Global Market Quick Take: Europe – June 23, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Another day testing the 4,400 level in S&P 500

US equities gyrated yesterday as investors had to digest several central bank hikes in Europe on top of macroeconomic figures in the US pointing that the US economy remains soft, but on the other hand not going into a recession either. News flow in US technology helped US equities to bounce back during the session with Amazon shares leading the bounce back rallying 4% as Amazon’s CEO for the AWS business said that AI will underpin growth in its cloud business and that Amazon overall is not behind competitors on AI. S&P 500 futures are trading lower this morning hovering above the 4,400 level which is the critical support level.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index extended losses as stimulus hopes fade

The Hong Kong equity market resumed trading after a public holiday, while mainland bourses remained closed. However, the Hang Seng Index suffered a sharp decline of nearly 2%, extending its downward streak to over 6% across four consecutive trading days. Investors, losing faith in the prospects of aggressive stimulus measures, opted to liquidate their positions. Adding to market concerns, the offshore yuan weakened to 7.2286, reaching its lowest level since November last year. This downward trend in sentiment was particularly evident in sectors such as property developers, consumers, new electric vehicles, and Internet names, which experienced significant losses.

FX: GBP and NOK fail to gain on large hikes. USD surges

The US dollar rose yesterday and overnight despite a weak weekly jobless claims print. USDJPY surged to new highs since last November above 143.00 after Japan reported another hot CPI report (more below). GBP and NOK both failed to hold gains despite hawkish larger-than-consensus 50 basis point hikes, which only managed to raise yields at the front end of the respective yield curves, and with NOK sensitive to the sharp drop in oil yesterday. AUD has weakened sharply and AUDUSD has posted a bearish reversal, pushing on its 200-day moving average, while EURUSD was repulsed at the 1.1000 level.

Crude oil suffers +4% weekly decline amid rate hike and growth concerns

Crude oil’s sharp decline on Thursday extended into the Friday session with WTI trading back below $69 and Brent getting uncomfortable close to key support below $72. Fresh weakness was seen after multiple central bank rate hikes during the day was followed up by a hawkish testimony from Fed Chair Powell in which he said more rates hike were likely in the second half. A surprise draw in US crude stocks and signs of demand for fuel products picking up did little to support an overriding risk-off sentiment. The third quarter increasingly looks like a time that could make or break the oil market as OPEC and IEA’s lofty outlook for demand growth need to be realised to avoid additional weakness and with that raised pressure on OPEC+. A break below trendline support in Brent at $72 could see weakness extend to $70.

Gold breaks lower on peak rate delay and stronger dollar

Gold slumped to a fresh three-month low at $1910 overnight, thereby extending a sell-off that was triggered among others by higher Treasury yields following Chair Powell’s comments in the Senate and a hawkish surprise from Bank of England and Norges Bank. In his testimony Powell said that one or two more rate hikes would be needed this year and it helped push the yield on two-year Treasuries to a three-month high. Silver suffered an even bigger decline with the risk to global growth being signalled through higher interest rates hurting metals with an industrial focus. Next key levels to focus is the psychological $1900 barrier in gold and $22 in silver.

The Bank of England hikes rates to 5%, further inverting the UK yield curve to lows seen in 2000 (GB00BK5CVX03 , IGLS:xlon)

Two-year yields remain in an uptrend as the BOE keeps a restrictive posture. Today’s retail sales came better than expected, showing that the economy remains resilient. That could pave the way for more hikes and for 2-year yields to continue to rise towards 5.5%. Markets are now pricing an implied rate of 6.16% by December and the 2-year swap spread remains at elevated levels.

What is going on?   

Japan’s May CPI came in higher than expected

May inflation in Japan continued to complicate the task of Bank of Japan that wants to patiently wait for signs of wage inflation before any moves to remove excess stimulus from the economy. Headline CPI rose 3.2% YoY, decelerating from 3.4% YoY in April and as expected, although the core measures came in above expectations. Ex-fresh food, May CPI came in at 3.2% YoY while the core-core measure (ex-fresh food and energy) was higher at 4.3% YoY from 4.1% YoY in April. BOJ’s July meeting is in focus as updated economic forecasts are released, and JPY is likely to remain under pressure for now. Our Market Strategist Charu Chanana discusses here what moves the yen and how to trade it.

The absence of the feared liquidity crunch supports the equity market

Contrary to market expectations, recent data suggests that concerns over a liquidity drain are unfounded as the US Treasury replenishes its General Account (TGA) at the Federal Reserve. Our analysis, available through this link, reveals that money market funds have utilized reverse repo balances to purchase Treasury bills, effectively offsetting the liquidity impact. The data highlights that the TGA increase has been counterbalanced by a decrease in overnight reverse repo balances and bank reserves at the Federal Reserve remained little changed. While it remains essential to remain vigilant, especially in monitoring the sources of TGA funding and their implications for market dynamics, it is reasonable to expect that the absence of the feared liquidity crunch will contribute to supporting the equity market.

