Global Market Quick Take: Europe – June 16, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): When does the AI hype end?

S&P 500 futures rose another 1.2% yesterday pushing the US equity market into more extended and unsustainable levels. Good earnings and an upward revised outlook from Adobe helped fuel sentiment after the cash market close in the large segment AI and other technology stocks. Nasdaq 100 futures rose 0.8% trading around the 15,366 level this morning. The question is increasingly when the wave of excitement over AI stops with reversal flows kicking in. A weaker than estimated initial jobless claims yesterday in the US are indicating some weakness in the US economy, but many macroeconomic indicators are currently being ignored by the equity market. 

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Expectations of further stimulus measures propel Hang Seng Index and CSI300 to new highs

The Hang Seng Index and CSI300 continued to register gains following China's central bank implemented a series of rate cuts, bolstering investor confidence in anticipation of further stimulus measures. On Friday, the Hang Seng Index rose by 0.7%, contributing to a month-to-date rally of 9.5%. This increase allowed the index to fully recover from its losses in May. Notable winners in the market included Alibaba (09988:xhkg), Lenovo (00992:xhkg), and LINK REIT (00823:xhkg), all of which recorded gains of over 3%. In mainland China's stock exchanges, the advance was led by state-owned enterprises (SOEs) following a meeting held by the State-owned Assets Supervision and Administration Commission. The meeting focused on enhancing the quality of SOEs and promoting mergers and acquisitions among them. CSI300 gained 0.6%.

FX: USD and JPY pummelled, EUR rips on hawkish ECB

The ECB proved more hawkish than expected (more below), which boosted European yields sharply at the front end of the curve as the market priced in more tightening from the central bank. The euro responded with a strong rally that found considerable extra fuel on US data, especially the higher-than-expected jobless claims, which crimped US treasury yields. EURUSD ripped above 1.0900 and the only resistance now is into the 1.1000-1.1100 area that capped the last rally. Overnight, the Bank of Japan refused to be swayed by the more hawkish turn of global central banks and declared that easing would continue, with no guidance that a policy tweak lies ahead. The JPY was blasted to new lows for the cycle n many JPY crosses, although USDJPY only partially recovered back above 140.50 after posting as high as 140.50 yesterday.

Crude oil: sentiment in check on weaker dollar and China stimulus hopes

Crude oil jumped the most in six weeks on Thursday as a weaker dollar and China stimulus signs helped improve sentiment across a market which overall remains rangebound, and where OPEC supply cuts continued to offset concerns about higher rates and recession concerns in Europe and the US. In addition, Beijing issuing a large import quota earlier in the week also helped support the overall demand outlook. OPEC’s focus on supply management will likely enforce the view of a soft floor under the market, currently around $72 in Brent, while an upside break seems equally unlikely as long the focus remains on a weakening economic outlook. From a technical standpoint, the $80 area in Brent will likely offer a great deal of resistance and funds positioned for additional weakness are unlikely to change their negative price view until we see the return of an 8-handle

Gold: supported by dollar weakness and recession concerns

Gold trades close to unchanged on the week with lack of selling interest below $1935 support giving traders enough confidence that the FOMC projection of two more rate hikes may not come to fruition amid a market focusing on recession amid a sharply inverted yield curve. Clearly seen through the 2-10 year US spread which is currently inverted by 94 basis points, the most since the March banking crisis. Additional support for gold being provided by the dollar sliding to a four-week low. Gold is currently trading at $1958 near the 21-day moving average line, and a break above may signal returning support, confirmed with a break above $1984, a recent high. 

US Treasury yields drop amid recession worries, following mixed economic data (2YYM3, 10YM3, 30YM4)

The US yield curve shifts lower as investors reconsider the FOMC meeting, with new data showing that the economy is weakening. Jobless claims came in the highest since October 2021 and the U.S. Industrial output was down -0.2%. Two-year yields are still up-trending, they are trading rangebound between 4.6% and 4.75%. Ten-year yields broke below the symmetrical triangle they were trading in, breaking below 3.75%. If they continue to fall, they will find resistance on their 200 SMA at 3.66%. As the market is divided between economic growth and recession, rate volatility will remain high. We expect long-term yields to be pinned down as growth deteriorates,while front-term yields will move according to monetary policies. The moment has arrived for central bankers to look at their balance sheet and be more aggressive under the QT (Quantitative Tightening).

Short-term German yields move higher, and the yield curve further inverts as the ECB prepares to tighten the economy further (IS0L:xetr, D5BC:xetr)

German 2-year Schatz opened slightly above 3% yesterday morning to close at 3.10% roughly in the afternoon. Ten-year yields soared following the ECB meeting, to drop in the afternoon amid mixed US data. It resulted in a further inversion of the German yield curve. We still see yields in an uptrend, yet if upcoming data continue to point to a weak economy, the yield curve is likely to continue to invert as long-term yields remain pinned down.

