Summary: Market sentiment was rather weak yesterday and coming into today as the SEC is set to investigate Coinbase over its practices and after Russia halved its deliveries of natural gas to Western Europe through the Nord Stream 1 pipeline. Markets are also eyeing the upcoming blitz of earnings reports from major companies in the coming few days, as well as whether the Powell Fed is set to deliver any softening of its forward guidance at tomorrow’s FOMC meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I). US equities traded lower yesterday ahead of a slew of earnings reports, with major US names Microsoft and Alphabet reporting earnings today, if after the close, while prominent names set to report ahead of the market open include 3M, McDonalds, Coca-cola, and Archer Daniels Midland, GM, UPS and GE. S&P 500 resistance is near 4,015 and Nasdaq 100 index resistance is 12,700 and support in the 12,200-12,000 area.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) Alibaba (09988:xhkg) surged 6% following the Company’s announcement that it will seek a primary listing in Hong Kong. Currently Alibaba’s primary listing is New York and has its secondary listing in Hong Kong. Investors are encouraged by the likely positive impact of enabling Alibaba to be included into the Stock Connect which will lead to southbound buying from investors in the mainland. On the negative side, Alibaba may be preparing for the material risk of having to be delisted from the U.S. as the company is in possession of huge amount of data that the Chinese government could consider sensitive. Hang Seng Index gained 1.5% and CSI300 was up 1%.
USDJPY. USDJPY was largely rangebound on Monday but came under modest pressure this morning as Bank of Japan minutes from the mid-June meeting were released. While members of the board continued to underscore the need for an easy policy, they still agreed to carefully watch the impact of financial, forex market moves on economy and prices. Many members spoke about importance of wage hike in achieving price target, which possibly will raise the prospect of a policy tweak from the BOJ. The 135.00 area looks important ahead of the even more pivotal 131.50 level, with these levels only likely to come into view on a more significant drop in US treasury yields or the market sensing a shift toward less hawkishness from the Powell Fed.
EURUSD and EURJPY. With the natural gas situation hanging over the Eurozone like the sword of Damocles, and given the difficulty for the ECB in managing a policy mix that includes overall tightening while trying to manage peripheral bond spreads via balance sheet management, all while awaiting a potential populist uprising in Italy, are potential pressure points for the euro, even versus the Japanese yen if yields continue lower. 1.0275 is a key resistance area for EURUSD, while EURJPY is sandwiched mid-range between 142.50 and the pivot low just below 137.00.
Crude oil (OILUKSEP22 & OILUSSEP22). Crude oil prices remain volatile, with prices slightly higher on Monday amid supply fears and a retreat in the US dollar. Still, expectations of aggressive Fed tightening continue to underpin some demand destruction fears, keeping oil prices capped and a modest decline was seen this morning. WTI futures were seen around $96/barrel while Brent futures rose to $104+. Libya’s National Oil Corporation said it aimed to bring back production to 1.2 million barrels per day (bpd) in two weeks, from around 860,000 bpd but political tensions continue to cap optimism.
US Treasuries (IEF, TLT). US yields jumped back higher yesterday, as the 10-year US treasury benchmark yield lifted away from the key 2.70-75% area to trade near 2.80%. As 2-year yields rose more sharply yesterday, the yield curve inversion that is the most profound since the year 2000 reached its most extreme for the cycle near –22.5 basis points. The FOMC meeting tomorrow is a critical next step as the market has recently sharply lowered peak Fed funds rate expectations to below 3.5% from nearly 4.0% and longer treasury yields have dropped on rising conviction that inflation will drop back on an incoming recession.
What is going on?
Russia halves natural gas deliveries to Europe through key pipeline. The Russian reduction of supplies through the Nord Stream 1 pipeline to 20% of capacity from the 40% that was the norm previously spiked EU natural gas prices about 10% higher, with the Netherlands 1-month forward natural gas benchmark trading near 176 this morning, marking sixteen days that the price has settled above 150 euros per megawatt-hour per therm. Russia claims that maintenance and delivery of turbine parts from Canada that drive the gas flows through the pipeline are behind the reduction, and that a return to 40% capacity is possible if a turbine unit from Canada, currently held up by sanctions, is able to make its way back to Russia.
