Summary: US equity market weakness on Monday continued overnight in Asia with the dollar strengthening towards parity against the euro in response to the region’s energy crisis and acute recession fears. Bonds also benefited from the current state of unease about the global economic outlook amid high inflation, China’s continued struggle with Covid, and geo-political uncertainties. Precious and industrial metals trade lower with crude oil still range bound ahead of two monthly oil market reports. Key focus being Wednesday’s US CPI print, not least considering it was last month’s print that helped trigger an aggressive FOMC rate hike and the current recession focus.
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US equity futures traded lower overnight after slumping on Monday, with traders positioning for another hot inflation reading on Wednesday and the start of a key earnings season that may provide clues on the direction of the economy. While the weakness was being led by megacaps like Tesla and Apple, it is also worth noting that the trading volumes across the US equity market was the lowest of the year, reflecting the current holiday season where liquidity dries up, thereby raising the risk of higher volatility. Into the earnings season, traders will be watching whether corporate America is resilient enough to pass on higher costs to consumers.
In spite of stronger-than-expected total outstanding aggregate financing (+10.8% YoY) and outstanding RMB loan data (+11.2% YoY) released yesterday after market close, investors’ primary concerns are the renewed worries about potential disruptions to economic activities due to rise in Covid-19 cases and looming recession risks in the U.S. and Europe. For Monday July 11, mainland China reported 347 new locally transmitted cases, including 59 cases in Shanghai. Shanghai is doing mass PCR testing today and again on Thursday in nine out of 16 districts. PCR mass testing and VAT rebates have been putting a lot of pressures on local governments’ budgets and limiting their capacities to stimulate the economy. While China reported sharply higher passenger car sales (+41% YoY) and EV sales (+130% YoY) in June, BYD (01211.xhkg) fell 11% on speculation that Berkshire Hathaway may be unloading the company’s shares.
The dollar’s continued push higher against most major currencies has taken it to within a few cents of parity against the euro, a level last seen 20 years ago. The European energy crisis, driven by reduced supplies from Russia, has taken gas prices to demand destructive territory more than ten times above the long-term average. The risk of recession and the ECB’s inability to combat inflation by raising rates, thereby widening interest rate spreads to the Greenback, have all fueled the drop in the common currency. While parity is the focus, the next key area of support is closer to €0.96, the top of the 2000 to 2002 consolidation range.
Crude oil (OILUKSEP22 & OILUSAUG22)
Crude oil and the fuel market in general has so far managed to find support despite the recession and strong dollar led sell-off across most other commodities, most notably the industrial metal sector. However, with the focus on recession and financial traders positioning themselves accordingly, tight fundamentals have not prevented the sector from taking a hit either. The losses seen in Asia today being driven by a Covid-19 resurgence in China adding to concerns about a global economic slowdown. It highlights the current challenge with traders having to navigate recession fears against a supply side challenged by sanctions and under investments. Focus on monthly oil market reports from OPEC and IEA.
The yellow and white metals continue to struggle amid a surging dollar which has taken the Greenback to decade highs against the euro and the Japanese yen. Overnight, gold slid to a nine-month low with the key focus being the strong dollar worsening the technical outlook which during the latest reporting week to July 5 saw hedge funds cut their net long in COMEX gold to a three-year low, while investors in ETFs have been net sellers in all but one out of the last 14 trading trading sessions. While the dollar continues to rise, the focus on gold-supportive geopolitical and financial market risks is likely to take a back seat. In addition, continued weakness across industrial metals have battered silver to the extent the XAUXAG ratio trades above 90, a two-year high.
US Treasuries (TLT, IEF)
The US 10-year yield dropped back below 3% after rallying above following Friday’s stronger than expected job report. This despite expectations that Wednesday’s US CPI print may edge closer to 9%, thereby supporting the Federal Reserve’s case for another jumbo rate hike at the July 27 meeting.
What are we watching next?
European gas trades higher on Tuesday with the Dutch TTF benchmark near €170/MWh or $51/MMBtu. Punitive and demand destructive high prices has strengthened European recession risks while making it very difficult for the ECB to combat surging inflation through hiking rates, thereby supporting the decline in the euro towards parity against the dollar. Reduced supplies from Norway supporting the price at a time of heightened worries that the Nord Stream 1 pipeline will stay shut following annual maintenance that ends around July 20. The fact Russia/Gazprom have decided not to ship additional gas through other pipelines, has been seen as a warning that Russia will further weaponize its gas weapon on Europe in retaliation for the regions support for Ukraine. This at a time where a heat wave across Europe has raised demand for electricity towards cooling.
Earnings Watch
A preview of Q2 earnings releases over the next two weeks can be read on the trading platform or at analysis.saxo.
Economic calendar highlights for today (times GMT
1600 – EIA's Short-Term Energy Outlook
2030 – API's Weekly Crude and Product Stock Report
During the day: OPEC’s Monthly Oil Market Report
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