Global Market Quick Take: Europe – 16 May 2024

Key points:

• Equities: New all-time high in US equities on softer CPI figures. Siemens result disappoints.
• Currencies: Broad post-CPI dollar weakness
• Commodities: COMEX short squeeze rocks the copper market, watch silver near $30
• Fixed Income: Sovereign bonds gain led by real yields on the back of a better-than-expected US CPI report.
• Economic data: US housing data and industrial production

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

Equities: Strong session in Asia following the lower-than-expected US April CPI figures with Japanese equities up 1.4% and Australian equities up 1.6%, and US equities reaching a new all-time high in yesterday’s session. European and US equity futures are pointing slightly higher this morning. The US inflation report repriced once again interest rate cut expectations with the market now pricing in two cuts by December. It is important to note that the super core measure on inflation is still running significantly above the headline figure and thus it is too early to run a victory lap on inflation. Siemens is reporting lower-than-expected orders and comparable revenue in its quarterly result with shares down 4%.

FX: The dollar sold-off with US inflation cooled and providing some relief after three straight months of overshoot. The DXY index erased the gains since the last inflation print on 10 April and is now below the 200DMA at 104.35 with key test ahead at 104. Kiwi led the gains in H10 as NZDUSD rallied past 0.61 and AUDUSD rose to 4-month highs and now testing the 0.67 handle. Lower yields helped the yen as well, and USDJPY slipped to an overnight low at 153.60, despite a weak Q1 GDP report raising doubts about the trajectory of rates. Given concerns on US inflation are unlikely to cool and yields could remain choppy, it remains hard to expect a turnaround in the yen for now given its demand as a funding currency in carry trades. GBPUSD rose to 1.27 and EURUSD was well past 1.0850 to highs of 1.0888 last. CAD underperformed, as was noted in our inflation preview, with USDCAD down marginally to test the 1.36 handle.

Commodities: A copper short squeeze in New York helped drive prices to a record high on Wednesday, in the process creating a large dislocation to prices on other exchanges, not least the LME. Hedge funds and physical traders have been caught short with the July HG contract now trading at a record 15 cents premium to the next month, up from around a 1 cent discount earlier this month. The squeeze carries the risk of driving prices to levels not reflecting current sluggish demand. Gold, silver and platinum all received a boost after soft US data lowered the dollar and lifted the prospect for rate cuts. Gold trades near USD 2400, a level it has yet to close above while silver is closing in on major resistance in the USD 30 area. Lower crude oil prices in response to a second monthly demand growth downgrade from the IEA was later reversed after the EIA reported a 2.5mb stockpile drop and implied demand for gasoline and diesel both rose. Wheat prices surged after Russia’s crop this year was cut amid dryness and frost damages, only to drop back on forecasts for rains in southern Russia.

Fixed income: US Treasuries experienced significant gains following mild April CPI data and weaker-than-anticipated April retail sales figures. The yield curve steepened, with the most notable drop in yields occurring in the short and intermediate maturities, reflecting renewed expectations of rate cuts in this year's swap market. The US 10-year yield closed the day 9.7 basis points lower at 4.34%, while yields on 3- to 5-year tenors dropped over 10 basis points. This movement was driven by a decrease in real yields, which fell 8 basis points to 2.03%, marking the largest decline since January. Expectations for rate cuts in Europe also intensified following the US April CPI report. Italian bonds outperformed their peers, tightening the BTP-bund spread to its lowest level since March. Similarly, UK gilt yields dropped, with the 10-year yield falling to 4.06% as money markets increased their Bank of England rate-cut expectations to 60 basis points by year-end, up from 54 basis points the previous day. Today, the focus shifts to US April industrial production, import prices, the May Philadelphia Fed Business Outlook, and the New York Fed Business Activity Index. In Europe, attention is on the ECB's financial stability review. Scheduled speakers include Fed members Harker, Bostic, and Mester, as well as ECB members Panetta, De Cos, Nagel, and Villeroy.

