Financial Markets Today: Quick Take – July 27, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I). US equities were rather downbeat during the session yesterday, with the S&P 500 closing about 1.2% lower, but the reports after hours from Microsoft and Alphabet buoyed sentiment on the former’s positive guidance on 2023 cloud revenue and despite Alphabet’s second consecutive quarter of ad sales. Today features another slew of earnings reports (see list below), but the biggest day is tomorrow’s batch of earnings reports that includes Apple and Amazon. Earnings may play second fiddle, however, to the FOMC meeting tonight if the Fed surprises with more hawkishness than the market is pricing. S&P 500 resistance is near 4,015 and Nasdaq 100 index resistance is 12,700 and support in the 12,200-12,000 area survived yesterday’s test.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Hong Kong and Chinese stocks retreated moderately, with property techs, property developers and auto leading the decline.  Alibaba (09988:xhkg) fell nearly 4%, paring most of the gain yesterday as markets refocusing on the risk of Chinese ADRs being forced to be delisted from US exchanges.  Country Garden (02007:xhkg) collapsed 14% following announcement of placement at deep discount. 

EURUSD and EURJPY. The natural gas emergency is worsening for the Eurozone as prices have risen near the highest levels triggered by Russia’s invasion of Ukraine as fears rise that Russian supplies could fall further and require shutting in some portions of EU productive capacity. For EURUSD, parity looms as the next objective if the Fed remains on a hawkish course, while EURJPY also looks heavy within the range, with focus on the key pivot low just below 137.00 - if longer yields stay tame and even fall on continued recession fears or for whatever reason post-FOMC, EURJPY may outperform EURUSD to the downside.

Crude oil (OILUKSEP22 & OILUSSEP22). A fresh rise in crude oil prices yesterday was reversed yesterday as the US announced that it would tap the Strategic Petroleum Reserve for another 20 million barrels more than planned. Gains in crude however returned higher in the Asian morning. US crude oil inventories fell sharply last week, with API data showing a drawdown of 4 million barrels for the week ended July 22 compared to a build of 1.9 million barrels in the previous week.  A key recent line of resistance in Brent crude has formed just above 107.50/barrel - with the similar level for WTI crude between 101-102/barrel.

US Treasuries (IEF, TLT). US yields tested lower yesterday on downbeat risk sentiment during the US equity session and weak economic data, including a new 9-year low in the Expectations component of the US Consumer Confidence survey for July and weak New Home Sales. But the FOMC meeting today (preview below) is the chief focus here, and the cycle lows in the 10-year Treasury yield benchmark since late April near 2.7% are an important chart point. Yesterday’s 5-year treasury auction saw solid demand.

What is going on?

U.S. consumer confidence and new home sales declined. The US consumer confidence index fell 2.7 points to 95.7 in July, with the component for perceptions of current economic conditions down substantially by 5.9 points to 141.3. job market outlook also softened, suggesting that the labor market strength may start to come in question over the next few months as well. Meanwhile, new home sales disappointed as they fell 8.1% to 590,000 in June following a rebound in the prior month. While some of the slowdown can be attributed to post-pandemic normalisation in demand, higher mortgage rates also remain a dampener.

Australia Q2 CPI comes in mixed, with the headline a shade below expectations for the quarter at 1.8% QoQ and 6.1% YoY vs. 1.9%/6.3% expected, respectively, but with the “trimmed mean” core measure in at 1.5% QoQ and 4.9% YoY vs. 1.5%/4.7% expected, respectively –the last of these representing a new 30-year high. An RBA rate hike awaits at next Tuesday’s RBA meeting, with the market not quite fully priced for a 50 basis point hike.

EU member states agreed to reduce their gas demand by 15% from 1 August 2022 and 31 March 2023. The reduction quotas are based on average consumption over the past five years. Each member state can implement the measures of its own choice to reach the target. There are several exemptions and possibilities to request a derogation: if a member state is not interconnected to other member states’ gas networks, if electricity grids are not synchronized with the European electricity system and if they have limited interconnections to other member states. Meanwhile, energy prices continue to jump: the European gas futures soared above EUR 200/MWH (the highest level since early March) and the French year-ahead power climbed to a record of EUR 495/MWH yesterday. We fear the EU can’t avoid some form of electricity rationing this winter.

