Global Market Quick Take: Europe – 26 August 2024

Key points:

• Equities: Quiet start to the week after strong gains last week. Focus this week on Nvidia earnings
• Currencies: Focus on dollar and yen on hawkish BOJ, dovish Powell and Mideast escalation
• Commodities: Crude supported by fresh MidEast worries; gold pausing
• Fixed Income: Global bonds surge as Powell signals rate cuts, focus shifts to central bank speeches and key economic data
• Economic data: German IFO, UK Markets Closed

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news: Top defence contractors set to rake in record cash after orders soar (FT), Big Tech in China doubles AI spending despite US restrictions (FT), Mideast on Edge After Israel Bombs Lebanon to Thwart Attack (Bloomberg), Powell’s Pivot Leaves Traders Debating Size, Path of Rate Cuts (Bloomberg), Darkening global outlook, central bank pivots signal more turbulence (Reuters), Nvidia earnings highlight a busy end of August: What to know this week (Yahoo)

Macro:

• Fed Chair Powell’s comments at the Jackson Hole conference indicated that a September rate cut is coming as he said that “the time has come for policy to adjust”, and he did not close the door to a 50bps cut either. He avoided words that other Fed committee members used earlier in the week, like “gradual” and “methodical” for the rate cut cycle. Moreover, Powell’s comment that he does not seek or welcome further labour market cooling also emphasized that focus has shifted from inflation to unemployment and the Fed remains open to act bigger if August payrolls data showed deterioration.
• Bank of Japan’s Ueda spoke in the parliament on Friday and indicated that the central bank could hike rates again if inflation and economic data performed as expected. He played down the significance of BOJ’s July rate hike in the market turmoil that ensued after the decision and said that concerns over the health of the US economy was the key catalyst.

Macro events (times in GMT):  August Bank Holiday in UK with London Markets Closed, Ger IFO Business Climate (Aug) exp 86 vs 87 prior, and expectations 85.8 vs 86.9 prior (0800), US Durable Goods Orders (July),

Earnings events: This week’s key earnings event is Nvidia reporting on Wednesday after the US market close. The GPU-maker used in training and inference of AI models is expected to report another quarter of explosive growth with revenue at $28.8bn up 113% YoY and EPS of $0.65 up 157% YoY. Investors will focus on two things, 1) the near-term outlook for revenue, and 2) if the new Grace Blackwell 200 chip, its next-generation AI chip, is on track to launch in Q1 2025 after a recent delay due to a design flaw. Other key earnings to watch are PDD (parent company of Temu) reporting today, Salesforce and CrowdStrike reporting on Wednesday. Read our earnings preview here.

• Monday: PDD Holdings (Temu)
• Tuesday: BHP Group, Bank of Montreal, Bank of Nova Scotia, ANTA Sports
• Wednesday: BYD, Royal Bank of Canada, Nvidia, Salesforce, CrowdStrike, Fortescue, Novonesis, HP, Li Auto, Pure Storage
• Thursday: Dell Technologies, Marvell Technology, Pernod Ricard, Lululemon, Autodesk
• Friday:

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: Powell’s speech on Friday signalling the begin of the Fed’s rate cut cycle was perceived as positive in global equity markets with US equities rallying into the weekend ending the previous week on a high. Futures are pointing to a slightly lower open in Europe and flat open in US equities. The key event this week is earnings from Nvidia on Wednesday and today macro traders will focus on Germany August IFO figures expected to show lower expectations for the German economy as the country’s manufacturing sector continues to be weak. Later this week the market will once again focus on initial jobless claims as it has become clear from Fed speakers including Powell’s speech at Jackson Hole last week that the labour market is now the Fed’s main focus. On Friday, Workday shares rose 13% as earnings showed good progress on profitability. In Europe on Friday, Nestle shares were in focus as the CEO was abruptly changed on growth concerns. DSV was also in focus as CVC and DSV have submitted bids for German logistics company DB Schenker.

Fixed income: U.S. Treasuries surged on Friday after Federal Reserve Chair Jerome Powell indicated that an interest rate cut is likely at the upcoming policy meeting in mid-September. This led traders to bet on a larger rate cut, possibly a half-point, in September and expect 102bp rate cuts by the end of the year. As a result, short-term Treasury yields dropped significantly, and the yield curve steepened, with 2-year U.S. Treasury yields falling by 9bps to around 3.9%, more sharply than 10-year yields, which fell by 4bps to around 3.8%. Most of this movement happened shortly after Powell's comments were released, signaling stronger expectations for more aggressive Fed easing. European sovereign bonds, particularly German Bunds and UK Gilts, saw yields drop and yield curves steepening after Fed Chair Powell indicated a likely U.S. rate cut. Traders increased their expectations for rate cuts by the European Central Bank (ECB) to 68bp by year-end and into the next year. In the UK, Gilts also saw yields drop, although Bank of England Governor Andrew Bailey gave mixed signals about future rate changes. This week, the attention shifts towards central bankers’ speeches, the Eurozone and U.S consumer sentiment, and a 2-year, 5-year, and 7-year auction ahead of perhaps the most important event of the week for markets: NVIDIA earnings release.

Commodities: The sector rose 1% last week after the Fed’s dovish tilt helped drive gains in industrial metals, precious metals and softs, more than offsetting losses in energy and grains. Overnight, the loss in energy was reduced with crude oil rising after an Israeli strike on Hezbollah targets in Lebanon once again raised tensions in the Middle East. Brent has returned to trade near USD 80 after once again finding buyers near key support in the USD 75-area. Gold pushed higher on Friday after Powell confirmed the FOMC’s changing focus towards rate cuts, but considering how much this announcement was expected, the yellow metal may struggle to push higher in the short term unless the geopolitical situation deteriorates further. Soybeans attempted a bounce on Friday as traders covered short positions while monitoring an incoming heatwave that could threaten some crops in the U.S. Midwest. Wheat’s slide continued amid the threat of cheap Black Sea exports. Uranium and miners traded higher on Friday after Kazatomprom released a lower-than-expected production guidance for next year

FX: The US dollar traded soft overnight in Asia after ending last week sharply lower as Fed Chair Powell said that the “time has come” for rate cuts, managing to deliver a dovish message despite the market’s positioning tilting dovish and expecting a larger than 25bps rate cut at the September meeting. The message from Powell also boosted the odds of a soft landing as he was seen unwilling to accept further weakness in the labour market, and this boosted activity currencies such as Kiwi dollar and Australian dollar. The latter will face inflation and retail sales data this week which needs to stay strong to confirm that the RBA can lag the rate cut cycle. The Japanese yen also remains in a strong spot with BOJ’s Ueda keeping rate hikes on the table, in contrast the Powell’s dovish message and escalation in geopolitical risks also providing a haven bid. The euro is at a key level around 1.12 against the US dollar and German Ifo data will be on watch today.

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