Global Market Quick Take: Europe – May 30, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): US debt ceiling debate takes center stage

Equities bounced back on Friday with S&P 500 futures closing above the 4,200 level as investors extended the gains in AI related stocks and the US debt ceiling got a bit closer to a deal. With the US debt ceiling deadline approaching on Thursday, it will be the all-consuming event this week for markets. In addition to news coming out on the US debt ceiling, we will get May figures from the Conference Board on consumer confidence and Dallas Fed on manufacturing activity, with both expected to remain in subdued territory. The 4,200 level in S&P 500 futures remains the key level to watch on the downside for support.

Chinese equities (HK50.I & 02846:xhkg): Offshore listed Chinese equities entered a bear market

Chinese equities continued their downward spiral, reaching a new nadir, despite the recent upward trajectory of US markets. Chinese companies traded outside of the mainland performed more poorly than their domestic A-share peers as foreign investors’ confidence in China’s economic recovery has been fading by the day. While the CSI300 Index shed only 11% from its January high, both the MSCI China Index and the Hang Seng China Enterprise Index fell more than 20% from their January highs and technically entered a bear market. Hong Kong’s Hang Seng Index, extending its loss by 0.7% today, was 18.9% below its peak in January.

FX: dollar grinds to new highs after debt ceiling deal

The US dollar continues to grind stronger and has posted local highs versus several currencies this morning, likely in part on the US debt ceiling deal. Once the ceiling is formally lifted, presumably in the coming days, USD liquidity could come under pressure on the blitz of US treasury issuance needed for it to rebuild its reserves by some hundreds of billions of US dollars in the coming months. EURUSD traded sub-1.0700 this morning for the first time since March, with the next support the range lows into 1.0516. USDJPY is well back above 140.00, GBPUSD is eyeing the local lows just above 1.2300 and AUDUSD nearly touched 0.6500 this morning, near the lows of the year posted last week.

Crude oil remains stuck with focus on debt ceiling deal and OPEC+

Oil prices remain stuck while awaiting the response from the Congress on the debt ceiling deal. WTI and Brent futures traded lower during Asian hours but overall, within small uptrends that was supported last week by the Saudi Arabia’s Energy Minister warning that short speculators should “watch out”. A warning that helped increased the Brent crude net-long by the most in two months in the week to May 23. Focus is on the OPEC 3-4 June meeting, with increasing prospects of a production cut, after Russia also walked back on comments that OPEC wouldn’t intervene at the June meeting. Russian Deputy Prime Minister Alexander Novak said they will engage in discussions with partners to determine what is best for the market.

Gold remains challenged by recent shift in focus to rate hike from cuts

Gold trades near support at $1934, the 50% retracement of the February to May rally after slumping last week as the dollar strengthened in response to continued strength in US economy data raised the risk of further rate hikes and with that a postponement of the timing of a gold supportive peak rate situation. However, with elevated rate cut expectations now priced out, gold will be in a better position to respond to price supportive developments. Focus this week on the US debt ceiling deal and Friday’s US jobs data.

The US yield curve (2YYK3, 10YK3, 30YK3) bull flattens following news surrounding the debt ceiling

The risk of a substantial financial contraction coming from a debt ceiling deal is removed if the bill presented by Biden and McCarthy passes Congress. However, the risk of a liquidity squeeze rises significantly as the treasury has to issue a total of $1 trillion to replenish its reserves. $600 billion will need to be raised in just six weeks. That will likely dry up liquidity from risky assets and continue to bear flatten the curve. In the short term, we expect the two-year yields to break above resistance at 3.63% and soar to 4.8%. Ten-year yields will rise at a slower pace but will be likely to test resistance at 4%. Thirty-year yields are likely to soar to 4.07%.

UK Gilts (FLGM3, FLGU3) are likely to continue to tumble amid soaring US Treasury yields

Although 10-year yields are likely to test and break resistance at 4.59% and 2-year yields might soar test resistance at 4.68%, we believe rates will unlikely soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer as happened last September during Truss’ mini-budget crisis. Therefore, the BOE will need to step into rescue, limiting rates’ upside to avoid a financial crisis.

What is going on?

US debt ceiling deal back in focus today as Congress returns from holiday

While Biden and McCarthy reached an agreement-in-principle on lifting the debt ceiling deal over the weekend, they will still have to secure enough backing from the Republican majority in the House and eventually the Democratic majority in the Senate to move forward. The deal’s details immediately triggered a backlash from right wing conservatives. The first critical test will be a vote in the House expected on Wednesday. The Senate is due to follow with votes that could slip into the weekend. The US Treasury has declared that if no legislation is enacted by June 5, the US will run out of cash to pay all its bills. If the deal is passed as currently agreed, it would lift the debt ceiling until early 2025, importantly punting this perennial showdown to the other side of the November 2024 US Presidential election.

