Global Market Quick Take: Europe – August 18, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): More Chinese weakness continues to weigh on equities

US equities continued to slide yesterday with the S&P 500 futures getting closer to the key support levels around 4,370. This morning the index futures are trading around the 4,387 level, but sentiment remains fragile with a negative session out of China with more worries about the Chinese shadow banking system and the most intense Yuan fixing defense in recent memory. China is also urging banks to intervene in the market and strong companies to buy back their own shares to own sentiment in the market.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets continue to decline

The Hang Seng Index and CSI300 resumed their weakness overnight as worries about China’s property sector and shadow banking sector lingered. China Evergrande sought Chapter 15 protection in a New York court. The Hang Seng Tech Index tumbled nearly 3% as digital health names plummeted over 10%, following JD Health’s revenue miss. EV names lost over 3%.

FX: China attempting to boost yuan

USDCNH reversed from a 7.35 high on Thursday back below 7.29 overnight after China delivered its strongest ever pushback against a weaker yuan via its daily reference rate for the managed currency, as it sought to restore confidence to a market spooked by disappointing data and heightened credit risks. The People’s Bank of China set its so-called fixing at 7.2006 per dollar compared to expectations for 7.3047, and that was the largest gap to estimates since the poll was initiated in 2018. Yen was also firmer, with USDJPY trading down to 145.35 from highs of 146.56 as a 20yr JGB auction saw particularly poor demand, with lower accepted prices and the widest tail since 1987. Steady gains in Treasuries still supported the dollar, and AUD and NZD remained the worst G10 performers. AUDUSD is testing 0.64 handle while is close to 0.59. GBPUSD still sustaining strength above 1.27.

Crude oil: rebound on signs of support from Chinese authorities

Crude oil as well as other China-centric commodities rebounded on Thursday following a three-day correction on China demand concerns after the Yuan stabilised amid government intervention and stockpiles around the world continued to be drained amid OPEC+ production cuts. Against a short-term outlook for tight physical oil market conditions supporting prices, the macroeconomic outlook remains clouded with uncertainty, not least driven by China concerns and the risk of further US rate hikes hurting sentiment and risk appetite. The technical picture points to consolidation with Brent looking at support at $81.75 and WTI at $78.

Gold: downtrend maintained amid rate hike focus

Gold prices remain in a downward trending channel which today will offer resistance at $1900 and support at $1880. The fourth weekly decline in a row, has been driven by rising yields and a stronger dollar amid speculation the FOMC may have to hike rates further as incoming economic data points to continued price pressure. As long this remains the focus asset managers and other large investors will have their focus elsewhere amid the current high opportunity/funding cost for holding gold relative to short-term money market products.

The US yield curve bear steepens bringing misery to the stock market  (2YYU3; 10YU3, 30YU3)

Thirty-year yields rose to the highest since 2011 and 10-year yields are testing resistance at 4.32%, which if broken would bring the benchmark to the highest yield since 2008. The front part of the yield curve, however remains anchored amid the selloff in the stock market. Sentiment for long term yields remain bearish as explained here. However, as the benchmark offers a higher yield, its risk-reward ratio becomes more compelling. We expect the yield curve to continue to steepen, putting pressure on markets.

The UK Gilts rise amid global rates selloff (IGLS:xlon, GLTS:xlon)

GPD numbers last week and jobs and CPI numbers this week showed that more tightening is needed in the UK. The focus shifts toward today’s retail sales. Two-year gilts might soar to test resistance again at 5.5% and potentially breaking above it. A 50bps rate hike might be on the table for September, but it depends on August inflation and jobs data, which are going to be released one day before the monetary policy meeting. As the British economy deteriorates, we favor quality and low duration, hence the front part of the Gilt curve.

What is going on?

Ugly UK retail sales

The pound dipped after UK July retail sales ex-fuel fell 1.2% compared with an estimate of a 0.6% decline, with prior data also revised lower. On top of wet weather conditions reducing clothes sales retailers indicated that the increased cost of living and food prices continued to effect sales volumes. The rounded of a tough week of data for the BoE with sticky inflation and strong wage data raising the need to hike further and keep rates higher for longer.

European payments firm Adyen plunged 40%

Dutch payment processor Adyen reported H1 revenue growth that was the slowest since its initial public offering, spooking concerns about its stretched valuation and a steep sell off of ~40%. Investors were also cautious about Adyen’s hiring spree and competition from US rivals such as Stripe amid an environment of slowing economic growth. Revenues for H1 rose 21% to €739.1mn, vs. €754mn expected. H1 EBITDA margin came in at 43%, below expected 48.6% and last year’s 59%.

