Global Market Quick Take: Europe – May 16, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): still waiting for the next catalyst

Despite a much weaker than estimated May Empire Manufacturing survey yesterday S&P 500 futures managed to rise while the trading range stayed incredible tight. This morning we observe slight weakness across all equity index futures ahead of this morning’s May German ZEW survey and US April retail sales. On a positive note, yesterday’s performance in global equities saw a comeback to cyclical industry groups such as semiconductors, banks, and materials.

Chinese equities (HK50.I & 02846:xhkg): little changed amid disappointing activity data

The Hang Seng Index pared early gains to nearly flat and the CSI300 shed 0.3% amid weaker-than-expected numbers from China (more below). The Hang Seng Index initially opened higher, driven by gains in China Internet names, on the back of strong rally overnight in ADR trading stemming from the news that asset manager Michael Burry had increased his stake in Alibaba (09988:xhkg) and JD.COM (09618:xhkg). JD.COM gained more than 4% while Alibaba’s advance waned and was nearly unchanged.

FX: AUD weakens as China activity data disappointed

The dollar was a notch weaker on Monday despite the dismal Empire state manufacturing and ongoing debt ceiling drama. AUD and NZD firmed the most at one point, with AUDUSD rising back above 0.6700, but that pair reversed back lower as data from China underwhelmed. NZDUSD backed up significantly after its test below 0.6200 but remains in the shadow of last week’s large sell-off unless it can work its way back above 0.6300 or higher. The Japanese yen remains range-bound, and USDJPY traded around 136, a bit more than a figure below the 200-day moving average. GBPUSD rose back above 1.2500 with EURGBP slipping to lows of 0.8677.

Crude oil: US prepares to start refilling SPR

Crude oil prices gained on Monday on reports that the US will start soliciting bids for crude to fill its depleted strategic reserves. Deliveries into the stockpile are planned for August, with awards to be announced in June, the Energy Department said. Meanwhile, supply disruption concerns rose with the wildfires in Canada threatening its main producing regions in western Canada. WTI prices rose above $71/barrel while Brent trades near $75.50, capped slightly overnight perhaps by soft data from China (more below).

Gold holding above 2,000 while silver sticky at 24.00

The $2,000 level remains supportive as two stabs at that price over the last seven trading days saw support coming in above that psychological level, but a backup in yields holding traders back from leading an assault on the all-time highs of 2,075 after a surge earlier this month fell short at 2,063. We could get a sense of how sensitive gold is to the specific issue of the debt ceiling debate as an important meeting is set for today on the issue (more below). Elsewhere in precious metals, after a freefall of over a dollar/ounce last Thursday, support for silver has come in around the 24.00 area after the 38.2% retracement of the rally off the March lows was the exact low on Friday (23.75). The critical level for bulls to remain constructive is the 61.8% retracement down near 22.30

US Treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) steady

US Treasury yields remained steady, even as the US May Empire Manufacturing survey came in far below expectations and near the worst levels since the pandemic. The April Retail Sales report today will be the next focus for bond traders as yields have largely coiled within tightening ranges for the two months-plus since Silicon Valley Bank’s demise triggered turmoil in US banks.

What is going on?

Weak UK employment data takes down sterling this morning

The UK April Payrolled Employees data dropped a stunning –136k vs. +25k expected and +42k the prior month. This is an out of the blue figure that has taken the market aback and has sterling on the defensive as UK yields are marked slightly lower. The April Jobless claims data also rose, if less dramatically, to a high since early 2021 at +46.7k and vs. +26.5k in March.

Weaker than expected consumption data from China in April

China’s April Retail Sales data out overnight were out below expectations, showing a 18.4% YoY gain vs. 21.9% expected and 10.6% in April. The year-ago numbers were heavily impacted by zero-Covid policies. April Industrial Production data was very weak relative to expectations at +5.6% YoY vs. +10.9% expected and April Property Investment slumped to –6.2% YoY vs. -5.7% expected. China’s youth unemployment levels in April rose to a record 20.4% despite the decline in the overall unemployment rate to 5.2%. China’s working population declined by 41 million over the last three years due to retirement and higher unemployment among young workers.

Nubank Q1 results beat

Nubank, the largest online bank in South America, reported yesterday Q1 total revenue of $1.62bn vs es.t $1.47bn almost doubling from a year ago. On the negative side, 15-90 days delinquencies to 4.4% from 3.7% in December. Total deposits came in at $15.8bn vs est. $16.9bn suggesting potentially that the Silicon Valley Bank failure has spooked some people from holding deposits with a smaller bank. The online bank continues to expand operations outside Brazil in countries such as Mexico and Colombia. Nubank shares rose 9% in extended trading.