Turkish lira weakens as President Erdogan set to announce new cabinet

The lira lost another 0.6% from yesterday’s levels versus the US dollar after the weekend run-off saw President Erdogan emerge victorious. He met with former finance minister Mehmet Simsek, seen as a market friendly choice, as he declared that he would look to bring “international credibility” to his governing team, suggesting that the policies that have driven extreme inflation in Turkey in recent years, especially the heavy intervention in the country’s monetary policy, could come under review.

UK Shop Price data hits record high in May

The British Retail Consortium reported overnight that shop prices rose 9.0% year-on-year, a record after a slight dip from March’s 8.9% to April’s 8.8%. Official UK retail prices (the Retail Price Index) registered a significant drop in April to 11.4% YoY vs. 13.5% in March and the cycle high of 14.2% in October. Anecdotal reports suggest some UK consumers are prioritizing spending and saving on promotions and with the use of loyalty cards. The most recent April UK Retail Sales report showed retail volumes down 2.6% YoY.

What are we watching next?

Australia’s April CPI could rise, but AUD could continue to struggle

The monthly CPI for Australia is due on Wednesday, and April inflation is expected to tick higher to 6.4% YoY from 6.3% YoY previously when food prices saw notable gains. A weaker-than-expected print could confirm the bias from the Reserve Bank of Australia to pause at the next policy meeting on June 6. This would mean AUDUSD could also extend its down move further below 0.65 handle, with the only real support left on that chart the late 2022 low below 0.6200. However, if the print comes out to be firmer-than-expected, it will complicate the task of the RBA. RBA Governor Lowe will appear before a parliamentary committee ahead of the CPI release.

US Conference Board Consumer Confidence survey today

Friday’s final University of Michigan sentiment survey saw a slight improvement on the preliminary survey, as the Expectations component was revised up to 55.4 from 53.4, although this still represents a material drop from the 17-month high in February at 64.7. Importantly, the final May University of Michigan 5-10 year inflation expectations component dropped back to 3.1%, within the range since 2011, versus the 12-year high of 3.2% in the preliminary survey. Today sees the release of the Conference Board Consumer Confidence number for May. The April survey showed the expectations component dropping to 68.1, the third-worst number since 2013, with only the two summer months of June and July of 2022 posting worse numbers (likely on the sentiment impact of the spike in petrol prices in that time frame). And the April survey also showed the greatest spread between the “present situation” and expectations at –83 since 2001. Historically, overall consumer confidence correlates closely with the strength of the labor market. The survey headline is expected to soften slightly to 99.0 vs. 101.3 in April.

Economists expect China’s manufacturing to contract in May

Investors are now presented with a fresh set of insights aimed at discerning the trajectory of China's much-anticipated economic revival, ascertaining whether the weakness exhibited in April's data was merely a transient blip or indicative of a waning recovery. Economists surveyed by Bloomberg forecast that both the official NBS manufacturing PMI and the private Caixin manufacturing PMI will register at 49.5, marginally below the pivotal 50 mark, thereby remaining within contractionary terrain. Notably, economists have taken cognizance of the decline in the Emerging Industries PMI, which retreated from 53.1 in April to 50.7 in May. In addition, South Korea's exports to China, widely considered a bellwether for China’s manufacturing sectors, have recorded a contraction of 23.4% Y/Y during the initial 20-day period of May. Meanwhile, economists in the Bloomberg survey expect continued expansion in non-manufacturing activities, albeit at a more moderate pace. The NBS non-manufacturing PMI, encompassing construction and services, is projected to decelerate from April's reading of 56.4 to 55.3 in May. Similarly, the Caixin services PMI is anticipated to dip from 56.4 in April to 55.2 in the same month.

Earnings to watch

Today’s US earnings watch is HP and HP Enterprise with both reporting after the close. HP (consumer business) is expected to report revenue growth of –21% y/y and EBITDA of $1.24bn down from $1.59bn a year ago, driven by significant impact from inflation and on consumer spending on consumer electronics. HP Enterprise is expected to report revenue growth of 9% y/y and EBITDA of $1.4bn up from $1.1bn a year ago.

• Tuesday: HP, HP Enterprise
• Wednesday: Salesforce, Crowdstrike, Okta
• Thursday: Broadcom, VMware, Lululemon Athletica, Dell Technologies, MongoDB, Zscaler, Dollar General, Hormel Foods

Economic calendar highlights for today (times GMT)

• 0700 – Spain Flash May CPI
• 0700 – Sweden Parliamentary hearing with Riksbank on monetary policy
• 1300 – US Mar. S&P CoreLogic Home Prices
• 1400 – US May Consumer Confidence
• 1430 – US May Dallas Fed Manufacturing Activity
• 2300 – Australia RBA Governor Lowe to testify
• 2350 – Japan Apr. Industrial Production
• 0100 – New Zealand May ANZ Business Confidence
• 0130 – China May Manufacturing and Non-manufacturing PMI
• 0130 – Australia Apr. CPI