Global Market Quick Take: Europe – July 14, 2023

What is our trading focus?

US equities (US500.I, USNAS100.I): a very strong session

The US June inflation report was a gift that continued to give for equities, with the major US indices rocketing higher still as US treasury yields continued to drop. PepsiCo’s earnings report after hours suggests the US consumer remains resilient, but the heart of earnings season lies ahead, with the big banks beginning to report today and a rather high bar of expectations set for this quarter’s earnings, given the multiple expansions this rally has driven.

European equities (EU50.I): Watch chemical stocks

European equities rallied to the top of the range in many indices, including the Stoxx 50, on contagion from the strong risk sentiment in US equities. One note of caution: the very strong euro will weigh on exporter profits as the euro trades at its highest trade-weighted level ever.

FX: USD continues to plummet

A solid US weekly jobless claims number could do nothing to brake the greenback’s slide, as the prior day’s soft CPI print continued to weigh, together with lower US treasury yields and firmer pricing of Fed rate cuts next year. EURUSD nearly reached 1.1250, with a major Fibo of the entire sell-off wave from the pandemic highs to last fall’s lows coming in at 1.1275. USDJPY probed lower still and came within 20 pips of its 200-day moving average just above 137.00. AUDUSD traded within a few pips of its range top since February near 0.6900.

Crude oil: focus shift from demand to supply concerns

Crude oil prices are heading for a third weekly gain with unplanned disruptions in Libya and Nigeria, and together with Saudi and Russian production cuts these developments have helped shift the market attention from demand concerns – which remains robust according to the latest Oil Market Reports from OPEC and the IEA, to supply concerns. Brent extended its gains above resistance-turned-support at $78.50, and further gains will bring resistance at the 200-day moving into focus, in Brent at $82.55, and WTI at $77.60.

Gold and silver continue higher supported by weaker dollar

Precious metals continued higher on Thursday after the weaker than expected June inflation report was followed by an equally weak PPI report. Gold is heading for its best week since April, up 1.8% on week, but while it has yet to challenge key resistance in the $1980 area where several recent lows and highs can be found, silver has sliced through several resistance levels to gain 7.5% on the week. A continuation above $25.25 could see it challenge the downtrend from the 2011 high just below $50. It is worth noting that gold’s 1.8% advance is less than the 2.2% broad dollar decline this week, highlighting the risk of a pullback should short covering lift the greenback.

US treasury yields drop further (2YYN3, 10YN3)

US treasury yields fell lower still yesterday, with both 2-year and 10-year yields pushing 10 basis points lower and the 10-year benchmark importantly pushing back down into the range below 3.85% that was a resistance area (the range highs for late May-late June) on the way up.

What is going on?

US PPI reinforces a disinflationary outlook.

The US PPI increased by 0.1% M/M in June, below the median forecast of 0.2%. For May, the PPI was revised downward from -0.3% to -0.4%. On a year-on-year basis, the PPI rose by 0.1% compared to the median forecast of 0.4%. May's figure was also revised downward from 1.1% to 0.9%. Excluding food and energy, the PPI increased by 0.1% M/M in June and 2.4% Y/Y. The median forecast for June was 0.2% M/M and 2.6% Y/Y. Both May's figures were revised downward to 0.1% (from 0.2%) and 2.6% (from 2.8%), respectively. Overall, the report indicates a soft trend and potentially reinforces a disinflationary outlook.

In contrast, initial jobless claims for the week ending July 8 came in at 237,000, which was lower than the median forecast of 250,000. The previous week's reading was revised to 249,000.

New governor for Reserve Bank of Australia

The Australian government appointed current RBA deputy governor Michelle Bullock to replace Philip Lowe as RBA governor in September for a 7-year term. AUD saw little reaction as she is viewed as providing continuity of RBA policy. She will be responsible for a significant overhaul of the RBA structure, which will now have a policy committee, fewer rate meetings in line with global peers, and a press conference after every meeting.

US Fed’s Waller offers conditional Fed guidance

The Fed’s Christopher Waller, the hawkish Fed Board of Governors member, said yesterday that he expects the Fed will need to raise rates at least twice more this year, although a further softening of inflation could leave a second hike unnecessary.

Technical Analysis Update

• S&P 500. Potential upside to 4,546 – 4,635
• Nasdaq 100. Upside potential to 16,000
• DAX Bounced from support at 15,482. Uptrend resumed Likely test of all-time highs
• AEX25 Testing key resistance at 777. Likely move to 802
• CAC40 Range bound between key resistance at 7,403 and key support at 7.080.
• EURUSD uptrend. Above resistance at 1.1185. Likely short-term correction but room to 1.1485. Resistance at 1.1180-1.1275
• GBPUSD broke strong resistance at around 1.3025. Expect minor correction before moving higher
• USDJPY Correction overdone. In consolidation area. Support at 137.85. Likely rebound
• EURJPY correction bouncing from rising trend line and 153.
• EURNOK Shoulder-Head-Shoulder pattern unfolding. Below support at 11.20. Potential to 10.80
• Gold bounced to 0.382 retracement at 1,963. Expect minor setback before next attempt higher
• Silver above resistance at 24.50. Next resistance at 25.85-26.45
• Copper above resist at 382. Building uptrend
• Brent oil Likely to reach 83.00 short-term. A close above 83.00 room to 87.20
• US 10-year Treasury yields correction 0.618 retracement could dip to 3.75testing lower rising trendline. Uptrend intact

What are we watching next?

Earnings to watch

The Q2 earnings season starts this week with our key focus on US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season today. Read our earnings preview here.

• Friday: Wells Fargo (1100 NY/1500 GMT), JPMorgan Chase (1100 NY/1500 GMT), BlackRock (pre-market), UnitedHealth (premarket), State Street (1130 NY/1530 GMT), Citigroup (1200 NY / 1600 GMT)

Earnings next week:

• Tuesday: Bank of America, Novartis, Morgan Stanley, Prologis, Lockheed Martin, Charles Schwab, PNC Financial, Bank of NY Mellon
• Wednesday: Tesla, ASML, Netflix, IBM, Elevance Health, Goldman Sachs
• Thursday: TSMC, Johnson & Johnson, SAP, Blackstone, CSX, ABB, Freeport-McMoran
• Friday: American Express, Schlumberger

Economic calendar highlights for today (times GMT)

1230 – Canada May Manufacturing Sales
1310 – US Fed’s Goolsbee (Voter 2023) to speak
1400 – US Jul. Preliminary University of Michigan Sentiment