Global Market Quick Take: Europe – 1 August 2024

Key points:

• Equities: US technology stocks rebound after the Fed signaled a rate cut in September
• Currencies: Japanese yen gains on BOJ rate hike and dovish Fed signals
• Commodities: Gold receives triple dose of support, Geopolitical risks forcing crude bears to rethink
• Fixed Income: US Treasuries rally on Powell's hints of September rate cut; euro-area inflation rise complicates ECB's next move.
• Economic data: Bank of England, US ISM manufacturing

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news:  Fed recap: Chair Powell gives the September rate cut signal traders were hoping for (CNBC), Investors beef up bets on BoE interest rate cut (FT), Meta’s Upbeat Quarterly Report Buys Time for AI, Metaverse (Bloomberg), Iran vows revenge after Hamas leader assassinated in Tehran (BBC)

Macro: The FOMC left rates unchanged at between 5.25-5.50%, but it made tweaks to its statement that appear to leave the door open to a rate cut in September. The Fed did however reiterate that it does not expect that it will be appropriate to lower rates until it has gained greater confidence that inflation is moving sustainably towards target, suggesting that the Committee still wants to see favourable data before pivoting to rate cuts. Overall, it was a dovish meeting, even though Chair Powell didn’t quite seal a September rate cut. Market continues to completely price in a rate cut in September, and data will remain in the driving seat. ISM manufacturing is out today with focus turning to key labour market indicators, the nonfarm payrolls, on Friday. Euro-area inflation for July suggested that services inflation remains sticky at high levels. Headline inflation accelerated to 2.6% YoY from 2.5% in June, coming in above expectations. Core was unchanged at 2.9% YoY, also higher than expectations. This will make it difficult for the ECB to cut rates again in September. Markets have reduced the odds of a September rate cut from over 90% earlier to 70% now. US ADP national employment for July fell to 122k from the prior, revised higher, 155k and short of the expected 150k. Within the release, median change in annual pay for job-stayers and job-changers fell to 4.8% (prev. 4.9% Y/Y) and 7.2% (prev. 7.7% Y/Y), respectively, continuing to indicate a further slowdown in wage growth. China’s Caixin manufacturing PMI, a private survey, unexpectedly shrank for the first time in nine months in July, another signs the country’s export machine might be cooling, potentially worsening the economy’s outlook. The index fell into contraction territory at 49.8 from 51.8 in June, reflecting weakening momentum in overseas shipments as it focuses on small and export-oriented firms

Macro events (times in GMT): BoE Rate Announcement at 1100 (preview here), US Unit Labor Costs (Q2) exp 1.7% vs 4% prior (1230), US Initial Jobless Claims, exp 236k vs 235k prior (1230), US ISM Manufacturing PMI (Jul) exp 49.6 vs 49.5 prior (1345)

Earnings events: Pre-market Boeing reported revenue of $16.9 billion vs. $17.46 billion estimated. Adj. loss per share of 2.90 vs 1.82 estimated. Boeing announced their new CEO and president to be former Rockwell Collins CEO Kelly Ortberg. Kelly Ortbeg will start 8. August. Shares were up 2% in normal trading. Arm Holdings Q1 revenue and profit increases on AI demand. Revenue increased to USD 939mln vs 905.5mln expected. EPS USD 0.21 vs 0.34 expected, sending the shares down 9% after market. Arm expects revenue between 3.8 and 4.1bln for the year, in line with expectations. Meta Platform shares were up some 8% as Q2 revenue beat estimates. Revenue $39.07 billion, +22% y/y, est $38.34 billion. Qualcomm reported fiscal Q3 earnings that surpassed Wall Street expectations, with adjusted EPS of $2.33 and revenue of $9.39 billion. Shares were up 7% in extended trading. Toyota's quarterly profit rose 17% to ¥1.31 trillion, driven by a weak yen and strong North American demand, but share extends losses as much as 8.3%. BMW's Q2 earnings fell as China sales dropped 4.7%. EBIT margin was 8.4%, missing analyst expectations of 8.8% and down from 9.2% last year.

• Thursday: Ferrari, Anheuser-Busch, Volkswagen, ING Growp, BMW, Shell, Intel, Apple, Amazon.
• Friday: Chevron, Exxon Mobil, Enbridge, Berkshire Hathaway.

