Global Market Quick Take: Europe – July 13, 2023

What is our trading focus?

US equities (US500.I, USNAS100.I): Inflation surprise sends equities to highest close in 15 months

The US June inflation report added fuel to the US equity market rally delivered downside surprises to the headline and core inflation figures putting downward pressure on the 10-year yield and lowered the expected rate hikes to just one more for this year. The VIX Index collapsed all the way back to around 13.5 while S&P 500 futures rallied to close at 4,507, the highest level since early April 2022. With the US inflation report out of the way the market’s next focus is on Q2 earnings starting today with earnings from Delta Air Lines and PepsiCo.

European equities (EU50.I): Watch chemical stocks

European equity futures rallied yesterday on the back of the surprise to US inflation with STOXX 50 futures gaining 1.8% to close at 4,387, which is the upper end of the established trading range since April. STOXX 50 futures are also up this morning extending the momentum. While the market is generally positive, the German chemical giant BASF has cut its FY23 revenue and operating income guidance pushing its shares down 4% in pre-market, so watch the industrial sector and especially chemical stocks in today’s session.

FX: USD plunges on soft US CPI data

The soft US CPI data, particularly the surprisingly low levels at the core (more below), crushed US treasury yields back lower and took the USD sharply lower, with EURUSD bursting above 1.1100 for the first time since early last year and GBPUSD above 1.3000 overnight. USDJPY was less affected as the powerful rally in risk sentiment saw its former broad strength ease somewhat. Elsewhere, more traditionally pro-cyclical currencies surged: SEK rose nearly 3% versus the USD dollar yesterday and is up over 6% from the lows of last week, while NZD is up over 2% from yesterday’s lows.

Crude oil: back to the 80’s

Crude oil prices trade higher after an ongoing recovery received an additional boost after a lower-than-expected US inflation print raised optimism the US rate-hike cycle may be nearing an end, thereby reducing the risk to demand from a potential recession. In addition, China’s import of crude oil reached the second highest level on record last month, a sign of robust demand from refiners as they utilized their recent government allocated quotas. While Saudi supply cuts have started to be felt, the market will turn its attention to monthly Oil Market Reports from OPEC and IEA, and whether they still see price supportive market tightness into the second half of the year. Brent trades back above $80, forcing recent short sellers to reduce. Support around $79 with the 200-DMA at $82.55, the next level of resistance.

Gold and silver pops higher on weak CPI print

Gold and silver closed sharply higher on Wednesday supported by a drop in the dollar and Treasury yields after cooling US inflation raised optimism the Federal Reserve’s rate hike cycle may be nearing an end. One more rate increase remains priced in before September but after that the attention increasingly has shifted towards focusing on the timing of the first cut. Gold trades up 1.7% on the week while silvers near 5% jump have seen it retrace half the May to June correction. Gold meanwhile has hit some resistance just below $1960 with $1975, the next major level after that. Support at $1930

The US yield curve bull steepens on US CPI data (2YYN3, 10YN3)

US yields plunged yesterday on the soft US core CPI data (more below). The 2-year yield dropped faster than the 10-year yield as the market priced in more Fed rate cuts for next year even as the market leans in favour of a rate hike at the July meeting. The 2-yr dropped over 12 basis points to 4.71%. The 10-year yield dropped over 10 basis points to 3.85%, near the previous range highs in May and June. A 10-year US Treasury auction saw strong demand.

What is going on?

US core CPI inflation slowed to 4.8%, headline CPI fell to 3.0%

Both the June headline and the core CPI came in softer than expected. The headline CPI inflation increased to + 0.18% M/M in June from +0.12% in May but below the median forecast of +0.3%. On a year-on-year basis, CPI inflation slowed to +3.0% in June from +4.0% in May and was below the +3.1% expected.

Notably, core CPI slowed sharply to +0.16% M/M in June from +0.44% in May versus the median forecast of +0.3% and it was the slowest month-on-month change since February 2021. On a year-on-year basis, core CPI inflation fell to 4.8% in June from 5.3% in May and below the 5.0% anticipated by the median forecast. In the composition, used car prices dropped by 0.5% M/M while new car prices were unchanged. Rent increased by 0.46% M/M and owners’ equivalent rent added 0.45% M/M, slowing from +0.49% and +0.52% in May respectively. The report adds to the notion of the July rate hike will likely be the last hike in this cycle.

Separately, the Atlanta Fed's core sticky CPI, a weighted basket of items that change price relatively slowly, fell to +2.8% on a one-month annualized basis in June from +4.0% in May. On a 3-month annualized, it slowed to +3.8% from +4.4%. On a year-on-year basis, the measure slowed to +5.6% from +6.0%.

