 2.5% expected. Core inflation jumped higher to 2.9% YoY, suggesting that the narrative at the ECB meeting this week may be more neutral despite the well-telegraphed rate cut likely to be seen. China’s manufacturing activity expanded at the fastest pace in almost two years in May, according to the export-oriented Caixin gauge, contrasting with weak official data on Friday that dented the country’s growth outlook. The Caixin manufacturing purchasing managers index rose to 51.7 last month from 51.4 in April, slightly above the median forecast of 51.6, however with some pointing to technical factors being the main reason for the positive print. OPEC+ meeting ended with a decision to extend its oil production cuts well into 2025, while also setting a timeline for gradually winding down some of those curbs later this year. The OPEC+ agreement prolongs roughly 2 million barrels a day of cuts, which have played a key role in supporting crude prices above $80 a barrel this year but were set to expire at the end of June. The curbs will continue in full in the third quarter then be gradually phased out over the following 12 months, according to a statement from the Saudi Energy Ministry. The UAE received an upward adjustment to 300k to its baseline which is now 3.5 million bpd.

In the news: India Stocks, Bonds Set to Gain as Polls Show Landslide Modi Win (Bloomberg), Nvidia Announces Next-Generation Rubin AI Platform for 2026 (Bloomberg), 10-year Treasury yield hovers near 4.5% after inflation data roughly matches expectations (CNBC), Japan confirms first currency intervention since 2022 with $62 billion in spending (CNBC), Dow has best daily gain for year; indexes up sharply for May (CNBC), RBA seen as the only other major central bank at risk of hiking (BT), Oil Swings After OPEC+ Signals Plan to Return Barrels to Market (Bloomberg)

Macro events: EZ/UK/US Final Manufacturing PMIs (May), US ISM Manufacturing (May) exp 49.6 vs 49.2 prior, ISM Prices Paid exp 59.5 vs 60.9 prior (1400)

Earnings events: Quiet week ahead on earnings with the key earnings to watch being Crowdstrike, Lululemon, and Inditex. Given the strong pullback in Crowdstrike last week this earnings result will in particular be important for the whole cybersecurity industry. Analysts expect FY25 Q1 (ending 30 April) revenue growth of 31% YoY as demand remains very strong for cloud-based cybersecurity solutions.

• Tuesday: Ferguson, Crowdstrike, HP Enterprise, Core & Main, Bath & Body Works
• Wednesday: Brown-Forman, Lululemon Athletica, Inditex, Dollar Tree, Campell Soup
• Thursday: Sekisui House, J M Smucker, Meituan, Samsara, DocuSign, NIO

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