Global Market Quick Take: Europe – 26 July 2024

Key points:

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

In the news: Trump Vs. Harris 2024 Polls: Trump Loses 5 Points In Latest Major Survey—But Still Leads Harris (Forbes), Meta to Be Hit by EU Antitrust Order in Marketplace Fight (Bloomberg), OpenAI announces SearchGPT in challenge to Google's search dominance (YahooFinance). ECB poised to close lender owned by longtime adviser to Prince Andrew (FT).

Macro: The stock market saw a selloff in major technology companies, overshadowing positive economic data that bolstered confidence in the Federal Reserve's ability to achieve a soft landing. Despite 300 companies in the S&P 500 advancing, the index fell as tech megacaps underperformed while economically sensitive sectors like energy, industrials, and financials rose. US GDP growth exceeded forecasts, easing inflation concerns and boosting market bets on a September rate cut. Smaller companies showed strength, with the Russell 2000 climbing. Copper prices fell due to global demand pessimism, particularly from China, while oil prices rose and gold prices dropped. Today’s US PCE data release could confirm expectations of inflation nearing 2%, potentially prompting a Federal Reserve rate cut in September. If not, the U.S. yield curve is likely to flatten.

Macro events (times in GMT): Tokyo Core CPI YoY (00:30), French and Italian Consumer Confidence, (07:45, 09:00), Eurozone Consumer Inflation Expectations (09:00), U.S. Core PCE Price Index, Personal Income and Spending (13:30), Michigan Consumer Sentiment (15:00). 

Earnings events: Defense company L3 Harris Technologies reports strong Q2 earnings adj EPS at USD3.24 vs 1.83 last year. Analysts expected EPS at 3.18. Revenue rose 13%. L3 raises guidance. Verisign Net profit at USD198. Mio. EPS 2.01 vs 1.93 estimates and 1.79 last year. Sales increased by 4%. Mercedes-Benz Q2 earnings dropped 28% due to declining EV sales and weaker demand in China. Adjusted EBIT fell to €2.76B ($3B). Margin outlook revised to a max of 11%.

Equities: Aerospace and Defense had another good day together with banking. Oil sector bounced. European equity market lower on growth concerns and weak earnings reports. Ford Motor got hammered 18% after earnings. IBM 4.3% up after earnings. Cloud software company ServiceNow jumped 13.4% after a 22% in Q2 revenue and 23% raise in subscribers. Southwest Airlines rose 4.25% after better-than-expected earnings. American Airlines rose 4.2% despite issuing a profit warning. Defense company RTX +8.25% after better-than-expected earnings. Honeywell tanked 5.25% despite topping estimated but they lowered expectation for the full year. AbbVie up was up 3.4%. The company reported a strong second quarter and raised its guidance. Sales for its immunology drugs other than Humira jumped sharply.  

Fixed income: Yesterday, US Treasuries ended mixed, with the yield curve flattening. This was primarily due to a stronger-than-expected 2nd quarter GDP estimate of 2.8%, suggesting the Federal Reserve might delay cutting rates until at least September, which eased pressure on short-term yields. During European trading hours, yields hit session lows due to global stock market weakness but rebounded somewhat during US trading as US equities stabilized. By the end of the day, short-term yields were mostly unchanged or slightly higher, while long-term yields dropped by 4 to 5 basis points. The inversion between 2-year and 10-year yields decreased from -12bps a day earlier to -18bps. The 7-year Treasury note auction was successful, with strong demand leading to the lowest yield awarded since January and low primary dealer participation, indicating robust investor demand. If Friday’s PCE data shows that the Fed is nearing its 2% inflation target, the bond market could react positively, potentially pushing 10-year yields below 4.18%. Conversely, if the data does not support this, yields may continue to rise.

Commodities: Gold prices fell to a two-week low due to a stronger-than-expected US economic report, which eased expectations for imminent Federal Reserve rate cuts. The US economy grew at an annualized rate of 2.8% in the second quarter, boosting Treasury yields and the dollar, and leading to profit-taking in gold. Silver, palladium and and platinum also declined. Oil prices rose as equity markets pared losses after U.S. GDP readings, with WTI settling above $78 a barrel. Positive US economic data, including stronger GDP figures and declining crude inventories, provided upward pressure on oil prices despite earlier concerns about demand in Asia and bearish sentiment in the market. Copper prices fell below $9,000 a ton for the first time since early April due to growing pessimism about global demand, particularly from China. The drop was driven by weak Chinese consumption, rising global inventories, and profit-taking, despite efforts by China's central bank to stimulate the economy.

FX: The US dollar was slightly weaker overnight in the Asian session, as the sell-off in the US equity markets cooled and helped the risk sentiment to recover. The hot Q2 GDP report also helped to keep soft-landing hopes alive for the US economy, and the Fed’s preferred inflation metric, the June PCE, will be on watch today to assess the odds of a September Fed rate cut. To read Saxo’s PCE preview, go here. Risk-on currencies outperformed, with Australian dollar leading the gains. The Japanese yen was range-bound after several days of strength which hinted at risks of yen-funded carry trades unwinding, while euro and sterling gained. Focus turns to the FOMC meeting next week.

Volatility: The VIX increased to $18.46 (+0.42 | +2.33%). VVIX fell to 104.38 (-1.74 | -1.64%), and the SKEW index dropped to 134.17 (-2.67 | -1.95%). VIX futures declined to $16.800 (-0.345 | -2.01%) this morning. Expected moves for today, derived from options pricing, indicate the S&P 500 with an expected move of plus or minus 47.69 points (+/- 0.85%) and the Nasdaq 100 plus or minus 244.85 points (+/- 1.28%). Markets showed a continuation of Wednesday, with the S&P 500 closing at 5,399.22 (-27.91 | -0.51%) and the Nasdaq 100 ending at 18,830.58 (-201.80 | -1.06%). Notably, the daily expected moves have been rising from day to day all week, indicating increasing market volatility. This morning S&P 500 and Nasdaq 100 futures show a little more positive sentiment than yesterday, with S&P 500 futures at 5,460.00 (+18.75 | +0.34%) and Nasdaq 100 futures at 19,065.75 (+73.50 | +0.39%). Today's focus will be on the Core PCE Price Index numbers, the Fed's preferred measure of inflation, with the monthly and yearly data expected at 14:30. No significant earnings reports are due today. Yesterday's top 10 most traded stock options were Nvidia, Tesla, Apple, Pfizer, Advanced Micro Devices, Ford Motor Company, American Airlines Group, Amazon, Alphabet (GOOGL), and Microsoft.

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