Global Market Quick Take: Europe – August 24, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Equities rebound on strong Nvidia outlook

S&P 500 futures rebounded 1.1% yesterday and are advancing another 0.7% this morning as the blowout earnings results from Nvidia have lifted sentiment. The 4,500 level in S&P 500 futures is the next key level to watch on the upside. Adding further to sentiment in equities was the big move in the US 10-year yield dropping 13 basis points. Later today, the macro focus will shift to the initial jobless claims and durable goods orders for July.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): rally on corporate earnings and improved sentiment

The Hang Seng Index surged 2.3% and the CSI300 rallied 1.4% on green shoots of optimism stemming from solid earnings results from some leading Chinese companies. Wuxi Biologics (02269:xhkg) jumped over 10% after reporting strong revenue growth. Meituan (03690:xhkg) soared over 7% ahead of earnings later today. The consensus forecast for Meituan's Q2 predicts a 31.9% revenue growth to RMB 67.2 billion, and adjusted net income to turn profitable at RMB 4.5 billion from a RMB 0.9 billion loss last year. In mainland bourses, telecommunication, media, AI, and computing stocks were the top gainers. Meanwhile, the Chinese yuan strengthened to 7.2750 versus the dollar.

FX: Lower treasury yields, strong risk sentiment eventually reverse dollar gains

A whiplash session for the US dollar yesterday, as weak PMI’s from Eurozone and UK saw the US dollar surging against the Euro and sterling early in the session, with EURUSD nearly touching the 1.0800-area 200-day moving average. Later, weak US PMI’s and the negative revision of payrolls data ( more below) took US treasury yields down all along the curve and combined with surging risk sentiment, helped reverse much of the US dollar strength, though tactical status is unclear after the whip-saw session. AUDUSD gained momentum on the shift in sentiment in asia overnight and on news of gains in Australia’s iron ore and gold exports.

Crude oil: focus turning to Jackson Hole

Crude oil prices continued to be weighed down as demand concerns spread from China to the US and Europe following disappointing August PMIs (see below). Supply concerns also continue to ease with the Biden Administration in talks with Venezuela to explore easing sanctions. This will potentially add to rising supplies from Iran. Prices tried to recover as the stock market mood improved and after the EIA reported a 6.1mn bbl drop in US commercial crude oil inventories but for now, the focus turns to Fed Chair Powell’s comments at Jackson Hole on Friday (see below), and any signs of concern on the economy raising the prospect of peak rates may trigger an across-the-board risk on rally. Key support in Brent between $81.25 and $81.75.

Metals: driven higher by softer yields and short covering

Iron ore and copper prices were higher on Wednesday despite weakness in PMIs, as markets started to reduce the pricing of further rate hikes, and yields softened from their recent multi-year highs. China’s economy continues to struggle, but there was speculation that Chinese mills will ramp up output ahead of the peak construction period. Surging silver prices, supported by copper, also helped push gold higher with the softness in yields supporting a recovery in prices. Copper, silver and gold all witnessed heavy fund selling in recent weeks, and the change in sentiment has forced the covering of short positions, and that helps explain some of the positive price action this week.

European gas slumps as risk of Australia strikes recede

The Dutch TTF benchmark gas contract slumped 20% below €30/MWh in early trading on signs that a labor dispute at Australia’s biggest LNG export plant will be resolved, thereby easing fears about one of three possible strikes in a key exporting nation. Earlier in the week we wondered, strike or no strike, whether EU gas prices above €40 was sustainable at this time of year when EU storage facilities are 91.6% full and could hit capacity within weeks, well ahead of the winter demand season which does not kick off before late October. In addition, EU demand continues to trail the seasonal average by close to 15% as other sources of energy gain traction and the economic outlook weakens. In the short-term some support may emerge as seasonal maintenance in Norway reduce flows from August 26.

US Treasuries rally on the back of disappointing PMI data, but demand at the 20-year Note auction remains weak (2YYU3, 10YU3, 30YU3)

PMI data in Europe and in the US led to a bond rally on both sides of the Atlantic weighting especially on yields in the belly of the yield curve. However, bullish sentiment in safe havens wasn’t enough for investors to extend maturity and buy into the new 20-year US Treasury notes despite offering 4.499% in yield. the highest on record. Indirect bidders came at 68.4%, and the bid-to-cover at 2.56x, and the auction tailed by almost 1 basis point. Today the Treasury will sell 30-year TIPS. If demand remains weak it might be a sign that the market is yet not able to digest larger issuance of bonds, especially with foreign investors repatriating.