Technical analysis highlights: S&P500 uptrend potential to 5,400. Nasdaq 100 uptrend potential to 19K. DAX uptrend likely to reach 19,285. EURUSD turned bullish, testing resistance at 1.0885, a daily close above potential to 1.10. GBPUSD testing resistance at 1.2710. USDJPY correction could drop to 152.90 before resuming uptrend. EURJPY correction, support at 166.95, still upside potential to 170. AUDJPY rejected at  0.786 retracement at 103.90, correction down to 101.45. AUDUSD broken resist at 0.6650 upside potential to 0.6750. USDCHF testing key support at 0.90. Gold took out resist at 2,353 potential to 2,430. Silver testing resist at 29.80, expect correction. US 10-year T-yield correction below 4.35 support to 4.29

Volatility: With the release of the CPI data yesterday aligning with forecasts, market volatility sharply declined. The VIX closed at $12.45 (-0.97 | -7.23%), reaching its lowest point since January 11th. The VIX1D also saw a significant drop, ending the day at $8.93 (-7.92 | -47.00%), a typical post-CPI release behavior, reflecting a reduction in short-term market anxiety. This resulted in a rally across U.S. equity markets. Although today's economic indicators, such as Initial Jobless Claims and the Philadelphia Fed Manufacturing Index, could slightly influence market volatility, significant impacts are unlikely. Earnings releases from Walmart, Applied Materials, and Deere are anticipated today, but their market impact is expected to be minimal. The market is now turning its focus towards next week's earnings from Nvidia. In the futures market, VIX futures experienced a marginal increase to 13.800 (+0.025 | +0.17%), while both S&P500 and Nasdaq 100 futures are showing modest gains this morning, trading at 5340.25 (+7.25 | +0.14%) and 18727.75 (+36.00 | +0.19%) respectively. Wednesday's top 10 traded stock options, in order: Tesla, NVIDIA, AMC Entertainment, Apple, Amazon, GameStop, Intel, Advanced Micro Devices, Faraday Future Intelligent Electric, and Marathon Digital Holdings.

Macro: US April CPI came in-line with consensus, helping to ease concerns about the disinflation narrative. Headline CPI was at 0.3% MoM (vs. 0.4% prev.) and 3.4% YoY (vs. 3.5% prev.) and core CPI was at 0.3% MoM (vs. 0.4% prev.) and 3.6% YoY (vs. 3.8% prev.). The annualized numbers saw 3mth at 4.6% (prior 4.6%), 6mth at 3.7% (prior 3.2%). Supercore metrics were not as positive, coming in at 4.9% YoY from 4.8% prior. The 6mth annualized core was also hot at 4.0% YoY from 3.9% previously. Disinflation was primarily goods-driven, with core services inflation still high at 5.3% YoY in April. Rental inflation also remained sticky. It is also worth noting that this is the first softer inflation report in six months and does not constitute a trend. However, markets were looking for a sign of relief, and they got one. Market has now priced in a September Fed rate cut. US retail sales came in softer-than-expected. Headline was flat MoM vs. 0.4% expected and 0.6% prior, while ex-autos and gas was -0.1% MoM (vs. +0.7% prior and +0.2% exp). Retail Control fell 0.3% against the expected 0.1% rise and the prior 1.0%. This is further evidence that US consumers are starting to pullback, although they remain resilient. Fed’s Kashkari spoke after the CPI release and reiterated Fed’s higher-for-longer message. Japan Q1 GDP showed a large contraction of 2.0% annualized, vs. -1.2% expected. Q4 growth was also revised lower to 0% from +0.4% previously. Both private consumption and business spending underwhelmed, coming in at -0.7% QoQ (vs. -0.2% exp) and -0.8% QoQ (vs. -0.5% exp) respectively.

In the news: Wall Street boasts record closes as inflation data fuels rate-cut bets (Reuters), Japan's economy skids, complicating BOJ's rate hike plans (Reuters), Dell surges 11% on optimism it has secured big AI server orders (CNBC), Xi welcomes Putin to China as both leaders seek to bolster strategic ties (CNBC), Copper Short Squeeze in New York Is Felt Across Global Market (Bloomberg)

Macro events: US Housing Starts and Building Permits (Apr), US Jobless Claims exp 220k vs 231k prior (1230), US Industrial Production (Apr) exp 0.1% vs 0.4% prior (1315), EIA’s Weekly Natural Gas Storage Change exp. 77bcf vs 79 bcf prior. Fed speakers: Barr & Barkin (1400), Harker (1430), Mester (1600) & Bostic (1950)

Earnings events: Key earnings focus is Siemens, Walmart, JD.com, and Deere. From a macro and demand perspective Siemens and Walmart are the two most interesting to watch.

• Today: Meituan, Siemens, Deutsche Telekom, Walmart, Copart, Applied Materials, Deere, JD.com, Baidu, Swiss Re, KBC Group,
• Friday: Richemont, Engie

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