Financial Markets Today: Quick Take – July 28, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I). US equities rallied hard on the FOMC meeting failing to alter the market hope that the Fed is set to decelerate its rate tightening regime after delivering another super-size 75 points (FOMC wrap below). But Meta reported its first quarterly sales decline in company history after the close last night and tone-setter Apple will report earnings after the close today. Nasdaq 100 resistance is near 12,700, then 13,000, while the S&P 500 broke above the local 4,017 pivot, possibly opening up the zone toward the next area into 4,200.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) China’s CSI300 was up about half-a-percent while Hang Seng fluctuated between modest gains and losses.  Chinese property names were mostly down in the morning session but bids came back after lunch and rebounded modestly.  Following the 75 basis point hike by the Fed overnight, Hong Kong raised base rate to 2.75% from 2%.  Banks in Hong Kong however maintained their best-lending rates unchanged. Chinese education names rallied over 6% across the board. 

USD pairs as Fed fails to provide forward guidance. The USD was sold on the Fed indicating it will simply yield to incoming data as it sees some softening in figures and will let the data dictate coming actions as it is now at the theoretical “neutral rate” of 2.50%. EURUSD is pushing toward the key range resistance into 1.0275+ and AUDUSD is back challenging the key 0.7000 level.

JPY crosses as USDJPY makes sharp move post-FOMC. The JPY crosses initially jumped higher around the FOMC meeting as global yields were generally sideways while risk sentiment surged. But this price action reversed sharply overnight, led by the bottom dropping out of the USDJPY. This suggests the market is comfortable with its view that the Fed is set to slow its pace of rate increases. USDJPY dropped through 135.57, the most recent pivot low, which could open up for a run at the important 131.50 area, assuming the last important local Fib retracement at 134.50 falls. Elsewhere, a pair like EURJPY has not tracked recent developments in European-Japanese yield spreads at the longer end of the curve (Japanese yields frozen out to 10 years while EU yields have dropped massively from June highs, not to mention the added challenges for Europe as it wrestles with the fragmentation issues. The next level to watch in EURJPY is the pivot low from earlier this month at 136.87.

Crude oil prices gain on risk-on and supply concerns. (OILUKSEP22 & OILUSSEP22). Crude oil prices also gained overnight amid sustained demand but weaker supply concerns. WTI futures are now back to $97/barrel and brent up to $107. US crude oil stockpiles dropped by the most since the end of May, falling 4.52mbbl last week according to the Energy Information Administration. Crude oil exports from the US rose to a record 4.55mb/d, driven by a widening spread between WTI and Brent. The Fed’s tone also suggested little demand concerns, while a power outage in Kazakhstan further added to supply concerns.

US Treasuries (IEF, TLT). US yields traded sideways ahead of upcoming data, including today’s first estimate of Q2 GDP, amidst talk of the risk of a “technical recession” (two consecutive quarters of negative GDP growth – but remember that revisions to first GDP estimates are often significant) and ahead of the latest weekly jobless claims today and the June PCE inflation data tomorrow. The FOMC meeting failed to spark much volatility in yields as the Fed generally refuses to provide guidance (see FOMC wrap below). The key chart point for the 10-year benchmark Treasury yield remains the 2.70-75% zone.

What is going on?

US yields sideways as Fed refuses to provide guidance at FOMC meeting. The Fed delivered the expected 75 basis points hike, but the new FOMC monetary policy was hardly changed from the June statement, mostly only a new sentence noting that “Recent indicators of spending and production have softened”. In the press conference Q&A, Fed Chair Powell dodged every attempt to make a point that could be considered solid forward guidance – he even specifically stated that the Fed won’t issue any “clear guidance” on future rate moves and that the June FOMC rate forecasts are the only thing on offer for a likely path of rates (even after WSJ’s Nick Timiraos specifically poked Powell to answer whether he thought it was fair that the market is pricing the Fed to cut rates next year after a peak by the end of this year.) For the September FOMC meeting, Powell said that further “unusually large” rate increases (read: 75 bps, not 50 bps) will depend on incoming data, with two CPI prints before that September 21 meeting. Market currently priced at +58 bps. The Fed seems to be hoping that it can decelerate its rate hike path now that it has reached the “neutral rate” of 2.50 (really 2.25-2.50% if we consider upper and lower bounds of the policy rate) and the market has been indulging its own view that the softer economy will allow the Fed to begin cutting rates by early next year since Powell doesn’t want to explicitly push back against that view. This looks to be a highly complacent view from the market’s side, and financial conditions have eased notably since the June FOMC meeting.

Meta reports first ever revenue drop. After squeezing 7% higher during the market session, Meta reported its first every decline in year-on-year quarterly sales after hours, dropping over 4% after the report. The current quarter revenue only missed estimates by $0.1 billion, but the forecast for the coming quarter was very weak: $26-28.5 billion versus analyst estimates of just over $30 billion.

Qualcomm (QCOM) disappoints with outlook. The dominant chipmaker in the smart-phone market offered up a weak forecast after the market close yesterday, estimating revenue for the coming quarter at 11-11.8 billion versus analyst estimates of 11.9 billion. The stock dropped sharply by over 3% after its earnings report late yesterday, after having rallied sharply from the June lows below 120 to interact with the 200-day moving average currently near 155.

Australian Retail sales cool as rising rates take toll data on watch. Retail spending rose less than expected reflecting increasing cost of living pressures are beginning to weigh on household spending. Retail sales rose 0.2% in June, less than half the 0.5% gain predicted. Following the report the Australian three-year government bond yield slipped, perhaps shifting the odds on the likelihood of a 50 basis point hike from the RBA next Tuesday. Most growth came from café and restaurants food spending (up 2.7% rising for the 5th month). However, what was a surprise was department store sending saw the largest fall of 3.7%, following the surge last month, and food spending fell for the first time five months, showing cost of living pressures and rising rates are indeed taking a toll.

