Global Market Quick Take: Europe – August 28, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Back to wait-and-see mode

Jackson Hole delivered little to markets seen by the relaxed response in equities and bond yields causing the VIX Index to collapse down to around the 15 level. S&P 500 futures are trading around the 4,420 level this morning which seems to roughly the mid-point of the newly established trading range. Fed Chair Powell focused in his speech on lags in monetary policy creating a more uncertainty policy environment and then that inflation dynamics have changed around wages indicating that the Fed is worried about the wage inflation spiral.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets surged on stamp duty cut

The Hang Seng Index jumped by over 3% and the CSI300 soared as much as 5.4% at the market open after the Chinese authorities cut stamp duties and announced some other measures to boost the equity markets. Markets, however, spent the rest of the day paring gains. In early Asian afternoon, the Hang Seng Index and the CSI300 were both around 1.5% higher than last Friday. Technology and healthcare stocks top the gainers while utilities and materials lagged.

FX: Hawkish-leaning Powell and dovish Ueda throw JPY to fresh YTD lows

The dollar wobbled but was ultimately stronger after Powell reaffirmed that rates will be left higher-for-longer. His comments pushed USDJPY to fresh YTD highs of 146.63 and the high was revisited this morning after Ueda’s dovish comments from Saturday were digested by markets. The EURUSD failed to get a bump as Lagarde did not confirm a September rate hike and remains stuck at the 1.08 handle. GBPUSD was the underperformer in the week as it slid below 1.26. NZDUSD had a sixth consecutive week of declines as it continues to test the 0.59 handle while AUDUSD getting a slight bump higher to 0.6420 on China’s stamp duty cut announcement. 

Crude oil remains rangebound

Crude oil ended Friday on a high note, supported by surging fuel prices after a fire shut down the third-largest refinery in the US. The crude market, however, remains rangebound with multiple drivers offsetting each other. Powell’s potential risk on party failed to materialize as he maintained his hawkish stance on rates and inflation target. Focus today on China actions to support its economy, tropical storm Idalia heading for Florida, and whether Brent can regain momentum on a break above $85, the 21-day moving average.

Gold holding up despite higher for longer

The yellow metal trades steady after managing to withstand Friday’s selloff attempt after Powell reiterated the Fed’s long-term 2% inflation target while at the same time saying the FOMC would proceed carefully while not ruling out further rate hikes. The first rate cut is now expected to occur next June from a month earlier previously. Gold prices nevertheless trade a tad firmer today with yields and the dollar both trading softer. Speculators meanwhile cut their COMEX futures net long to a March low last Tuesday, and with the gross short near a nine-month high, any additional strength could trigger short covering. Resistance at $1924 & $1936

Grains: hot US weather focus

Chicago soybeans rose 1.5% on Monday to a one-month high, while corn gained ground after a U.S. farm survey found that hot and dry weather conditions stressed both crops, which could result in smaller harvests than the government had predicted. Wheat also rose amid concerns over global grain supplies. There are forecasts of more hot and dry weather in the U.S. Midwest, and with soybeans being in a crucial stage of developments it would be susceptible to damage from extreme temperatures

The fight against inflation is not done. Two- and seven-year Treasury auctions in focus (2YYU3, 10YU3, 30YU3)

Jerome Powell and Christine Lagarde highlighted on Friday that upside inflation risks remain, and more tightening might be warranted. That’s despite weakening economic data on both sides of the Atlantic. We still see the US yield curve steepening by the end of the year without turning positive, although it might return to flatten in September. However, we expect the flattening of the German yield curve to be limited as the economy is stagnating. We still see scope for long-term yields to move higher, with 10-year US Treasury yields rising to test 4.5% amid an economy in stagflation. Today and tomorrow’s investors’ demand at the 2- and 7- year auctions are in focus.

Chinese authorities cut stamp duties and unveil other measures, aiming at stabilizing the equity market

The Chinese authorities announced four significant measures to provide support to the equity market on Sunday. The Ministry of Finance announced the reduction of stamp duty on securities transactions from 1‰ to 0.5%, effective August 28. Another move involves tightening IPOs and listed companies in placing new shares, as announced by the China Securities Regulatory Commission (CSRC). To further stabilize the market, the controlling shareholders' ability to divest their stake is also being restricted. The CSRC also moved to prevent controlling shareholders of companies whose share prices falling below their issuance price, net asset value, or paying insufficient cash dividends in recent years from reducing their holdings on the secondary market. Lastly, the three Chinese stock exchanges are adjusting the minimum margin financing requirement ratio for securities transactions. The current 100% requirement will be reduced to 80% after market closure on September 8. Overall, these measures showcase China's desire to bolster investor sentiment and stabilize the equity market. The USDCNH dropped on the news before bouncing with support below 7.27 staying firm

What is going on?