What is going on?

Nvidia rips higher after smashing estimates on Q2 revenue and Q3 guidance

In our preview notes ahead of Nvidia earnings we had flagged the possibility of a potential miss on revenue as capital expenditures had not gained much in Q2 among the largest US and Chinese technology companies. However, Nvidia proved those concerns wrong with Q2 revenue coming in at $13.5bn vs est. $11bn and adj. EPS of $2.70 vs est. $2.07 and lifting the Q3 revenue outlook to $16bn +/- 2% vs est. $12.5bn. In addition, Nvidia announced an additional $25bn in share repurchases. On the earnings call with analysts the company said that demand is tremendous and that it has visibility into next year for demand. Nvidia shares rose 6.5% in extended trading hours.

Weak European/UK and US preliminary PMI’s

The PMI shock began as Europe came in yesterday, with France and Germany prints suggesting the slide in manufacturing activity is slowing but services sliding into contraction as well. Germany’s numbers were clearly indicative of a recession, with the manufacturing PMI at 39.1 and services at 47.3. Overall EZ manufacturing PMI was at 43.7 in August from 42.7 in July but services came in at 48.3 from 50.9 previously and 50.5 expected. UK’s manufacturing and services PMIs were both below expectations at 42.5 and 48.7, respectively. US services PMI managed to stay in expansion at 51 but was below 52.3 in July and 52.2 expected. Manufacturing slipped further into contraction to come in at 47 from 49 previously. All of these numbers are clearly indicative of slowing US and European economies as high interest rates continue to bite.

US NFP jobs data sees downward revisions

The yearly revisions to the BLS establishment survey (March 2022-March 2023) saw a downward revision by 306k, implying that the labour market was perhaps a touch cooler than initially expected during this time. With Jackson Hole ahead, this may be another reason for Powell to stay away from committing to further rate hikes but continue to highlight a data-dependent approach. The preliminary re-benchmarking — which will likely lower March 2023 payrolls by 306k, or 0.2% of total payroll employment — is approximately double the historical average. The actual re-benchmarking won’t take place until next February, and could differ somewhat from the preliminary estimates. Private industries saw the largest downward revision.

What are we watching next?

Focus shifting to Jackson Hole speech from Powell tomorrow

The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming kicks off today and runs through Saturday. This year’s theme is "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak on Friday at 1405 GMT. Other central bank heads will also likely be on the agenda. There is considerable attention on this speech and whether the Fed is set to deliver major long term policy hints, far more than any anticipation around whether Powell is set to offer strong hints on the near-term course of policy. As noted in John Hardy’s latest FX Update, Powell’s speech could touch on rising fiscal dominance (massive treasury issuance projections and the pressure this will bring to inflation risks and higher long rates) and whether this will require that the Fed consider appropriate policy options. In addition, “Fed whisperer” Nick Timiraos recently penned a piece suggesting that the Fed could be set to raise its projections of the appropriate Fed policy rate for the longer run, where the median in the Fed‘s quarterly “dot plot” projections has been pinned at 2.5%. A hint that the Fed is set to raise its longer-term policy projections at the September FOMC meeting could spark significant volatility.

Earnings to watch

Today’s US earnings focus is on Workday and Marvell Technology both reporting after the US market close. Analysts expect Workday to report revenue growth fo 15% y/y and EPS of $1.26 up from $-0.17 a year ago. Marvell is expected to report revenue growth of -12% y/y and EBITDA of $423mn down from $480mn a year ago.

• Today: Royal Bank of Canada, Toronto-Dominion Bank, Meituan, CRH, Intuit, NetEase, Workday, Marvell Technology

Economic calendar highlights for today (times GMT)

• 1230 – US Initial Jobless Claims
• 1230 – Chicago Fed National Activity Index
• 1230 – US Jul Durable Goods Orders
• 1430 – EIA Weekly Natural Gas Storage Change