Global Market Quick Take: Europe – June 28, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): A strong US consumer lifts equities

US equities regained their lost territory in a significant rebound session with S&P 500 futures rising 1.1% as strong US June consumer confidence and May new home sales came in better than expected suggesting the US consumer outlook is still robust. Travel and leisure related stocks such as cruise lines and airliners were leading the gains together with technology in US equities and retailing stocks are now the best performing industry group over the past week. If we couple the move with the low VIX Index and the loose financial conditions in the US it is difficult to see how inflation will ease substantially and thus the case for rates for longer is still strong.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Markets stagnate, NEV manufacturers rally

Hang Seng Index and CSI300 Index treaded water around recent lows, failing to extend the rally yesterday. Market reactions to reports about potential additional US export bans on microchips were muted. The Hang Seng Index slid moderately by around 0.2% and the CSI300 shed 0.5%. New energy vehicle (NEV) manufacturers topped the market performance, seeing Xpeng (09868:xhg) and Nio (09866:xhg) rallying strongly by over 6%. In the A-share market, technology, media, and telecommunication names weighed on the market while coaling mining stocks gained amid stronger consumption of coal in electricity generation under a widespread heatwave. Industrial profits in China declined by 12.6% YoY in May, a smaller contraction than the decline of 18.2% in April.

FX: USD fights back late yesterday

Volatility remains quite muted across much of FX, but the US dollar fought back after wobbling at times yesterday as US data was supportive, with CNH weaker after a PBOC-inspired boost the prior session and AUD and NZD fading lower on lower than expected Australian CPI reported yesterday. USDJPY poked back to a new high for this cycle as long US treasury yields were supported by the strong Consumer Confidence and other data (more below). Still, US long treasury yields may need to surge higher still to support a notable extension of the rally there. Sterling could eye Bank of England speakers today at the ECB’s forum in Sintra, Portugal today, with Fed Chair Powell and others in attendance.

Crude oil trades just above key support, will it hold?

A fresh slump in crude oil prices on Tuesday saw Brent return to challenge a trendline that by now has provided support six times since it was established on March 20. Today, the level comes in at $71.85 and given its importance the risk of it being challenged by short-term technical traders remains. To the upside, meanwhile, the 21-day moving average currently at $74.85 has provide resistance for the past two days. For now, the market remains stuck with demand concerns weighing on the market while OPEC production cuts have helped prevent a deeper setback. The API report last night was mixed with a 2.4m barrel crude stocks decline being offset by a 1.45m barrel increase at Cushing. EIA’s official report is due later and apart from stock levels, traders will look out for changes in demand from refineries and consumers.

Copper sees fresh fund selling as technical outlook deteriorates again

HG Copper has retraced 50% of the recent China stimulus inspired rally and for a fourth day it is trading below its 200-day moving average, currently at $3.825. A combination of speculators joining the rally too late, forcing them to reduce bullish bets, and sluggish economic data from China highlighting the current softness in domestic demand. In a three-week period up until last Tuesday, speculators had bought 46,300 contracts of HG contracts, in the process flipping a net short to a net long of 23,200, a four-month high. In the short-term the market will continue to look for additional government initiatives to support the Chinese economy and to arrest the recent slide. Support at a $3.755 followed by $3.700.

The Sintra Forum is in focus for the bond market today. Rates have the potential to continue their rise (2YYM3, 10YM3, 30YM3)

Yesterday, US durable goods orders and home sales surprised to the upside, paving the way for the market to increase Fed rate hikes expectations. The data leaves the front part of the yield curve vulnerable to rising rates tomorrow as several central bankers speak at Sintra. We expect 2-year US Treasury, German bond, and Gilt yields to resume their rise with gilts underperforming peers. Although yield curves are deeply inverted, they might flatten further. As font term yields rise and long-term yields remain pinned down.

Gilt yields continue to rise as markets price the BOE rate to peak at 6.2% (IGLS:xlon, GLTS)

Two-year Gilt yields rose to 5.25% yesterday as markets increased the BOE rate hikes bets. Today’s Sintra forum on central banking might push yields further up as central banks might reiterate their hawkish stance. Two-year gilt yields will not find resistance until 5.57%, the 2008 peak.

What is going on?   

Biden administration considers AI-chip export curbs to China

According to an exclusive report from the WSJ, the US is considering new restrictions on exports of AI-related semiconductors to China, according to “people familiar with the situation”. The article (paywall) suggests that the US Commerce Department could move as soon as early next month to halt shipments of chips from Nvidia and others to “China and other countries of concern withouh first obtaining a license”.  Nvidia and AMD were up yesterday, but erased those gains in late trading after this news broke.

Strong US Consumer Confidence in June

US Consumer Confidence came in stronger than expected on all fronts, with the Present Situation component improving sharply to 155.3, the highest since the summer of 2021, while the Expectations component jumped sharply to a six month high of 79.3 after a string of more downbeat readings in the low seventies.

