Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Financial Markets Today: Quick Take – August 1, 2022
Saxo Strategy Team
Summary: US equities ended last week on an upbeat note after a choppy session roiled by hotter than expected PCE inflation data, but in the end with fresh drop in US treasury yields to new multi-month lows driving a sentiment boost. A new month is under way as earnings season rolls on and the week features a busy calendar of macro event risks, with Friday’s US payrolls and earnings for July topping the list. Tonight, the RBA meets as the market leans for a 50-basis point hike.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities ended July up 9.1% making it one of the best months ever in the US equity market and yesterday’s price action took S&P 500 futures to the 100-day moving average for the first time since early April. We expect mean reversion effects to kick in around these levels and the 4,170 level is the major resistance area from early June.Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Markets initially were troubled by the weak China PMI data and Alibaba being added by the US SEC to the list of Chinese ADRs potentially to be delisted from U.S. exchanges. Stocks in in Hong Kong and mainland China traded lower at the open but managed to pare all the losses through the day. HSBC surged more than 2% after reporting higher Q2 revenues and earnings, beating market expectations. Net interest income increased 6.5% sequentially and 13.2% from a year ago. Interest margins increased to 135 basis points in Q2 from 126 basis points in Q1. Autos surged 3% to 9% across the board on incremental government policies in China to boost demand for passenger car purchases. Geely led the charge higher after reporting strong delivery of its high-end EV in July.
USDJPY as US yields drop
The USDJPY correction lower continues apace as US treasury yields at the long end of the curve closed last week at multi-month lows. USDJPY dropped to as low as 132.51 on Friday in an FOMC week that saw the Powell Fed refusing to provide guidance and choppy reactions to US data. The move extended as low as 132.07 in Monday’s Asian session. A fresh surge in Tokyo CPI reported last week may not move the needle by much on Bank of Japan’s rate hike expectations, but the yen still has significant potential to recover if US data continues to point towards moderation in economic activity. The 131.50 area is the next major chart point to the downside, while resistance is perhaps 135.00-50.USD and data this week
Given the lack of forward guidance from the FOMC meeting last week, the US data releases late last week showed the way after the Fed has declared itself entirely data dependent in its next moves. On Friday the stronger than expected June PCE inflation data drove a sharp USD rally only to see that rally almost entirely fade by the close. This week, further US data, from the ISM Manufacturing survey up today and ISM Services Wednesday will likely drive considerable intraday volatility, but the Friday July US jobs report and earnings data will likely prove the key test for USD sentiment this week, with the direction in US treasury yields the key coincident indicator for the greenback. Notable levels for the USD sell-off include the 1.0275+ area in EURUSD and the pivotal 0.7000 area in AUDUSD in addition to the USDJPY levels noted above.Crude oil prices gain on risk-on and supply concerns. (OILUKOCT22 & OILUSSEP22)
After gains last week, the focus in crude oil is shifting to the OPEC+ meeting this week where expectations for any notable increase in output for September are minimal. Supply side issues also continue to underpin but focus short-term has shifted to China’s manufacturing PMI miss and the resulting demand contraction. WTI futures slid back below $98/barrel in the Asian hours, while the October Brent futures were below $103.
US Treasuries (IEF, TLT)
US Treasury yields at the longer end of the curve fell to new multi-month lows on Friday despite hot June PCE inflation data as the market firms up its view of a weaker US economic outlook, while the shorter end of the curve has dropped less, meaning that the yield curve has inverted back toward the cycle lows, from a high for the 2-10 slope near –15 basis points toward –25 bps on Friday (cycle lows was just below –30 bps mid-last week). US data this week in focus as the 10-year Treasury yield benchmark dipped below the key 2.70% area last week.What is going on?
