Global Market Quick Take: Europe – July 25, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Energy stocks surge

The S&P500 advanced 0.4%, driven by energy, financials, and real estate. Technology lagged, seeing the Nasdaq100 ticking up 0.1%. Energy stocks surged as the WTI crude rose more than 2% to a three-month high. Regional banks rebounded, with the SPDR S&P Regional Bank ETF (KRE:arcx) adding 2.5%. Tesla (TSLA:xnas) gained 3.5% after revealing strong global sales outside China and the US markets. The maker of Barbie dolls, Mattel (MAT:xnas) climbed 1.8% led by the strong box office performance of the film Barbie. IMAX surged 1.8% on the strong box office of Oppenheimer. On the other hand, Spotify (SPOT:xnys) plunged 4.5% after the headline of subscription price increases.

FX: EUR weakness drives the dollar higher

The US dollar was higher on Monday as Treasury yields surged in the NY session. Earlier weakness in EUR and GBP by a set of disappointing July PMIs also boosted the dollar. EURUSD broke below 1.11 and the 1.10 may also be threatened if ECB makes a dovish shift on Thursday. GBPUSD also tested a break below 1.28 but was rejected. The Japanese yen recovered in the crosses even as USDJPY rebounded from a test of 141.00. AUDUSD has rebounded slightly from a test near the key 0.6700 support area ahead of Australia reporting Q2 CPI numbers early in the Asian session tomorrow.

Crude Oil: jumps higher on China stimulus

While crude oil prices have been supported lately due to supply tightness, demand concerns also eased now with proposed stimulus measures from China. Both WTI and Brent jumped over 2%, climbing to three-month highs and topping their 200-day moving averages. Demand is also rising amid the summer US driving season.

Wheat: up over 8% on weather and war worries

CBOT wheat contracts finished Monday’s session with 8.6% gains, and other grain prices moved substantially higher as Russian attacks on Ukrainian ports and grain storage facilities continued on the Danube river. Corn prices were also 6% higher. Meanwhile, Europe’s crop monitoring service reduced its crop yield forecasts for this year’s harvest on concerns on dry and hot weather. Agri stocks and funds may remain in focus.

US Treasuries (2YYU3, 10YU3, 30YU3): yield curve bears flatten before Wednesday’s FOMC meeting

The 2s10s spread fell to -105bps on the day as demand for front-term Treasuries remained elusive following a block sell trade. Yesterday’s 2-year US Treasury auction drew the highest yield since 2007 at 4.823%. Yet, we still expect a bull steepening of the yield curve as the Fed prepares to deliver the last rate hike of the cycle tomorrow. The bull steepening might accelerate further on Friday if PCE data, specifically the monthly rate, shows an increase of prices between 0.1%-0.2%, which implies an annualized core PCE rate close to the Fed’s target. Two-year yields are likely to find strong resistance at 4.50%. Ten-year yields are unlikely to break below 3.70% as they will remain underpinned by a lack of signs of an upcoming recession. We, therefore, see the 2s10s spread steepening towards, but not breaking above -80bps.

EU sovereigns (D5BC:xetr, IS0L:xetr): ECB and German inflation in focus

Yesterday’s Germany manufacturing PMI showed that Germany is in a recession, causing a bull steepening of the yield curve. EU rates have the potential to continue drop despite the ECB hikes rates this week as it starts to be uncertain whether the central bank is going to hike once more in the fall, and markets are set about the Fed ending its rate hike cycle this week. Yet, a bull flattening of the German yield curve is more likely as Schatz yields remain supported. In contrast, Bunds yields have the potential to drop amid recession fears. If bunds break support at 2.40%, they will find support next at 2.30%.

What is going on?

China Politburo meeting sends a modestly dovish signal about properties but remains tight on stimulus

The recent Politburo meeting in China reflected a cautious approach to economic stimulus with limited commitments. One of the notable relatively bullish signals is the removal of the “housing is for living in, not for speculation” phrase from the readout of the meeting. Investors welcomed the omission and heightened the expectation of some relaxation on home buying restrictions in higher-tier cities. Another mildly bullish sign is the Politburo’s explicit recognition of the challenges faced by the economy including mentioning “insufficient domestic demand” and “some business enterprises are facing difficulties”. You can find more details and our takes on the investment implications of the Politburo meeting in this article.

Disappointing German PMIs set stage for a dovish ECB

Eurozone flash July PMIs came in weaker than expected, highlighting the significant growth risks in parts of the region. German July manufacturing PMI was shockingly low at 38.8 from 40.6 previously while France’s manufacturing PMI also dipped further into contraction to come in at 44.5 from 46 in June. Services PMIs held up slightly better but still in a declining trend. German services PMI slid to 52 in July from 54.1 previously while France services PMI was in contraction at 47.4. Overall, Eurozone manufacturing PMI for July was at 42.7 from 43.4 in June while services PMI slid to 51.1 from 52. These weak prints have put further focus on ECB meeting scheduled for this week and whether there will be any scope for them to guide for another rate hike after the one expected this week. 

