Global Market Quick Take: Europe – May 12, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): compressed trading ranges

Negative jitter around the US debt ceiling negotiation and initial jobless claims weakened further providing a bit of weight to the forward curve in SOFR futures pricing rate cuts later this year, but the equity market remained relaxed with S&P 500 futures staying in the recent tight trading range. The VIX Index remains below 17 suggesting little implied short-term risks in the market. In Nasdaq 100 futures there were a bit more positive vibes yesterday due to the market liking yesterday’s AI announcements by Google. Today’s key macro event for the equity market is May preliminary University of Michigan consumer sentiment.

Chinese equities (HK50.I & 02846:xhkg): head for weekly losses

The Hang Seng Index and the CSI300 Index extended the decline, edging down 0.1% and 0.6% respectively by mid-day, both heading for over 1% losses for the week. In China, the amount of new RMB loans slumped to 719 billion in April from RMB3,890 billion in March. Loans to corporates collapsed by 75% and loans to households turned negative, stirring up investors’ worries further about the loss of momentum in the Chinese economy. The Hang Seng TECH Index, however, was lifted by rallies in e-commerce platforms following JD.COM (09618:xhkg) reported a better-than-feared 1% Y/Y revenue growth in Q1, a 33% EPS beat, and upbeat guidance for Q2. JD.COM surged 7% and peer e-commerce names gained between 2-4%. E-commerce A-shares stocks also advanced in mainland bourses. A-share textiles and traditional Chinese medicine names also bucked the decline.

FX: Safe haven flows drive the USD higher

Despite cooler economic data in the US knocking treasury yields back lower and refuelling of banking sector concerns, the US dollar rallied on Thursday across the G10 board. GBPUSD tried a weak rally immediately after the Bank of England’s rate hike but resumed its slide from recent highs subsequently to test 1.25 as the hawkish message was later discounted and yields actually fell at the front end of the UK gilt curve. EURUSD also dropped to test 1.09. AUDUSD and NZDUSD had more to give after recent gains, and were down toward key levels of 0.6700 and 0.6250 respectively. USDJPY bounced from lows well below 134.00 yesterday after a broad JPY surge, trading above 134.50 this morning in Europe.

Crude oil: demand concerns still weighing

Weak demand concerns continue to pile up for the crude oil market, with US economic data on cooling inflation and labor market conditions further igniting slowdown concerns and China’s inflation and credit data also pouring water on the China demand surge hopes. WTI prices dipped below $71/barrel while Brent was below $75. There were however some reports that underpinned oil prices later. US energy secretary, Jennifer Granholm, said the government aims to purchase oil to refill the Strategic Petroleum Reserve after a congressionally mandated drawdown ends in June. OPEC increased its outlook for China’s 2023 oil demand, thereby supporting expectations for a rise in global demand of 2.33mb/d, a prediction that contradicts the current downward trend in oil prices

Copper and silver, two major casualties during Thursday’s risk off session

Copper fell to its lowest level in seven months on rising concerns over the health of China’s economy. Copper futures broke below key support of $3.80/lb for the first time in four months, thereby supporting fresh selling by momentum-based funds and hedge funds already short. The next key level of support at $3.6680/lb, the 61.8% retracement of the October to January rally is now being tested. While short-term pressure is apparent, copper remains the king of green metals and lack of a resilient supply means prices will remain underpinned in the medium/long term. The copper weakness triggered a 5% sell off in silver, the biggest one-day loss since February 2, 2021, with selling accelerating after breaking support at $24.50. Having shown resilience following the 31% March to April rally, correction risks have been rising with focus now on support at $23.72, the 38.2% retracement of the mentioned rally.

Gold, the next shoe to drop?

The general market weakness on Thursday, especially across the metal sector, saw profit taking drive the gold price back towards a key area of support. Recently established longs after the softer CPI print lifted expectations for a Fed pause got caught offside and with silver tumbling 5% support evaporated. However, mounting fears of the US debt ceiling, de-dollarization flows, geopolitical tensions, expectations for rate cuts later this year remain key reasons why the yellow metal is currently holding up very well. The gold-silver ratio has jumped to near 84 and highest since March 29. Strong fundamentals aside, the short-term direction will be determined by flows and hedge funds are currently holding an elevated long, that could get squeezed. Support at $2007 followed the $1991 ahead of the big one at $1950 while resistance remains firm above $2050.

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) lower on US data

The soft PPI headline data and spike in jobless claims (more below) saw US treasury yields pushing lower, though curiously a bit more at the long end than at the short end as the rally in 2-year treasuries reversed in late trading and the 2-year benchmark only closed a couple of basis points lower, while the 10-year Treasury yields closed some 6 basis points lower. The bottom of the range since the US bank turmoil began in March is now a bit closer in the 10-year benchmark – at 3.25% versus the 3.39% level this morning.

What is going on?

The slow cooling of the US economy – PPI softens, jobless claims rise

US producer prices in April rose 0.2% M/M, less than the expected 0.3% rise, while the prior month was revised to a 0.4% decline from an initial 0.5% decline. The Y/Y figure fell to 2.3% from 2.7%, coming in softer than the 2.4% expected. Core PPI rose 0.2% M/M, as expected and reversing last month's 0.1% decline, with core services rising to 0.4% from 0.2% while core goods were more contained at 0.2%. Core PPI rose 3.2% Y/Y, beneath the expected 3.3% rise and down from the prior 3.4%.