Chinese banks set for possible enormous losses on property crisis
Chinese property stocks are under pressure as an increasing number of Chinese mortgage holders are refusing to make payments in more than 90 Chinese cities. S&P Global estimates, in a worst case scenario, that 6.4% of Chinese mortgages (worth over $350 billion) are at risk, while Deutsche Bank put the figure at 7% of mortgages, putting many Chinese banks at risk, some of which have more than 30% of their loan portfolios in mortgages.Worrying U.S. data as confidence data at rock bottom, June PCE inflation hotter than expected
The final reading of the University of Michigan Consumer Sentiment Index showed little change from the historic low in June. The headline index was up 1.5 points to 51.5 in July, with current conditions close to the record low (58.1, +4.3 points) and the expectations are at the lowest level since 1980 (47.3, -0.2 point from June). Inflation expectations cooled slightly last month (the one-year expected inflation rate was at 5.2 % and the five-year expected inflation rate was at 2.9%). In addition, inflation picked up in June. The headline PCE inflation was at 6.8 % - this is the highest level since March 1982. The Core PCE inflation –which is monitored closely by the U.S. Federal Reserve, was at 4.8 %. This is still uncomfortably high, close to the 1982 high. Most of the rise in inflation in June was explained by surging energy prices. The inflation headache won’t disappear soon.Metals stronger last week on weaker dollar and China stimulus
Industrial metals had a comeback week with broad-based gains across the space as weaker dollar, supply constraints and China stimulus measures underpinned. Zinc rallied sharply on Friday amid further signs that Europe’s energy crisis is putting smelters under pressure. Aluminum stockpiles have also plunged to a 31-year low. A surprise miss in China’s manufacturing PMI to contraction zone may however dent the rally in industrial metals.Energy companies report massive profits and buybacks
A slew of energy earnings reports last week surpassed expectations not just on profits, but also on shareholder returns, on high oil prices. Exxon, Chevron, Shell Plc and TotalEnergies SE all reported record profits. All of them expanded share buybacks except Exxon, which had already tripled repurchases earlier in the year. Exxon grew its quarterly profit by over $3 billion. Executives at Exxon and Chevron said they don’t see much evidence of fuel-demand destruction even as recession fears mount. The energy sector now accounts for 4.5% of the S&P 500 index, having come roaring back post-pandemic as focus shifted back to lack of energy sources.China official manufacturing PMI fell into contractionary territory while Caixin manufacturing PMI managed to stay above 50
The official China NBS manufacturing PMI released on Sunday July 31 surprised to the downside and declined to 49.0 back to the contractionary territory (vs consensus: 50.3; June: 50.2). The manufacturing output component and manufacturing new order component were both in contraction, coming at 49.8 and 48.5 respectively. Exports new orders fell 2.1 points to 47.4. Oil and gas refinery and metal processing were in contraction and dragged the overall manufacturing PMI lower. Non-manufacturing PMI came at 53.8 (vs consensus 53.9; June 54.7). The services component decelerated 1.5 point to 52.8 but remained in the expansion territory. Air transportation, catering and lodging came at above 60, indicating strong expansion. Caixin manufacturing PMI, which focuses mor on SMEs in the coastal region, came in at 50.4 (vs consensus: 51.5; June: 51.7), barely staying in the expansion territory.HSBC surprises to the upside in Q2
The pan European-Asian bank beats on earnings in Q2 driven by higher than estimated net revenue. HSBC believes dividends can be restored soon and mention a lot of strengths across its division while China remains relatively weak and loan provisions are expected to climb on real estate.What are we watching next?
US ISM manufacturing on tap today
The US S&P Global flash Manufacturing PMI for July moderated 0.4pp to 52.3 and regional Fed surveys were mixed. The Bloomberg survey for today’s July ISM manufacturing index has a median forecast from economists at 52.0, down from 53 a month ago, which means a further slowing of the expansion is expected. While the supply side hurdles may be easing, weakening in demand is likely to cap increases in new orders and the overall headline.Australia RBA Cash Target announcement tonight
The RBA is expected to hike rates 50 basis points tonight at their monthly meeting, but a minority are looking for a smaller move as rate expectations for the cycle peak have moderated sharply for many central banks since the mid-June FOMC meeting and the RBA expectations for peak rates are near the lowest levels since early June.
Earnings Watch Calendar
The Q2 earnings season is still pushing ahead with more than 260 important earnings releases next week with the most important for market sentiment listed below. Given the economic pressures in Europe, the German earnings next week are our focus.
- Monday: Xinyi Solar, HSBC, Heineken, Activision Blizzard, Devon Energy, Mosaic
- Tuesday: Kweichow Moutai, Generali, Mitsubishi UFJ, BP, Koninklijke DSM, AMD, Caterpillar, PayPal, Starbucks, Airbnb, Occidental Petroleum, Marriott International, Uber Technologies, Ferrari, Electronic Arts
- Wednesday: Nutrien, Maersk, AXA, Societe Generale, Siemens Healthineers, BMW, Infineon Technologies, Vonovia, Nintendo, JDE Peet’s, CVS Health, Booking, Moderna, Regeneron Pharmaceuticals, Fortinet, Albemarle, eBay, MercadoLibre
- Thursday: Novo Nordisk, Credit Agricole, Merck, Bayer, Adidas, Beiersdorf, Toyota, SoftBank, Glencore, ING Groep, Eli Lilly, Alibaba, Amgen, ConocoPhillips, EOG Resources, Air Products and Chemicals, Block, DoorDash, Twilio
Economic calendar highlights for today (times GMT)
- 0715-0800 – Eurozone final Jul. Manufacturing PMI
- 0900 – Eurozone Jun. Unemployment Rate
- 1345 – US Jul. Final S&P Global Manufacturing PMI
- 1400 – US Jul. ISM Manufacturing
- 2300 – South Korea Jul. CPI
- 0130 – Australia RBA Cash Target
- 0130 – Australia Jun. Building Approvals
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