Global Market Quick Take: Europe – August 9, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Market awaits tomorrow’s US July inflation report

US equity futures are hanging on to their gains for the week positioning themselves for good news in tomorrow’s US July inflation report expected to show core inflation remains steady at 0.2% m/m. S&P 500 futures are trading around the 4,525 level in early trading hours with resistance at the 4,535 level.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Core inflation on the rise on services

Both the Hang Seng Index and the CSI300 Index slid by around 0.3% as investors remain cautious. China CPI growth dipped to -0.3% Y/Y in July from 0,0% in June due to a high base last year and a large -1.7% Y/Y decline in food price. Excluding food and energy, the core CPI ticked up to +0.8% Y/Y from +0.4% driven by rise in service prices. The contraction of PPI moderated to -4.4% Y/Y from -5.4%. China property stocks stabilized after a 2-day selloff while battered pharmaceutical names rebounded. EV stocks were among the top losers. Li Auto tumbled 6.4% after the EV maker projected Q3 deliveries at the range of 100,000 to 103,000, below market expectations.

FX: Dollar trades marginally lower with focus on Thursdays CPI print

A quiet summer holiday market was seen in Asia overnight with the greenback trading a touch lower within narrow ranges ahead of Thursdays CPI release, the next major macro risk event for G-10 FX. Gains were led by the AUD after attempting to recover from Tuesday’s slump to a 7-week low amid worse than expected China trade data. Also finding a small bid following recent softness were the JPY and EUR while the Chinese off-shore Renminbi trades firmer after hitting a one-month low on Tuesday.

Crude oil: Correction meets fresh buying interest

Following a mid-session slump WTI and Brent both rose on Tuesday to end the day close to unchanged and near resistance at the April highs, in WTI the at $83.50 and Brent at $87.50. Front end prompt spreads trade near a four-month high, a reflection of the current tightness on combination of robust demand and OPEC+ production cuts. Continued risks to Russian crude shipments from tensions in the Black Sea remain after the Ukraine’s Zelensky said that it would choose its targets if Russia blocked Ukraine’s ports. Meanwhile, the EIA said US production would rise faster than previously expected this year while an API report showed swelling US stockpiles of crude and a continued drop in distillate, the tightness in which has supported the recent crude rally. Focus on US CPI and oil market reports from OPEC on Thursday and IEA on Friday.

Gold remains in a short-term downtrend

Spot gold prices remain in short-term downtrend after falling to a one-month low on Tuesday before a recovery in stocks and bonds helped off-set the dollar strength that followed a downgrade of 10 US small- and mid-sized banks and concerns over weak Chinese economic data. We maintain a positive outlook for gold as global growth slows, bond yields peak, and the FOMC ability to hike rates becomes increasingly challenged. Attention now turns to Thursday’s US CPI print which is expected to show a rise in headline inflation to 3.3% and a small drop in the core. Gold is currently boxed into a tightening range between $1921 and $1937.

US Treasuries: CPI data and Treasury auctions in focus this week (2YYU3, 10YU3, 30YU3)

Yesterday’s 3-year auction received strong demand stopping through When Issued by 1.8bps as investors secured a yield near multi year high. The US yield curve bull flattened as Chinas’s trade slumped more than expected and inflation expectations declined in Europe. Today the US Treasury is selling $38bn new 10-year notes, and if they are price above 3.99%, the auction would offer the second highest yield in more than a decade. Therefore, we expect strong bidding metrics despite the auction size has been increased in size by 19% from last month. That could drive yields lower, yet we expect 10-year yields uptrend to remain intact.

European sovereign curves bull flatten (ECHB:xetr, IS0L:xetr)

Bund yields dropped by 13.4bps to 2.46% yesterday amid a slump of Chinese exports, improved inflation expectations and Italy’s windfall tax on banks. As markets remove bets of another rate hike by the end of the year, we can expect the yield curve to resume its bull steepening. Yet, when inflation concerns will be renewed by the fall, front- term government bonds will be in put in peril once again before the bond bull market begins.

What is going on?

Italian government issues clarification following day of heavy banking losses

Following a day of heavy losses across the domestic banking sector, Italy issued a clarification of its new tax on banks’ windfall profits, saying the impact may be limited for some banks and the levy won’t exceed 0.1% of a firm’s assets. Banks that have already increased the interest rates they offer to depositors “will not have a significant impact as a consequence of the rule approved yesterday,” the finance ministry said in a statement Tuesday night.

China slides into deflation, but core inflation increases

China's Consumer Price Index fell by 0.3% y/y in July, turning negative for the first time since February 2021, compared with the -0.4% market consensus and down from June's 0.0% print, data from the National Bureau of Statistics showed Wednesday. Producer prices meanwhile fell for a 10^th consecutive month, contracting 4.4% in July. With CPI and PPI both falling the need to break this debt deflation trap is becoming increasingly urgent with the Economic Daily, citing interviews with government officials, company executives and think tanks, writing that China should focus its economic efforts on driving the real economy and strengthening manufacturing sector development through innovation.