Another US survey emphasises downturn in sentiment

The NY Fed's manufacturing survey saw a sharp fall in business activity for May, with the headline index collapsing to -31.8 from April's +10.8 and expected -3.75. This was the second lowest reading of the post-COVID cycle after January's -32.9, and underpinned by weakness in both new orders (-28.0 vs prior +25.1) and shipments (-16.4 vs prior +23.9). Meanwhile, prices remained firm, with prices paid edging up to 34.9 from 33.0 while prices received were at 23.6 from 23.7.

Hedge fund titans Druckenmiller and Tepper increase Nvidia stakes

The latest 13F filings from Druckenmiller’s family office showed him adding to his stake in NVidia and Microsoft, while Tepper’s Appaloosa also bought additional NVidia shares and bought Cathie Woods’ ARK Innovation ETF. Many associate NVidia’s recent huge share price revival with the growth of the potential for AI, taking over as a factor and focus for NVidia from the crypt

What are we watching next?

Next meeting on debt ceiling up today

US President Biden and House Speaker McCarthy and other Congressional members are scheduled to meet this afternoon in US time to discuss the debt ceiling issue, with some Senate Republicans said to be hopeful that McCarthy will show more flexibility in negotiations after the House Republicans passed a bill by the slimmest of majorities (216-214) that the Biden White House and the Democrat controlled Senate won’t even consider. McCarthy is under enormous pressure and has made no indication of willingness to compromise, having no room to maneuver and with his position as House leader possibly under attack from his own party’s ranks if he moves to a more compromising stance.

US April retail sales on the radar

Tuesday’s retail sales print will be a test of the strength of the US consumer, while industrial production will be on watch to see if it confirms the uptick seen in PMIs. Headline retail sales are seen rising 0.8% M/M in April, offsetting some of the 0.6% M/M decline in March, core (ex-auto and gas) retail sales are seen up 0.2% M/M (prev. -0.3%), while the Control Group is expected to be up by 0.3% M/M, after -0.3% in March. The upside surprise in the retail sales print will however have to be substantial to make any impact on the market pricing of interest rate cuts by the Fed later this year, as banking sector and debt ceiling overhangs remain.

G7 meeting set for Friday and into the weekend

The G7 nations are set to meet this 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, especially after the US last week called for G7 members to move against China’s “economic coercion”. Rahm Emanuel, the US ambassador to China said that “G7 members are developing the tools to deter and defend against China’s economic intimidation and retaliation.“ The US position on initiatives against claimed coercions is said to be more aggressive than the EU position, but a UK public broadcaster NHK said that the G7 would aim for a statement that promises to extend support for countries perceived to be targets of this coercion, though it did not reveal its sources. US Treasury Secretary Yellen also said last week that the US is working on a new set of specific investment restrictions in China for key technologies. As well, Reuters cites unnamed officials who revealed that G7 leaders will move to tighten sanctions on Russia, especially on the country’s energy and other exports.

Today’s Technical Highlights:

• S&P 500 range bound 4,050-4,195
• Nasdaq 100 higher but uptrend still stretched. Resistance at around 13,700
• Silver. Support at 23.75 likely to be tested once again. Next support 23.00.
• Copper closed below support at 372. Downside risk to 360-356.,
• Platinum bouncing from rising trendline and support at 1,050. Uptrend intact
• EURUSD below support at 1.0900. Finding some supp at 55 Moving Average.Strong supp at 1.0744
• Dollar Index rejected at the 0.382 retracement at 102.50
• USDJPY rebounds from rising trendline. Could move to re-test 137.85 resistance
• GBPUSD below rising trendline. Support at 0.382 Fibo retracement at 1.2344

Earnings to watch

Today’s earnings focus is Home Depot reporting before the market opens with expectations for FY24 Q1 (ending 30 April) revenue growth is -2% y/y and EBITDA of $6.2bn down from $6.7bn a year ago as growth in home improvement has disappeared in the short-term as households are diverting spending elsewhere due to inflation.

• 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)

0900 – Germany May ZEW Survey

0900 – Eurozone Q1 GDP and Employment

0900 – Eurozone Mar. Trade Balance

1200 – Poland Apr. Core CPI

1215 – US Fed’s Mester to discuss economic and policy outlook

1230 – Canada Mar. Manufacturing Sales

1230 – Canada Apr. CPI

1230 – US Apr. Retail Sales

1315 – US Apr. Industrial Production and Capacity Utilization

1400 – US May NAHB Housing Market Index

1400 – ECB President Lagarde to speak

1400 – US Fed’s Barr (Voter) to testify before House Financial Services Committee

1615 – US Fed’s Williams (Voter) to speak

1830 – US Fed’s Goolsbee (Voter 2023) to speak

1915 – US Fed’s Logan (Voter 2023) to speak

2350 – Japan Q1 GDP

0130 – Australia Q1 Wage Price Index