US PMIs were mixed

The flash July US S&P Global Manufacturing PMI survey beat, rising to 49 from 46.3 and above expectations of 46.2. Services PMI missed, however, falling to 52.4 from 54.5 and beneath expectations of 54.1, albeit still remaining in expansionary territory. Overall, the composite fell, but remained in expansionary territory, printing 52 from the prior 53.2. While this may give further boost to the soft-landing narrative, it is worth noting that commentary hinted at business optimism about the year-ahead outlook deteriorating sharply to the lowest seen so far this year, and there were also some concerns about the stickiness of inflation.

Adidas seeing surging demand for Yeezy shoes, improves earnings guidance

Demand for Adidas's Yeezy sneakers exceeded expectations in their first online sale since the company ended its collaboration with Kanye West. This could help restore the brand image of Adidas and reduces the risk of a large write-down on its remaining stock. Adidas received orders worth over 508 million euros for 4 million pairs of unsold Yeezy shoes at the end of May and early June. Adidas reports earnings on August 3 and shares are down 47% from the 2021 peak.

What are we watching next?

Technical Analysis

• S&P 500. Correction on going. Support at 4,455
• Nasdaq 100. Correction down to 15K-14687 likely
• DAX Range bound. Rejected at 16,210. Need to close above for uptrend
• AEX25 Range bound between 781 and 748
• CAC40 Broken above resist at 7,403 but indicators not supporting bullish break. However, no resist until 7,581 
• EURUSD Short-term correction to 1.10 likely before uptrend resumes. Medium-term room to 1.1485
• GBPUSD correction could be over at 1.28 support and uptrend likely to resume
• USDJPY Rebound facing resistance at 142. Expect setback before break of 158
• EURJPY rejected at key resist at 158. Expect minor setback but
• EURGBP Struggling for upside momentum. Double bottom pattern could be cancelled
• Gold uptrend but short-term correction to 1,940-1,930 likely
• Copper could be building uptrend.  Minor resistance at around 395  
• Brent testing resistance at 83. If broken next resistance at 87.25
• WTI testing resistance at 79.20. If broken next resistance at 83.35
• Wheat testing June peak at 784. Likely higher prices next few weeks
• US 10-year Treasury yield resuming uptrend. Likely to get back to 4%

Earnings to watch – heavy day of earnings ahead

Today offers a hefty menu of major mega-cap stocks, starting after the European close with luxury goods giant LVMH and then finishing after the US close with Microsoft and Alphabet reporting.

Focus for the LVMH semi-annual earnings report will be on the status of US growth, as some further slowing is expected there, with the degree of offsetting strength in China also on watch. Top-line growth for the company enjoyed a resurgence in the wake of pandemic stimulus, but top-line growth is expected to decelerate well south of 10% Y/Y through the end of this year.

Microsoft shares jumped last week to all-time highs after the company announced the pricing plan for new AI features called Copilot that will be available for use with its Office products, but those gains were backed out by the end of the week. Top-line growth for Microsoft is expected to remain below 10%, with some concern that cloud services growth will continue slowing.

For Alphabet, the focus will be on the degree to which competition from AI-driven rivals is eating into their core search business. The company’s YouTube business saw falling revenue from advertising Y/Y for the first time ever last quarter. Google’s cloud business posted a profit for the first time last quarter and had grown to 10.7% of revenue, up from 8.6% a year ago.

Earnings next week:

• Tuesday: LVMH (after European close), Danaher (1000 GMT), Verizon (1100 GMT), GM (1030 GMT), Biogen (before US open), NextEra Energy (before open), Snap (after close), Microsoft (after close), Alphabet (after close), Visa (after close), Texas Instruments (after close)
• Wednesday: Meta, Coca-Cola, Thermo Fisher Scientific, Christian Dior, Union Pacific, Rio Tinto, Boeing, ServiceNow
• Thursday: Samsung, Amazon, MasterCard, Nestle, Roche, L’Oreal, AbbVie, McDonalds
• Friday: ExxonMobil, Procter & Gamble, Chevron, Hermes, AstraZeneca, Sanofi, Keyence, ITC

Economic calendar highlights for today (times GMT)

• 0800 – Germany Jul. IFO Business Climate survey
• 1230 – US Philadelphia Fed Non-manufacturing activity
• 1300 – US May S&P CoreLogic Home Price Index
• 1400 – US Jul. Conference Board Consumer Confidence
• 1400 – US Jul. Richmond Fed Manufacturing Index
• 1700 – US Treasury to auction 5-year Notes
• 0130 – Australia Q2 CPI