Novo Nordisk shares rise 17% inching closer to become Europe’s most valuable company

Novo Nordisk share rallied 17% yesterday on trial data showing that its weight-loss drug Wegovy also reduce heart risk by 20% relative to a control group. This news is good for Novo Nordisk as health insurers have been reluctant to provide coverage for Wegovy, but if the drug also provides heart risk benefits, then it might change the game for health insurers and that will broaden the demand picture as affordability will go up.

US earnings recap: Eli Lilly, UPS, Rivian, and Coupang

Eil Lilly, Novo Nordisk’s biggest competitor in insulin drugs and weight loss drugs, revised its FY23 revenue guidance higher yesterday on higher-than-expected demand for its drugs, but the shares were also boosted by the news from Novo Nordisk on. UPS lowered its FY23 revenue to $93bn from previously $97bn as the company lost more volume than expected during the ongoing labour cost negotiations with labour unions. UPS shares declined 1%. The EV maker Rivian rose 2% yesterday as the company increased its production target for the year to 52,000 EVs from previously 50,000 while narrowing its operating losses. Coupang shares rose 6% as the South Korean e-commerce company beat on revenue and profitability in Q2.

Vestas earnings show how broken the wind turbine industry is

Vestas is reporting Q2 earnings this morning maintaining its fiscal year revenue and EBIT margin guidance of €14-15.5bn and –2% to +3% respectively. The world’s largest wind turbine maker is also guiding that supply chain disruptions will negatively impact the wind turbine industry in the second half of the year.

What are we watching next?

US July inflation report tomorrow

With the recent set of indicators including the US debt downgrade from Fitch the bond market has reassessed the path for the Fed funds rate now pricing in six rate cuts over the next 17 months. If the US July inflation report tomorrow shows that core inflation is easing further, then these bets on Fed rate cuts will accelerate and bond yields go move lower while boosting sentiment in US equities.

Technical Analysis

• S&P 500. Top & reversal pattern. Correction very likely. Support at 4,455
• Nasdaq 100. Correction down to 15K-14687 likely
• DAX Bearish. Likely to drop to 15,482 support area
• AEX25 Closed below support at 768 i.e., downtrend to 748support
• BEL20 uptrend but likely minor correction
• CAC40 Key support at 7,251. If broken downtrend to 7,100
• EURUSD Finding support at 0.786 retracement. Likely bounce and uptrend to resume
• Dollar Index rejected at 0.786 retracement at 102.41
• GBPUSD bounced just above key support at 1.2590. RSI bullish
• USDJPY testing once again 0.786 retracement at 143.40. A close above could lead to 145
• EURJPY close to be testing strong resist at 158
• Gold hovering around support at 0.618 retracement at 1,929. RSI still bullish
• Silver below support at 24.10. Could drop to 22.15
• Copper broken bearish out of rising channel. Support at 370 likely to be tested
• Brent resistance at 87.25. Likely range bound between 87.25 and 82
• WTI reaching resistance at 83.50. Likely range bound between 83.50 and 79
• US 10-year correction. Minor support at 3.90. Resistance at 4.22

Earnings to watch

Today’s US earnings focus is on Walt Disney and Illumina which both are dealing with a set of issues. Walt Disney has been under pressure for lack of profitability in its Disney+ streaming service and investors are keen to see management lifting operating margins back to previous levels. Analysts expect Disney to report FY23 Q3 (ending 30 June) revenue of $22.5bn up 5% y/y and EBITDA of $4.1bn up from $3.9bn a year ago. Illumina recently got the biggest fine in percentage of revenue by the EU for integrating its acquisition of Grail before the EU had approved the transaction, so investors want to hear some good news soon. Analysts expect Q2 revenue of $1.2bn unchanged from a year ago and EBITDA of $70mn down from $92mn a year ago.

• Wednesday: Commonwealth Bank of Australia, Vestas Winds Systems, Novozymes, Sampo, E.ON, Generali, Sony, NTT, Honda Motor, Flutter Entertainment, Delhaize, Walt Disney, Trade Desk, Illumina, Roblox
• Thursday: KBC Group, Brookfield, Novo Nordisk, Orsted, Siemens, Deutsche Telekom, Allianz, Munich Re, Hapag-Lloyd, RWE, Antofagasta, Zurich Insurance, Alibaba
• Friday: Constellation Software, Wilmar International

Economic calendar highlights for today (times GMT)

1200 – MX July CPI

1430 – EIA's Weekly Crude and Fuel Stock Report