IMF cuts world GDP growth outlook. The International Monetary Fund has cut its global growth outlook, estimating a slowdown in growth to 3.2% for 2022 from April estimate of 3.6%. The downgrades were broad-based, but led by the biggest hit in US growth estimate which was down 1.4% pts. China’s growth, meanwhile, was revised lower by 1% to 3.3% amid the zero-covid policy and a deepening property crisis. The IMF estimated that global output will slow further in 2023 to 2.9%.  

What are we watching next?

US yields and US dollar as FOMC to deliver another 75-basis-point hike today. Guidance from the Fed is key after recent data suggests headwinds for the economy are picking up, even if inflation remains the Fed’s chief focus and the Fed is fully priced to deliver a 75-basis-point hike today. Some observers emphasize that guidance is particularly key after today’s rate hike, as the hike will take the Fed funds rate to 2.25-2.50%, at the cusp of the theoretical 2.50% “neutral rate” which is no longer stimulative to the economy. The reaction of US yields to Fed policy will be key to watch this week after yields dropped sharply coming into this week on rising recession concerns from weak economic data. If Powell stays more hawkish than expected rather than confirming the market’s lower of rate hike expectations for late this year and early next year, it could mean another run higher in yields and the US dollar, weighing on risk assets and commodities.

China’s Xi Jinping and US President Biden to speak Thursday as Taiwan tensions mount. The talk comes as tensions mount on House Speaker Nancy Pelosi’s ambiguous plans to visit Taiwan in coming weeks and how China would respond to such a move as Chinese military activity in the area has picked up of late and the country has issued sharp rhetorical warnings on the threat a Pelosi visit would represent to the “One China” policy. In the meantime, Taiwan kicked off a week of annual military exercises and China sent troops and tanks to Russia to take part in a war game across 12 countries, including Russia, Iran, India, Kazakhstan, Uzbekistan, Azerbaijan and Armenia.

Several French listed companies will release their semi-annual results today. The luxury group Kering (owner of Balenciaga, Gucci, Yves Saint Laurent etc.) is likely to post another solid performance mostly due to higher sales in Europe from American tourists (the strong dollar increases their purchasing power). The payment and transactional services company Worldline will likely confirm that it is in route to reach its financial targets for 2022. Finally, investors expect that the omnichannel company Teleperformance SE (it is one of the world’s largest call centre companies) will confirm its annual operating margin objectives despite the increase in salaries. Other companies will release their results later this week, such as Air Liquide, L’Oréal, Orange, Sanofi, BNP Paribas etc.

Meta earnings ahead. Meta reports after-market today. The Facebook owner is suffering a host of challenges from slowing ad revenues, increasing competition as well as regulatory hassles. This means the core business is slowing, and there is lack of visibility on the Metaverse transition, which means that the stock may not be attractive even at its current low P/E of 12x. In a conference call yesterday, CEO Mark Zuckerberg was visibly frustrated in a company video meeting about questions related to extra holidays related to the pandemic when the focus was on staff reductions of under-performing employees.

Earnings Watch Calendar

Globally, the blitz of earnings reports continues today, including troubled social media giant Meta, semiconductor and telco equipment maker Qualcomm, mining giant Rio Tinto, the two major aircraft makers Boeing and Airbus, car makers Mercedes-Benz and Ford, and many more.

• Wednesday: Meta, Bristol-Myers Squibb, Qualcomm, Equinor, GSK, ServiceNow, Rio Tinto, Boeing, Airbus, 3M, Kering, Humana, Mercedes-Benz, Ford Motor, Kraft Heinz, Shopify, BASF, Danone, Fanuc, Enphase Energy, Spotify, Garmin
• Thursday: Apple, Amazon, Nestle, Pfizer, Merck, L’Oreal, Shell, Comcast, Intel, Linde, TotalEnergies, Sanofi, Honeywell, Anheuser-Busch InBev, Keyence, Volkswagen, Air Liquide, Schneider Electric, Banco Santander, Valero Energy, Stellantis, Neste, BAE Systems, Arcelor Mittal, Mastercard
• Friday: Exxon Mobil, Procter & Gamble, Chevron, AbbVie, AstraZeneca, Sony, Colgate-Palmolive, BNP Paribas

Economic calendar highlights for today (times GMT)

• 1230 – US Jun. Advance Goods Trade Balance
• 1230 – US Jun. Preliminary Durable Goods Orders
• 1400 – US Jun. Pending Home Sales
• 1430 – US DoE Weekly Crude Oil and Product Inventories
• 1800 – US FOMC Rate Announcement
• 1830 – US Fed Chair Powell Press Conference
• 0100 – New Zealand Jul. ANZ Business Confidence Survey