Bank of England surprises with a 50bps rate hike

Following the hotter-than-expected May inflation data a day before, the Bank of England opted to deliver a surprise 50bps hike in the Bank Rate to 5%. Policymakers said persistent inflation would require more action and the minutes included nothing to rein in market expectations for rates peaking at about 6%. That helped to restore some credibility for the central bank in its fight against inflation, but sterling reversed the initial gains quickly given that UK yields have already priced in considerable further BoE tightening and were almost unmoved beyond the front end of the curve in the wake of yesterday’s decision. Terminal rate expectations are now over 6% for the BOE, hinting that a recession may remain hard to avoid for the UK.

Norges Bank also goes for 50bps, SNB as expected

Norway’s central bank accelerated its rate hike pace to surprise markets with a 50bps increase in key deposit date to 3.75% amid stubborn inflationary pressures and a weak currency. EURNOK sold off sharply as the front-end of the Norwegian yield curve was repriced higher, but a sharp sell-off in oil prices saw the NOK tilting back lower.  Meanwhile, the Swiss National Bank (SNB) raised its benchmark interest rate by 25bps to 1.75%, but cut its inflation forecast for 2023 Q2 to 2.1% from 2.7% and for Q3 to 1.7% from 2.4%. However, the bank still guided for further rate increases. CHF initially sold off, but EURCHF found resistance at the 200-day moving average near 0.9840.

Earnings recap: Accenture, Darden Restaurants

Accenture reported better than expected FY23 Q3 (ending 31 May) EPS and revenue but lowering its revenue and earnings guidance for the full fiscal year. Accenture has been one of those stocks that have benefitted from the AI hype as the company has been seen as a major player in the implementation of AI tools for companies lacking in-house capabilities. Shares were down 2%.

Darden Restaurants reported Q4 results in line with estimates and guiding FY24 comparable sales growth of 2.5-3.5% vs est. 2.6% as consumers are holding back on spending on alcohol, which is a high margin product for restaurants. Shares were down 3%.

US jobless claims above expectations, Chair Powell repeats his message

Initial Jobless Claims data for the week of June 17 was out at 264k vs. 259k expected, with the prior revised up to 264k from 262k, marking the third consecutive week above 260k. This is yet another sign that the pace of cooling in the labor market is extremely slow, and there is little push for markets to price in the two rate hikes that the FOMC dot plot hinted, and Chair Powell has been pushing for in his testimonies this week. Continuing claims for the week ending June 10 declined to 1.759mn from 1.772mn, beneath expectations of 1.785mn, suggesting that there are still some pockets of a tight labour market. Comments from Governor Bowman leaned hawkish, as she noted inflation is still unacceptably high despite the drop in the headline data and further policy rate increases will be needed.

Turkish lira pummeled on smaller than expected hike

Consensus expectations for the Turkish central bank were for a super-hike that would take the policy rate to at least 20% from 8.50% previously to stabilize the lira and bring the policy rate closer to current Turkish inflation levels. Instead, the central bank only delivered 650 basis points to 15%. In its accompanying monetary policy statement, the central bank hinted at further rate hikes. TRY fell over 5% to fresh record lows yesterday and dropped further overnight.

What are we watching next?

The absence of the feared liquidity crunch supports the equity market

Contrary to market expectations, recent data suggests that concerns over a liquidity drain are unfounded as the US Treasury replenishes its General Account (TGA) at the Federal Reserve. Our analysis, available through this link, reveals that money market funds have utilized reverse repo balances to purchase Treasury bills, effectively offsetting the liquidity impact. The data highlights that the TGA increase has been counterbalanced by a decrease in overnight reverse repo balances and bank reserves at the Federal Reserve remained little changed. While it remains essential to remain vigilant, especially in monitoring the sources of TGA funding and their implications for market dynamics, it is reasonable to expect that the absence of the feared liquidity crunch will contribute to supporting the equity market.

Technical update

• Nasdaq 100. Rejected at resistance at 15,265. Correction down to around 14,500-14.300 likely before uptrend resumes. RSI supports higher Nasdaq medium-term
• S&P 500. Bounced from minor support at 4,352. No strong resistance until 4,546. A correction down to 4,315 could be seen
• DAX Likely to be range bound 15,625-16,300
• Nikkei225/JP225 correction time. Possibly down to 31,200
• EURUSD is back above 1.09. Potential to 1.1180
• GBPUSD Upside potential to 1.2940-1.3050. Expect short-term correction to test 1.2667 before next up move
• USDJPY above resistance at 142.25. Next level 146.60.
• EURJPY testing resistance at 157.
• Gold broken support. Down trend could lead to 1,870
• Silver in downtrend. Below 200 Moving Average. Support at 22.15. 

Earnings to watch

Our next earnings focus is CarMax, US used cars retailer, reporting FY24 Q1 (ending 31 May) results tomorrow with analysts expecting to see revenue of $7.5bn down 20% y/y and EBITDA of $256mn down from $461mn a year ago.

• Friday: Oracle Japan, CarMax

Next week’s earnings releases:

• Monday: Carnival, Vantage Towers
• Tuesday: Walgreens Boots Alliance, Alimentation Couche-Tard
• Wednesday: Micron Technology, General Mills
• Thursday: H&M, Nike, Paychex, McCormick
• Friday: Constellation Brands

Economic calendar highlights for today (times GMT)

• 0715-0800 – Eurozone Flash Jun. Manufacturing and Services PMI
• 1345 – US Flash Jun. S&P Global Manufacturing and Services PMI
• 1930 – Weekly COT Report from the US CFTC