Walmart slashes its profit outlook; a sign of more pain to come for retailers. Walmart (WMT) kicked off a week of bellwether earnings reports for consumer-goods giants, who report this week including Coca-Cola Co., McDonald’s Corp. and Procter & Gamble Co. The world’s biggest retailer’s shares fell 10% afterhours after it cut its profit outlook again, expecting adjusted earnings per share to fall as much 13% in the current fiscal year; as US shoppers focus on buying less profitable groceries. This is leading the retailer to slash its clothing prices to clear inventory. This raises new questions about US consumers’ ability to sustain their spending habits, given inflation is at a four-decade high. This will also send shockwaves through the sector, which is why Target, Amazon, and Costco also fell in afterhours trading.
Germany’s July IFO business confidence slumps to 2-year lows. Germany’s IFO business confidence index fell to 88.6 in July vs. estimates of 90.1 and a revised 92.2 in June. The higher-than-expected fall in one of the key indicators of the health of the German economy were underpinned by higher energy prices and looming gas shortages which continue to push Europe’s largest economy towards a recession. Concerns are mounting about the forward prospect for gas supplies from Russia ahead of winter.
What are we watching next?
US yields and US dollar as FOMC to deliver another 75-basis-point hike Wednesday. Guidance from the Fed is key after recent data suggests headwinds for the economy are picking up, even if inflation remains the Fed’s chief focus and the Fed is priced to deliver at least a 75-basis-point hike tomorrow (78 basis points priced in, meaning a small minority are betting on a 100-bp move). The reaction of US yields to Fed policy will be key to watch this week after yields dropped sharply late last week on rising recession concerns from weak economic data. If Powell stays more hawkish than expected, which is needed to bring inflation back down, it could mean another run higher in yields and the US dollar, weighing on risk assets and commodities. The possibility of weaker signals on economic growth in the week also possibly hints at further yield curve inversion this week, after this month saw the US 2-10 yield curve inverting the most (below –20 basis points) since 2000.
China’s Xi Jinping and US President Biden to speak this week as Taiwan tensions mount. US President Biden claims that he still intends to speak with Chinese leader Xi Jinping this week, though no date has been set. The talk comes as tensions mount on House Speaker Nancy Pelosi’s ambiguous plans to visit Taiwan in coming weeks and how China would respond to such a move as Chinese military aircraft activity in the area has picked up sharply of late and the country has issued sharp rhetorical warnings on the threat a Pelosi visit would represent to the “One China” policy.
Emergency meeting of EU energy ministers today. They will discuss the European Commission’s proposal to cut gas use by 15 % from next month. In a draft proposal, EU countries suggested that this target should take into account each state’s dependency on Russian gas as well as the amount they managed to funnel into storage. The reduction should also be less if a member country has extra gas it could supply to others in the EU either via LNG shipments or pipelines. Certain industries could be exempt as well.
The IMF publishes its updated economic outlook. Expect GDP forecasts to be revised downward, especially for 2022 in the eurozone. The latest July eurozone PMI indicators and the July German IFO business climate index (out at 88.6 versus forecast at 90.1) confirm the economy is decelerating very fast with risks tilted to the upside that it enters into a recession this year. In our view, energy rationing is one of the main issues facing the eurozone this year.
LVMH and Michelin will release their semi-annual results today. Despite a strong exposure to the Chinese market (which is decelerating due to the zero Covid policy), the French luxury group (owner of Céline, Givenchy, Christian Dior, Chaumet etc.) is likely to post another solid performance. It is able to pass on inflation to consumers. This is a major advantage in the current macroeconomic situation. The multinational tyre manufacturing company Michelin is in a tougher spot. The share is down 21 % YTD on the Paris Stock Exchange. Investors are wondering whether it can pass on the increase in the cost of production to buyers. This is far from certain.
Earnings Watch Calendar
The first major mega-caps of note are up today as Alphabet and Microsoft report earnings after the close, but a variety of companies are set to report today.
Economic calendar highlights for today (times GMT)
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