US New Home Sales roar higher in May

The pace of New Home Sales in the US was the highest in over two years according to data released yesterday, which saw a blistering 763k annualized pace of sales versus 675k expected and vs. 680k the prior month. The irony in the US housing market is that existing home supply is extremely low due to high mortgage rates, with those having rolled mortgages at record low levels during the pandemic unwilling to sell and take out a mortgage on a new residence as their monthly payments would soar. The SPDR S&P US Homebuilders ETF (XHB:xnys) rose nearly 2% yesterday on the news to a new high since early 2022.

Walgreens shares down 10% on weak outlook

The US drug store chain beat on revenue in its FY Q3 but lowered its earnings guidance for the fiscal year due to lower demand and rising input costs from wages.

Snowflake and Nvidia forge partnership

During the Snowflake Summit 2023, Snowflake (SNOW:xnas) and Nvidia (NVDA:xnas) announced a collaborative effort to empower businesses in creating tailored generative AI applications using their own proprietary data. Operating securely within the Snowflake Data Cloud, customers can utilize NVIDIA's NeMo framework designed for AI developers, which was initially unveiled in September.

What are we watching next?

ECB President Lagarde warns of persistently high inflation and anticipates further tightening

ECB President Lagarde cautions about the ongoing high and enduring inflation, necessitating additional rate hikes to address the situation. A further interest rate hike is anticipated in July, and she expresses scepticism that the central bank will soon be able to definitively declare that inflation has reached its peak. However, she does acknowledge that the intensity of price pressures is beginning to diminish.

Inflation data from Europe and the US tomorrow and Friday

In some of the smaller economies recently, including Norway and the United Kingdom, inflation readings, and core inflation readings in particular have come in hotter than expected. Then we saw a slightly softer core inflation reading reported yesterday for May in Canada and even a softer than expected Australia May CPI number reported overnight (only a headline number, the core inflation data is only reported quarterly there). Tomorrow, Germany reports its preliminary June CPI data after the May data showed a lower print than expected. Friday, the Eurozone will report flash June inflation numbers for headline and core inflation, with the latter surprisingly dropping 0.3% to 5.3% YoY in May. The US May PCE inflation data, the inflation data series used in Fed policy making, is up on Friday, expected to drop below 4.0% for the headline, but show a steady 4.7% YoY at the core. Should inflation numbers come in-line and lower than expected, it could take the steam out of central bank expectations, although the longer end of global sovereign yield curves bears watching for a break higher in yields (US 10-year benchmark has been poised in a tight range with key resistance near 3.85%, although 4.00% is the attention-getting level.

Technical update

• Was this the correction in US Equities? Indicators suggest higher levels after correction
• S&P500. Could still perform a correction to 4,300
• Nasdaq 100 possible correction to 14,500-14,300
• DAX key support at 15,625
• CAC40 support at 7.083 is key. Close below down trend confirmed
• EURUSD rejected at 1.10. Likely range bound short-term between 1.08 and 1.10 but uptrend intact. Resistance at 1.11
• GBPUSD bouncing just above support at 1.2667. Likely to resume uptrend
• USDJPY above key resistance at 142.25. Uptrend to 146.60
• EURJPY above resistance at 157.00. Uptrend very stretched but could continue to 160 Correction should be expected
• EURNOK testing rising trendline. Support at 11.40 is key. Below downtrend confirmed
• EURSEK uptrend very stretched. Support at 11.50 is key. Below downtrend/correction confirmed

Earnings to watch

Our next earnings focus is Micron after the US market close with analysts expecting Micron’s (MU:xnas) FY Q3 revenues to fall by 57% to $3.7bn from $8.6bn a year ago and to slide into a $1.58 per share loss versus a profit of $2.59 per share when reporting today. After the Chinese Government’s ban on certain Chinese manufacturers to use DRAM and NAND chips from Micron, the memory chip maker is expected to see their China sales halved, representing an about 12% loss to its total revenue. Investors will pay attention to any updates from the earnings call. Investors will also scrutinize the company’s comments on AI-related demand. It is believed that AI servers use 6 to 8 times more DRAM chips than regular servers and present a promising opportunity for Micron. Updates on Micron’s effort to catch up with SK Hynix in the high bandwidth memory (HBM) products that are used in AI-related GPUs will be another focus. 

• Wednesday: Micron Technology, General Mills
• Thursday: H&M, Nike, Paychex, McCormick
• Friday: Constellation Brands

Economic calendar highlights for today (times GMT)

• 1030 – Bank of England Chief Economist Huw Pill to speak
• 1230 – US May Advance Goods Trade Balance
• 1330 – Fed Chair Powell, ECB President Lagarde, BoJ Governor Ueda, others at ECB forum in Sintra, Portugal
• 1430 – EIA's Weekly Crude and Fuel Stock Report
• 1500 – ECB President Lagarde to speak
• 1700 – US Treasury to auction 7-year notes