Rio Tinto (RIO) HY Results for 30 June, the numbers and what’s next. Rio Tinto reported a much weaker than expected result, reflecting the commodity giant is not only being hurt by industrial metal prices pulling back (Iron ore, Bauxite, Alumina, Copper), but also by higher rates of inflation in their operating costs. Underlying profit fell 28% to $8.6b ($9.18b expected), free cash flow fell 30% to $7.1B ($10.2b expected) and it slashed its dividend payout to $4.3b (US$2.67 per share); that’s a 52% drop compared to the same time last year. We think until we see the market focusing on the supply shortage, and not recessionary fears, prices and thus mining company’s performance will likely remain capped. The next clues from the mining sector come from BHP’s full year results August 16. BHP’s results might not be as weak as Rio Tinto’s given BHP is somewhat supported by higher coal and oil prices generating 8.7% and 6.7% respectively from those assets. 

European energy crunch to continue. Nord Stream volumes fell to just 20% of capacity on Wednesday, according to German grid operators. Gazprom warned that there were more cuts to come, saying another turbine needed to be taken down for maintenance. With the prospect of gas flows remaining curbed for the foreseeable future, the European Union pressed ahead with a plan to cut gas use by 15% through next winter. Dutch front month futures (TTFMU2) ended the session up 2.6% to EUR 205.23/MWh after touching record highs of EUR 228 in the day. Electricity prices also signaled stress with French year-ahead power climbing to a record EUR 495/MWH yesterday and German year-ahead power prices at a record EUR 380.

What are we watching next?

China’s Xi Jinping and US President Biden to speak today as Taiwan tensions mount. 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 activity in the area has picked up of late and the country has issued sharp rhetorical warnings on the threat a Pelosi visit would represent to the “One China” policy. In the meantime, Taiwan kicked off a week of annual military exercises and China sent troops and tanks to Russia to take part in a war game across 12 countries, including Russia, Iran, India, Kazakhstan, Uzbekistan, Azerbaijan and Armenia. The US this week has sent an aircraft carrier group from Singapore toward the northeast, the direction of the Taiwan Strait between Taiwan and the Chinese mainland.

US Q2 GDP may remain positive. The first estimate of US Q2 GDP will be released today and after a negative print in Q1, the risk is that a second consecutive negative print may mean technical recession is here. The durable goods and trade data on Wednesday, however, suggests that a positive quarterly growth figure is likely. Durable goods orders were up 1.9% m/m in June from an advance estimate of 0.8% earlier. Even if a technical recession was to happen, it would largely be driven by inventories and net trade, but still strong consumer demand suggests a broad-based recession is unlikely.

ArcelorMittal, L’Oréal, Stellantis and Orange will release their semi-annual results today. Expect a very solid performance for ArcelorMittal. The stock is down 17.7 % YTD. But it is likely to rebound strongly today if it is confirmed. The market will focus mostly on sales in China for L’Oréal (but the impact of the zero Covid policy should be rather limited since the company manages to significantly boost its ecommerce business in China). The telecom company is expected to announce solid results too (but its business in Spain should continue to disappoint. Several analysts believe a restructuring is unavoidable). Finally, the auto carmaker Stellantis (owner of PSA Peugeot-Citroen, Fiat and Chrysler) should confirm its ability to reach an operating margin of above 10 % this year.

The central bank of Turkey will announce its year-end inflation update today. This will certainly not have much impact. Over the past three years, the July estimates stayed below actual inflation. In June, Turkey’s inflation stood at a 24-year high of 78.62 % YoY.

Apple earnings ahead. Weaker consumer demand in China, the risk of Apple users waiting for new models to upgrade, supply chain issues and deteriorating real incomes in many geographies may mean pressure on Apple’s (AAPL) earnings due today. Taiwan Semiconductor Manufacturing (TSM), Apple's leading supplier of processors, recently warned that demand for PCs, smartphones, and consumer electronics is weakening amid inflationary pressures and after the pandemic-driven boom. Still, Apple’s innovation and pricing power are key positives that provide resilience, and strong balance sheet and robust capital-return program suggest long term potential despite a tough macro environment.  Technically, rather interesting that we come into this earnings report with the stock price having rallying close to the 200-day moving average, currently near 158.75.

Earnings Watch Calendar

Today’s batch of earnings is perhaps the most tone-setting as it includes the world’s largest company by market cap, Apple, previewed above.

• Thursday: Apple, Amazon, Nestle, Pfizer, Merck, L’Oreal, Shell, Comcast, Intel, Linde, TotalEnergies, Sanofi, Honeywell, Anheuser-Busch InBev, Keyence, Volkswagen, Air Liquide, Schneider Electric, Banco Santander, Valero Energy, Stellantis, Neste, BAE Systems, Arcelor Mittal, Mastercard
• Friday: Exxon Mobil, Procter & Gamble, Chevron, AbbVie, AstraZeneca, Sony, Colgate-Palmolive, BNP Paribas

Economic calendar highlights for today (times GMT)

• 0900 – Eurozone Jul. Confidence Surveys
• 1200 – Germany Jul. Flash CPI
• 1230 – US Q2 GDP Estimate
• 1230 – US Initial Weekly Jobless Claims and Continuing Claims
• 1300 – ECB's Visco to speak
• 1430 – US Weekly Natural Gas Storage Change
• 1500 – US Kansas City Fed Manufacturing Activity
• 2200 – New Zealand Jul. ANZ Consumer Confidence
• 2330 – Japan Jul. Tokyo CPI
• 2350 – Japan Jun. Industrial Production
• 0130 – Australia Q2 PPI