Meanwhile, weekly US initial jobless claims printed at 264k vs. 245k expected and 4-week average (as of last week) of 239k. It is the highest reading since October of 2021, and supports market expectations for eventual Fed cuts, though several more weeks of worsening claims data will be necessary to support the scale of cuts priced into the forward curve. Markets continue to price in about 100bps of rate cuts from the Fed through the January 2024 meeting.

Richemont fiscal year results beat estimates

The Swiss-based luxury goods maker reports this morning better than expected fiscal year revenue and operating profit of €5.03bn vs est. €4.82bn. The company is announcing a special dividend of CHF 1 per share. The company is also saying that its Chinese group travel business has not rebounded, inflation will be stickier than what people think, and finally that US demand has been in a slowdown since November.

Alphabet shares rise 4% on AI announcements

Google, the search engine business of Alphabet, reported yesterday several key updates on their AI efforts and technology including announcing a foldable smart phone to rival that of Samsung. The market came away impressed by the AI announcements sending Alphabet shares higher by 4%.

JD.com rallies 7% on positive Q2 comments

JD.com, one of China’s largest e-commerce retailers, reported better than expected Q1 revenue and earnings and said that Q2 gross merchandise volume growth is higher than in Q1 bolstering the hope for a growth rebound.

Another round of regional bank fears

Regional bank fears re-ignited on Thursday after PacWest Bancorp announced it saw deposit losses in early May of roughly 9.5% after noting it is exploring all strategic options. Western Alliance also sold off on the news pre-market, but recovered later after it announced total deposits are up $600mn since May 2 to ~$49.4bn as of Tuesday May 9. Banking sector confidence remains fragile and prone to further deterioration if deposit concerns continue. The KRX regional bank index fell more than 2% to its lowest daily close of the cycle. Elsewhere, FDIC proposed a special fee on larger banks to recoup losses incurred by SVB and Signature Bank failures. The fee would be based on the amount of uninsured deposits at each bank, and would set an annual special assessment rate of 12.5bps on a bank's uninsured deposits as of December 2022.

Debt ceiling meeting postponed

The White House said it has postponed a meeting on debt ceiling negotiations between Biden and GOP leaders that was scheduled for Friday to allow staff-level talks to continue. After Tuesday’s meeting brought no progress in talks, another postponement could bring additional bond volatility. While the White House reportedly viewed the delay as a positive development, adding that staff meetings were going well and it was not yet time for the principal leaders to come back together, Republicans disagreed, and Kevin McCarthy said that he does not think there is enough progress for leaders to get back together. Concerns are also starting to rise about the Treasury’s cash balance which is down by half since the start of the month, standing now at $155bn, and on pace to hit Janet Yellen’s critical date of June 1, although if the Treasury can piece together enough financing until mid-June, fresh tax revenues may delay the crunch time until July or August.

What are we watching next?

Election in Turkey on Sunday

A smaller opposition candidate to President Erdogan who was polling at a few percentage points bowed out of the race yesterday in an election this Sunday that is chiefly a two-way affair between Erdogan and the main opposition candidate Kemal Kilicdaroglu, who has called the election a referendum on democracy and accused “Russian friends” of interfering in this Sunday’s election with deep fake videos and other content. Kilicdaroglu has slightly led Erdogan in the polls, but after a widening of the gap in the wake of the devastating earthquake in February, the gap has closed to only a few points. Yesterday, Erdogan announced a large hike in the minimum wage for civil servants set for July after announcing a previous 45% wage hike just two days prior.

G7 meeting needs to be on our radar

The G7 nations are set to meet next Friday and into the weekend in Niigata, Japan, with considerable anticipation that the meeting could produce major geopolitical signals related to the nature of the nations’ relationship with China. This morning, Bloomberg reports that G7 finance heads will propose a new partnership on supply chains that will only allow participation if certain minimum standards are met on human rights and environmental policies.

Today’s Technical Highlights:

• S&P 500 range bound 4,050-4,195
• DAX range bound. Key support at 15.700 for a correction
• Gold key support at 1,980 and 1,950
• Silver below key support at 24.64. Support at 23.72. Could spike down to 23.00
• Copper closed below support at 372. Downside risk to 360-356
• Brent Oil rejected at 0.382 could test previous lows at 71.28
• WTI lower after rejected at 0.50 retracement. Could test previous lows at 64.12
• EURUSD testing key support 1.0900. If closing below correction down to 1.0744
• Dollar Index could bounce to 102.50-103
• EURJPY Shoulder-Head-Shoulder reversal unfolding. Could drop to 144.80.
• GBPUSD testing rising trendline. A break likely leading to support at 1.2344
• US 10-year Treasury yields close to be testing key support at 3,30-3,25

Earnings to watch

Today’s US earnings calendar is non-existent, so the focus will be on the European earnings releases with Richemont being the most interesting because of the strong rally in luxury stocks this year. Next week’s earnings releases have been added with our focus next week being on Siemens Energy, Home Depot, Siemens, Tencent, Walmart, and Deere.

• Friday: Societe Generale, Allianz, Richemont

Next week’s earnings releases:

• Monday: Constellation Software, Siemens Energy, Meituan, Bridgestone, NU Holdings, Trip.com
• Tuesday: KBC Group, Vodafone, Nibe Industrier, Sonova, Home Depot, Baidu
• Wednesday: Siemens, Munich Re, Commerzbank, Tencent, Experian, Cisco, TJX, Target, Sea Ltd
• Thursday: KE Holdings, National Grid, Walmart, Alibaba, Applied Materials
• Friday: Deere

Economic calendar highlights for today (times GMT)

1115 – Bank of England Chief Economist Huw Pill to speak

1400 – US Preliminary University of Michigan Sentiment