Powell’s comments at Jackson Hole remain balanced

Fed Chair Jerome Powell said the central bank would consider another interest rate rise, and that it intends to hold policy at a restrictive level to temper inflation, attempting to sound hawkish but adding nothing new to what was already said at the July FOMC. There was however a firmer language around the 2% inflation target, putting speculations that Fed may consider raising the inflation target to rest. Powell also noted that the economy may not be cooling as fast as expected but appeared ready to respond if these conditions reversed. A slight hawkish tone saw the market push the rate cut expectations to June 2024 from a month earlier previously. A data-dependent approach will be maintained from here but the bar for another rate hike remains high.

ECB’s Lagarde spoke on persistent inflation pressures

The key underlying theme of the Jackson Hole symposium remained that central bankers around the world are not convinced about having put a lid on inflationary pressures in the current cycle. ECB President Lagarde spoke on the ramifications of tighter labour markets, the transition to a greener economy and the fragmentation of the economy into competing blocs. All of these mean a structural shift in global economy that could keep inflationary pressures higher than normal and complicate the role of monetary policymakers. However, there were little hints on near-term policy direction, with Lagarde only repeating the need to set rates at “sufficiently restrictive levels for as long as necessary” to bring inflation back to target in a timely manner. Markets are still pricing in a September rate pause from the ECB.

BOJ’s Ueda echoed structural challenges but maintained a dovish stance

Bank of Japan governor Ueda spoke at the Jackson Hole conference on Saturday and talked about the structural shifts in the global economy, saying that geopolitical tensions and tendencies towards “reshoring” — the return of manufacturing activities and jobs to home countries could be an inflection point. He said that while that could lead to local growth booms, it could also result in production inefficiencies. However, Ueda maintained that he viewed Japan’s underlying inflation to be still below the 2% target and that is reason why they will stick with current easing framework.

Copper: China announcements underpin a recovery

Copper prices started the week pushing higher towards $3.80 with resistance seen at $3.82 which is the 100DMA. China’s measures last week to support the property sector brought gains to metals in general, with Iron ore and silver up over 6%. Further stimulus announcements from China over the weekend may continue to support metals. Meanwhile, inventories for copper, iron ore and aluminum have dropped.

Technical Analysis

• S&P 500. Shoulder-Head-Shoulder Top & reversal pattern intact could be unfolding. Key support at 4,340. If unfolding downtrend to 4,200-4,100
• Nasdaq 100. In downtrend. Key support at 14,687.  Next at 14,254
• Hang Seng correction rejected at 18,562 resistance. Likely to resume downtrend
• DAX Key support at 15,482
• AEX25 downtrend. key support at 731.Next support at 716. Resistance at 748
• BEL20 downtrend. Key support at 3,550
• CAC40 Downtrend. Key support at 7,083 
• EURUSD downtrend. Testing lower rising trendline. Support at around 1.09
• Dollar Index uptrend. Could move to 104.82. Strong resistance at 105.80
• GBPUSD downtrend. Hovering around key support at 1.2590. Could drop to 1.24
• USDJPY uptrend intact. Strong resistance at 146.35. Below 144.50 3expect correction to 143
• EURJPY uptrend
• Gold downtrend but bouncing from below 1,900. Strong support at 1,870
• Copper rejected at 382 likely to resume downtrend   
• Brent correction ongoing. Likely to be range bound between 81.75 and 88.20

What are we watching next?

Earnings to watch

The number of important earnings releases is dropping fast. This week, the most important earnings releases to watch are from Salesforce, NIO, UBS, and Lululemon Athletica.

Next week’s earnings releases

• Today: Fortescue Metals, HEICO
• Tuesday: PDD Holdings, HP, Hewlett-Packard Enterprise, NIO
• Wednesday: Prudential, Salesforce, Crowdstrike, Pure Storage
• Thursday: UBS, Broadcom, VMware, Lululemon Athletica, Dell Technologies, Dollar General, MongoDB

Economic calendar highlights for today (times GMT)

• 1430 – Dallas Fed Manufacturing Activity
• 2000 – US Crop Conditions and Spring Wheat Harvested