Global Market Quick Take: Europe – June 26, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Will the decline extend this week?

US equities declined on Friday with S&P 500 futures declining 0.8% to close below 4,000 for the 12 June, but the index futures are attempting to rebound in early trading hours this morning in Europe. Equities face two big forces to absorb over the coming months with the first being tentative signs that inflation continues to be stickier than expected creating a path to higher policy rates and the second being whether the high expectations on AI technology can be met by companies in the coming earnings seasons.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Stocks decline as the bounce in holiday tourism spending and activities decelerate

After returning from a 4-day long weekend, mainland Chinese stocks slid, with the CSI300 falling over 1%. Despite the year-on-year increases of 32.3% in tourist trips and 44.5% in tourism revenues, the recovery of trips to 112.8% of the same holding period in 2019 and revenues to only 94.9% of the corresponding period in 2019 indicated a deceleration in tourism activities when compared to the 119.1% and 100.7% of 2019 levels respectively during the Labor Day holiday in May. The Hang Seng Index lost 0.4%.

FX: EURUSD off Friday lows

Initial Eurozone PMIs triggered an ugly slide in EURUSD on Friday, taking it down just below 1.0850 before rebounding to the 1.0900 area, with a tight range just above that level to start the week. The weak data took some of the fuel out of further ECB tightening expectations, with just under 50 basis points of further hikes priced through year-end, while the market assesses that the Fed is only likely to hike another 25 basis points. An ECB-hosted conference with many speakers from central banks around the world kicks off tomorrow in Sintra, Portugal. CAD was a strong performer. After slumping to new cycle lows above 7.23 on Friday, China’s renminbi (CNH) traded steady after a surprisingly strong fixing of the CNY to start the week.

Crude oil shrugs off potential Russia risks

Oil prices trade near unchanged after initially bouncing in response to the weekend events in Russia. Having dropped by more than 4% last week both Brent and WTI have once again managed to bounce from established support, in Brent around $72, and WTI around $67. However, while a deterioration in Russia may raise concerns about stability and supply, the short-term outlook continues to focus on the risk of lower-than-expected demand in China, hawkish surprises with larger-than-expected rate hikes from some central banks, and the stronger dollar. But with Russia likely to remain a key focus this week, the downside risks should be limited.

Gold holds above $1900 with dollar and haven flows in focus

Gold dipped to a three-month low on Friday before recovering as the weak economic backdrop came back in focus on disappointing flash PMI numbers. Earlier in the week, prospects of further rate hikes brought high real yields back in focus, leaving the metal struggling in the short term. The coup attempts in Russia over the weekend gave gold a small boost into the Monday session, but the question remains whether it will be strong enough to see it challenge resistance above $1940. For now, the downtrend remains, and it would take a break above the 21-DMA, last at $1949 to attract short covering and a change in sentiment.

This week’s focus is on the ECB forum on Central Banking and Friday’s PCE numbers (2YYM3, 10YM3, 30YM3).

Last week markets accepted that the Federal Reserve would not turn dovish soon, as Powell told lawmakers that two more rate hikes are “very likely.” However, markets will be looking to see if the Chair delivers the same message in Sintra at the ECB he ECB forum in Central Banks. In the meantime, last week’s PMI data show that growth in the US is slowing down. Therefore, the yield curve inverted further and could soon test pre-SVB lows, with the long part pinned down and the front part vulnerable to inflation and growth. The PCE index on Friday is in focus. The headline numbers are expected to fall from 4.4% to 3.8% YoY, while core inflation is expected to remain in line with April for the month of May. A surprise on the upside might lift yields to test resistance at 4.80%.

What is going on?

Apparent mutiny in Russia at the weekend a brief affair.

The leader of the mercenary Wagner-group staged an apparent mutiny and launched a dramatic march in the direction of Moscow, occupying a couple of large cities along the way on Saturday before Wagner leader Prigozhin called off the move and is apparently headed to Belarus on a deal said to be brokered by Belarussian leader Lukashenko. Observers have a wide range of views on how significantly the brief revolt suggests major weakness in Russian leader Putin’s status and how it will impact Russia’s ability to fight the war in Ukraine. As the situation came and went so quickly at the weekend, markets were little impacted today. Ukrainian president Zelenskiy said that Wagner forces remain active at the front in Ukraine.

Japan intervention risks come early on Monday

Japan's Finance Ministry's Vice Finance Minister for International Affairs Kanda was on the wires in early Asian hours on Monday with verbal intervention to support the yen. He is Japan’s top currency diplomat and commented that they will respond to FX moves if it becomes excessive and will not rule out any options. This comes as USDJPY rose above 143.50 in Friday’s US session, but the impact of verbal intervention was so far limited in early trading.

BOJ’s summary of opinions for the June meeting were also released, and these argued that it was appropriate to maintain current monetary easing, although noting that there is strong chance consumer inflation will moderate, but won't slow back below 2%, toward middle of current fiscal year. This will continue to fuel expectations of a policy tweak.

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

• S&P 500 closed below support at 4,352. Likely correction to 4,315-4,275
• Nasdaq 100 likely correction to 14,500-14,300
• DAX likely to test support at 15,625
• Gold in downtrend. No support until 1,870
• Silver bouncing from support at 22.15. Could rebound to 23.30
• Copper rejected at 100 Moving Average. Finding support at 0.382 retracement at 350.58. Uptrend intact
• EURUSD rejected at 1.10. Likely rangebound short-term but uptrend intact. Resistance at 1.11
• GBPUSD bouncing just above support at 1.2667. Likely to resume uptrend
• EURJPY reached strong resistance at 157.00. Likely correction

Earnings to watch

Our next earnings focus is cruise line operator Carnival which reports FY23 Q2 (ending 31 May) earnings today before the market opens with analysts expecting revenue of $4.8bn up 99% y/y and EBITDA of $658mn up from negative $943mn a year ago as the cruise line industry is coming back to normality after the pandemic years. With rising interest rates and net debt of around $31bn the question for investors is whether the operating income can come back to levels where the debt level is sustainable long-term. S&P Global Ratings has currently a credit rating of B on Carnival’s debt which implies that the debt is non-investment grade which means that Carnival is deemed to have the capacity to its financial commitments but is very fragile to adverse economic conditions.

This 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)

0800 – Germany Jun. IFO Business Climate Survey
0840 – Swiss National Bank President Jordan to speak
1430 – US Jun. Dallas Fed Manufacturing Activity
1700 – US Treasury to auction 2-year notes
1730 – ECB President Lagarde to speak
2000 – US weekly crop conditions report for corn, wheat and soybean