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: US technology stocks rose 3.8% yesterday as Fed Chair Jerome Powell signalled that the Fed would most likely cut the interest rate at the September meeting. Meta Platforms soared over 7% in extended trading after delivering better than expected second quarter earnings and optimistic guidance. Conversely, Arm Holdings plummeted more than 10% due to weak guidance for the current quarter. Equity markets have recently been wobbling due increased worries about forward demand for AI as several industry observers have indicated that the large US technology companies are beginning to doubt the profitability of the current investment boom in AI. Despite a seemingly mixed Q2 earnings season, the aggregate figures for US earnings are still above expectations for both revenue and earnings, and the technology sector has had a positive price reaction in aggregate to its earnings releases in addition to growing revenue 7% YoY. New US semiconductor export rules targeted towards China are expected to exclude for now ASML and Tokyo Electron which could add some positive sentiment to the industry.

Fixed income: Yesterday, US Treasuries rallied after Federal Reserve Chair Jerome Powell hinted at a potential interest rate cut as early as September. This optimistic outlook caused yields to fall across various tenors, with markets now pricing in over 70 basis points of rate cuts by the end of the year. Ten-year yields fell to around 4.08%, a drop of 8 basis points for the day. The day's economic reports also supported the potential for rate cuts as data indicated slower growth in the labor market and lower-than-expected increases in labor costs. Additionally, the US Treasury announced it would maintain unchanged its current quarterly sales of coupon bearing debt, easing pressure further on the market. Meanwhile, inflation in the Euro area unexpectedly increased in July, with consumer prices rising by 2.6% compared to the previous year, surpassing both the June figure and analysts' expectations. Core inflation remained steady at 2.9% for the third consecutive month. This rise in inflation complicates the ECB's decision-making process, as they must balance the need to control inflation with the necessity to support economic growth, making another rate cut in September unlikely. The BOE will hold its monetary policy meeting today. We consider what implication a hawkish BOJ might have for global markets here.

Commodities: An end-of-month rally across the energy and metal sectors helped reduce an overall monthly sector loss to 4%, with the hardest-hit markets last month being US natural gas (−21%), aluminium (−10%), and CBOT wheat (−8%), while top performers were gold (+4.1%), coffee, cocoa, and EU natural gas. WTI and Brent crude futures surged higher on Wednesday due to Middle East conflict fears, but monthly gains were limited by production uncertainties and weak Chinese demand. Gold prices received a triple dose of support from heightened Middle East tensions, lower Treasury yields and a softer dollar after Powell left the door open for a September rate cut. Gold reached a USD 2458 high overnight with silver following suit to reach USD 29.16 before profit-taking emerged in both metals. Copper continues to consolidate following last month's speculative washout last month, and after copper demand in China showed tentative signs of firming up, while US natural gas futures dropped below USD 2.05 per MMBtu as milder weather forecasts reduced expected demand for air conditioning.

FX: The US dollar weakened with the Federal Reserve keeping the door for a September rate cut open. Gains were led by the Japanese yen, that got three supportive legs from a Bank of Japan rate hike, the Fed’s indication of a September rate cut, and risk aversion coming into play as geopolitical tensions in the Middle East escalated. The euro however remained on the backfoot as sticky Euro-area inflation continued to question whether the June ECB rate cut was a policy mistake. The Australian dollar saw a decline earlier on Wednesday as Australia’s Q2 inflation came in softer, ruling out the possibility of a rate hike from the Reserve Bank of Australia next week, but it recovered later as the US dollar weakened. The British pound will be in focus today as it remains the G10 outperformer year-to-date and the Bank of England meeting announces its policy decision today.

Volatility: The VIX dropped to $16.36 (-1.33 | -7.52%) yesterday, indicating decreased market volatility, after the positively received remarks of Fed Chair Powell. Expected moves for today, derived from options pricing, are considerably lower than those from yesterday, with the S&P 500 having an expected move of plus or minus 46.48 points (+/- 0.84%) and the Nasdaq 100 plus or minus 256.07 points (+/- 1.32%): another indicator that today’s volatility will be less than on Wednesday. Futures for the S&P 500 and Nasdaq 100 show continued positive sentiment after their nightly session, with S&P 500 futures at 5,591.00 (+33.00 | +0.59%), Nasdaq 100 futures at 19,663.25 (+158.00 | +0.81%), and VIX futures at $15.830 (-0.170 | -1.06%). Markets rebounded strongly Wednesday with the S&P 500 at 5,522.30 (+85.86 | +1.58%) and the Nasdaq 100 at 19,362.43 (+566.15 | +3.01%). Key economic events today include Initial Jobless Claims, S&P Global US Manufacturing PMI, and ISM Manufacturing PMI at 14:30, followed by ISM Manufacturing Prices at 16:00. Today's notable earnings include Apple, Amazon, and Intel, all reporting after the bell. Yesterday's top 10 most traded stock options were Nvidia, Advanced Micro Devices, Tesla, Microsoft, Apple, Meta Platforms, Amazon, Sofi Technologies, Broadcom, and PayPal.

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