Walmart lifts earnings guidance

The largest US retailer reported better than expected earnings and comparative sales figures in Q2 while lifting earnings guidance for the fiscal year. US consumers are still substituting away from pricier retailers to Walmart underscoring that the stagflationary environment is still present in the US economy.

US jobless claims decline

US initial jobless claims slowed to 239k from 250k in the prior week, coming in a notch below the 240k expected. The 4-week average, however, rose to 234k from 232k. Continued claims data for the preceding week saw an uptick to 1.716mn from 1.684mn, above expectations of 1.7mn. Data suggests a still-tight labor market.

Japan July CPI matched expectations

Japan’s July CPI numbers had little sign of relief on inflationary pressures. While the prints came in-line with expectations across the board, headline CPI stayed firm at 3.3% YoY and core slightly lower at 3.1% from 3.3% in June. The core-core measure, which excludes fresh food and energy, was at 4.3% YoY from 4.2% previously again putting focus on BOJ’s assumption that inflation is transitory.

Grains market focus on Black Sea and US hot weather risk

The December wheat contract in Chicago bounced from the lowest close since December 2020 following a report that a Ukranian sea drone attempted to attack two Russian Black Sea fleet warships, a further escalation of hostilities between the two nations in the key waterway. Looking at corn and soybeans, the USDA has issued a hot weather warning, saying: "A punishing heat wave will grip much of the south and the nation's mid-section, including the western Corn Belt, where temperatures approaching or reaching 100 degrees Fahrenheit could adversely affect filling summer crops,"

What are we watching next?

Focus shifting to Jackson Hole next week

The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, is scheduled for August 24-26. This year’s theme "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak on August 25 at 10am ET. Other central bank heads will also be likely on the agenda. From recent commentaries, it appears that central bankers will keep the flexibility to hike rates further, while clearly avoiding committing to cut rates soon. Still, thoughts on economic momentum could be key and rising credit risks may warrant some dovishness.

Cyclical vs defensive sectors

The return spread between cyclical and defensive sectors hit a new low for the cycle with cyclical sectors now down 7% relative to defensive sector since the high in July. The moves are important to track because they signal internal rotation in equities and generally less risk appetite among investors.

Technical Analysis

• S&P 500. Downtrend. Likely to drop to support at 4,340
• Nasdaq 100. Downtrend . Closed below support at 14,750. Next is at 14,254
• Hang Seng bearish. Testing once again support at 18,052. Further down side likely towards 17K
• DAX Bearish. Rejected at 16K.  Likely to drop to 15,482 support area
• AEX25 Bearish. Support at 735 but could sell off down to 720-715
• CAC40 broken bearish. Support at around 7,083 
• EURUSD Likely to be range bound between 1.1065 and Key support at 10833. A close below Short- and medium-term trend down. 
• Dollar Index bullish but expect a correction to around 102.41
• GBPUSD is struggling for upside momentum. Key support at 1.2590. a close below likely sell off to 1.23 area. RSI still bullish 
• USDJPY broken resistance at 145. Next is 148 but expect a minor correction to 143
• EURJPY above strong resist at 158. Could move to 160.60 but expect minor correction to 157 before next upwards move
• AUDUSD Strong support at around 0.64. expect correction from here to 0.65
• Gold XAUUSD testing June lows at 1,892. RSI bearish. 200 MA giving. Closing of the week will be crucial some support but could drop to 1,870
• Silver XAGUSD testing June lows at  around 22.15
• Copper below 370.  Next support at 360-356
• Brent correction finding support at 83. Could dip to 81.75 before rebound
• Dutch Gas uptrend.
• US 10-year rejected at 4.32 peak. Expect a correction to 4.1%

Earnings to watch

Today’s US earnings focus is Deere reporting FY23 Q3 (ending 31 July) before US markets open with analysts expecting revenue of $14.1bn unchanged from a year ago as falling crop prices over the pat year are beginning to impact demand for farming equipment.

• Today: Kingspan, Deere, Palo Alto Networks, Estee Lauder, XPeng

Economic calendar highlights for today (times GMT)

• 0900 – Eurozone July CPI
• 1930 – CFTC's Weekly COT Report