What is going on? 

Adobe raises top-line forecasts on new generative AI features

Adobereported Q2 revenue and earnings that both beat estimates suggesting the business is still growing at a healthy pace. The company also raised its fiscal year revenue guidance to $19.25-19.35bn from previously $19.1-19.3bn and EPS of $15.65-15.75 to $15.30-15.60. Adobe indicated that it is raising the outlook based on early signs of demand for its new generative AI features that it has rolled across its products.

US retail sales and jobless claims come in above expectations

Headline retail sales rose 0.3% in May, against expectations for a 0.1% fall, and a nudge lower from the 0.4% increase in April. Still, data was mixed as the GDP input, retail control, rose 0.2%, as expected but down from the upwardly revised 0.7% in April. Meanwhile, jobless claims remained at the recent peaks of 262k, against the street looking for a drop back down to 249k, suggesting more slack in the US labor market. The long end of the US yield curve was the most reactive to the weak claims data, with the US 10-year benchmark treasury yield dropping back about ten basis points to below 3.75% after threatening the recent range highs.

ECB’s hawkish message 

As expected, the ECB delivered another 25bps hike to the Deposit Rate, taking it to 22-year highs of 3.5%. The decision to raise rates was once again premised on the judgement that inflation "is projected to remain too high for too long". Both headline and core inflation forecasts were upgraded through 2025, with core CPI for 2025 also seen above target at 2.3%. Lagarde also gave her strongest warning yet about wage rises and companies pushing up prices. Growth downgrades, meanwhile, were more modest. Lagarde also made it clear that a July hike is on the cards, although September can be a tough debate.  The market is pricing a rate hike in July and better-then-even odds of another in September.

Bank of Japan stands pat

The Bank of Japan offered no clue that it is considering joining the rest of the world in tightening policy as it kept its policy rate of –0.10% as almost universally expected, and retains its yield-curve-control policy, under which 10-year JGB yields are kept within a yield band of +/- 0.50%. The Bank says that it sees inflation easing later this year and offered no hint of future policy tweaks in the statement. Some argue that it makes most sense for the Bank of Japan only to bring a policy shift in the context of new forecasts for the economy, with the July 28 meeting bringing a refresh of those.

Commodity sector on track for best month since March 2022  

The commodity sector continues its strong start to June with the Bloomberg Commodity index trading up 6.2% to a seven-week high, with gains seen across all sectors led by an 11.4% jump across key grains futures and followed by a 6.9% rally in industrial metals and energy. Despite rising recession concerns in the US driving some supportive dollar weakness,  we are seeing increased speculation that the Chinese government may step up its support for the economy and some signs that demand is holding up. Elsewhere, hot and dry weather is raising concerns across the agriculture sector while also raising demand for natural gas from power generators towards cooling. Despite continued demand worries, the energy sector is holding up – supported by Saudi Arabia’s unilateral production cut and the prospect for a tightening supply and demand outlook into the second half. Finally, a data dependent precious metals market trade mixed amid lack of clarity regarding the short-term direction of US rates.

What are we watching next?

Triple-witching in US stocks

Friday is triple witching day in US stocks. Stock options, index futures, and index futures options derivatives contracts simultaneously expire. Witching occurs 4 times a year, on the third Friday of March, June, September, and December. Trading volumes te

U.S.-China diplomatic engagement intensifies as Secretary Blinken embarks on visit

Kurt Campbell, Deputy Assistant to the President and Coordinator for the Indo-Pacific said the U.S. “will seek to manage the competition and work together where our interests align from a position of confidence in ourselves and in the importance of consistent, clear, and high-level communication with other great powers. Secretary Blinken’s trip [to China] will advance this approach, and we expect a series of visits in both directions [between the U.S. and China] in the period ahead.”  U.S. Secretary of State Antony Blinken is flying to China this weekend for an official visit.

Technical update

Earnings to watch

Next week’s earnings calendar is still light in volume but earnings from FedEx on Tuesday and Accenture on Thursday are worth tracking. FedEx is a global logistics company and thus will provide a fresh outlook on our global transportation dynamics are evolving given the recent slowdown we have seen in the global economy. Accenture is one of the la

Earnings releases next week:

Economic calendar highlights for today (times GMT)

0900 – Eurozone Final May CPI
1145 – US Fed’s Waller (voter) to speak
1200 – Poland May Core CPI
1400 – US Jun. Preliminary University of Michigan Sentiment/Inflation expectations