Fed Beige Book: slight economic growth pick-up, some easing in labor market

The Fed’s Beige Book that was prepared for the July FOMC meeting reported “overall economic activity increased slightly since late May which was an improvement from the description of “little changed” in the prior report. It also reported hiring had become more selective and many Fed districts saw more labor availability. Some districts reported lower input prices for manufacturing.

German chemical giant BASF cuts FY23 guidance

BASF is cutting its FY23 revenue and operating income forecast as the German chemical giant is battling with high input costs following the reduced imports of cheap Russian gas. BASF says in their statement that they are not seeing further weakening in global demand in the second half.

Illumina hit by toughest EU fine on record

Yesterday, the EU antitrust regulator fined US-based Illumina, manufacturer of devices for analysis of genetic variations, at the worst possible rate at 10% of revenue equalling a fine of $432mn. The fine is given because Illumina begun integrating its $8bn acquisition of Grail before the EU regulator had approved the acquisition which it says will limit innovation in cancer screening technologies. The previous EU fine on similar grounds was given to French telecom giant Altice, but was only 1% of revenue, so Illumina is appealing the decision. Illumina shares rose 4% as the fine puts an end to the uncertainty.

China Trade Data shows worse than expected export drop

China’s Jun. Trade numbers showed a larger than expected drop of –12.4% Y/Y in exports (-10% expected), deepening the drop from –7.5% in May. Imports fell –6.8% Y/Y (-4.1% expected), leaving the overall trade surplus at $70.6 billion for the month. Exports to the US fell –24% Y/Y.

Bank of Canada raises policy rate by 25bps

The Bank of Canada hiked rate by 25bps to 5% as most expected, with little guidance in the monetary policy statement, although Governor Tiff Macklem noted that further hikes could be forthcoming “if new information suggests we need to do more.” Canadian front-end yields dropped sharply in line with the action in US yields after the US CPI release yesterday.

Corn hits 2-½-year low, soybeans tumble after WASDE report

US corn futures fell to their lowest level since early 2021 on Wednesday after the USDA projected a larger-than-expected domestic crop and rising stockpiles after a weather-related drop in the expected yield was offset by larger plantings estimate. Soybean futures also tumbled after the report forecast 2023/24 ending stocks at 300 million bushels, some 50% above trade estimates while wheat futures were pressured by a larger than expected production figure.

Technical Analysis Update

• S&P 500. Potential upside to 4,546 – 4,635
• Nasdaq 100 Closed above strong resistance at 15,265. Upside potential to 16,000
• Nikkei/JP225 bouncing from 32K. correction could be over. Uptrend to resume
• EURUSD uptrend resumed. Resistance at 1.1180-1.1275
• GBPUSD reached strong resistance at around 1.3025. Expect minor set back before next move higher.
• USDJPY Correction overdone. In consolidation area. Expect bounce next couple of days back above 140. Medium term uptrend intact
• EURJPY correction bouncing from rising trend line and 153.
• EURNOK Shoulder-Head-Shoulder pattern unfolding. Reached strong support at 11.20. Potential to 10.80
• EURSEK dropped to key strong support at 11.51. Expect short-term bounce
• Gold bounced to 0.382 retracement at 1,963. Expect minor setback before next attempt higher
• Silver above falling trendline. Likely to test resistance at 24.50
• Copper above resist at 382. Building uptrend.
• Brent oil above resistance at 78.66. Likely move to 82.50-83.00 short-term
• US 10-year Treasury yields correction could dip to 3.80 testing lower rising trendline. Uptrend intact

What are we watching next?

Earnings to watch

The Q2 earnings season starts this week with our key focus on US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season on Friday. Read our earnings preview here. Today Delta Air Lines and PepsiCo are reporting earnings with analysts expecting strong margin expansion for Delta Air Lines as jet fuel indicators suggest that air travel demand remains robust. Analysts expect Q2 revenue growth of 7% y/y in PepsiCo with stable operating margins as the beverage and snacks business remains resilient against inflationary pressures. 

• Thursday: Fastenal, Delta Air Lines (pre-market), Progressive (pre-market), PepsiCo (pre-market), Cintas, Conagra Brands (0930 NY/1330 GMT)
• Friday: Wells Fargo, JPMorgan Chase, BlackRock, UnitedHealth, State Street, Citigroup

Economic calendar highlights for today (times GMT)

• 0800 – IEA's monthly Oil Market Report
• 0900 – Eurozone May Industrial Production
• 1130 – ECB meeting minutes
• During the day: OPEC’s monthly Oil Market Report
• 1230 – US Jun. PPI
• 1230 – US Weekly Initial Jobless Claims
• 1430 – EIA’s Weekly Natural Gas Storage Change
• 1700 – US Treasury to auction 30-year T-bonds
• 2245 – US Fed’s Waller (Voter) to speak on Economic Outlook