Global Market Quick Take: Europe – 2 August 2024

Key points:

• Equities: Significant shift in risk sentiment with Japanese equities declining 5%
• Currencies: Steady week for the dollar as JPY and CHF outperforms activity currencies
• Commodities: Gold and silver up as weak US data cements a September rate cut
• Fixed Income: Bonds surge after BOE rate cut and US manufacturing slump
• Economic data: US jobs report

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

In the news: US manufacturing gauge drops to eight-month low (Reuters), Stock Slump Deepens as Japan Falls Most Since 2020: Markets Wrap (Bloomberg), Intel shares fall 20% on plans to cut 15,000 jobs (FT), Apple revenues rise on strong services business and iPad sales (FT)

Macro: US ISM manufacturing PMI for July was very soft as the headline unexpectedly fell to its lowest since November of 46.8 (exp. 48.8) from 48.5. Prices paid rose more than forecasted to 52.9 (exp. 51.8, prev. 52.1), while employment and new orders fell to 43.4 (exp. 49.0, prev. 49.3) and 47.4 (prev. 49.3). US initial jobless claims rose to 249k from 235k, well above the expected 236k, which saw the 4-wk average lift to 238k (prev. 235.5k). Continued claims (w/e 20th Jul) jumped to 1.877mln (exp. 1.856mln) from the prior, revised lower, 1.844mln. Seasonal factors maybe at play but slow cooling of the labor market continues. The Bank of England cut rates for the first time since March 2020, taking the Rate to 5.0% from 5.25%. The decision to loosen policy was made via a 5-4 vote with Governor Bailey stating that policymakers need to be careful not to cut rates too quickly, or by too much. Market has, however, priced in further easing of 40bps from the BOE for this year.

Macro events (times in GMT): US Nonfarm Payrolls (Jul) exp. 175k vs 206k (1230), Unemployment rate exp unchanged at 4.1% with Hourly Earnings falling to 3.7% YoY from 3.9%. Weekly COT report from the CFTC and ICE Europe (2030)

Earnings events: A busy earnings week is ending with the Q2 earnings season being okay given the high expectations going into the earnings season. The technology sector has grown revenue by around 7% YoY, which is good relative to the mixed macro backdrop. Yesterday’s earnings events were Intel, Amazon, Apple, and Snap. Intel shares were down as the chipmaker issued a weaker than estimated Q3 revenue outlook, suspended its dividend, and announced layoffs of 15,000 workers globally. Amazon shares were down after its Q2 earnings as its operating income forecast for Q3 came in well below analyst estimates and signaled a return to higher capital expenditures following years of cost cutting. Apple shares bounced up and down in extended trading after its earnings result showed that it has returned to positive revenue growth and sounded upbeat on consumers starting their upgrading cycle of new iPhones with the launch of its new AI features later this year. Snap shares dropped 23% in extended trading as the social media company issued low guidance for operating income.

• Today: Chevron, Exxon Mobil, Enbridge
• Weekend: Berkshire Hathaway

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

Equities: Futures are pointing to a lower open across all equity markets as equities gave up all gains delivered on Wednesday with US technology stocks falling 2.5% and Japanese equities falling 5% in today’s session. The outlook for central bank policy convergence has strengthened the Yen and as a result Japanese stocks are suffering. US macro data yesterday also showed that July was indeed a weak month globally with a faster slowdown in manufacturing and labour market worsening (initial jobless claims rising) faster than expected. Overall, risk sentiment declined. If the drawdown in equities continues, we can expect sectors and stocks that have gained the most the past nine months to lose the most. Based on high frequency macro data series we are still constructive on economic growth and do not expect a recession. As a result, we expect the current drawdown to well within historical norms outside a recession and up to around 10% under the right conditions. However, this should not make investors to scale back on overall exposure to equities.

Fixed income: European sovereign surged after the Bank of England cut interest rates for the first time since early 2020, and the rally intensified as US data showed a significant contraction in manufacturing activity. Ten-year Gilt yields dropped for six consecutive days, and 2-year yields dropped by 10 basis points, with markets now expecting two more quarter-point rate cuts by the BOE by year-end. Similar movements were observed in European bonds, with German Bunds yields dropping and traders increasing bets on ECB rate cuts for 2025. Italian bonds underperformed due to a weakened growth outlook, causing the BTP-bund spread to widen to 140 basis points to the highest since the first of July. US Treasuries rallied significantly, driven by weaker ISM manufacturing data and higher-than-expected initial jobless claims yesterday, leading traders to price in at least three interest rate cuts for the year. Ten-year yields dropped below 4%, closing at 3.96%,the lowest level since February, and 2-year yields to dropped by 10 basis points to 4.15%. The rally was further supported by aggressive month-end buying and the Federal Reserve's monetary policy announcement on Wednesday. We consider what implication a hawkish BOJ might have for global markets here.

Commodities: Gold and silver are heading for a weekly gain of more than 3%, supported by US economic data softness driving down bond yields while cementing the prospect for a September rate cut. Crude oil traded lower on Thursday with the recent geopolitical risk premium deflating after OPEC+ reiterated their intention to increase production from next quarter at a time where the two largest consuming countries are showing signs of weakening demand. Copper futures fell back towards the four-month low at USD 4.05, amid continued demand concerns from China where the government is prioritising advanced technologies and new energies over stimulus for the manufacturing sector. The grains sector remains under pressure with corn and soybeans hitting four-year lows amid the prospect for crop-friendly US weather, while wheat is stabilising amid weather concerns in western Europe and raised questions about production levels in Russia and Ukraine.

FX: The US dollar rose modestly against the cyclical currencies, while safe havens Japanese yen and Swiss franc outperformed in Thursday’s session. Softer US data continues to fuel market expectations of Fed rate cuts exceeding the June dot plot expectations as market is getting nervous about achieving the soft landing. Sterling underperformed despite the Bank of England’s hawkish rate cut, and we see this as a temporary decline. The Australian dollar and Canadian dollar were also lower as the focus turns to US jobs data out later today. Japanese yen could remain prone to more gains after gains of over 3% so far this week against the US dollar, in case of softness in the US jobs data.

Volatility: Yesterday was highly volatile, with markets initially positive before reversing sharply downward. The VIX surged to $18.59 (+2.23 | +13.63%), the VVIX, the VIX’s proper volatility index, increased to 111.18 (+16.93 | +17.96%). Markets are extremely nervous. VIX futures continued to rise to $18.350 (+0.885 | +5.06%) overnight. The S&P 500 and Nasdaq 100 futures continued the downward trend overnight, with S&P 500 futures at 5,434.25 (-46.00 | -0.84%) and Nasdaq 100 futures at 18,749.50 (-273.75 | -1.44%). Expected moves for today, derived from options pricing, are 64.77 points (+/- 1.19%) for the S&P 500 and 336.25 points (+/- 1.78%) for the Nasdaq 100, indicating continued high volatility. Both expected moves are up again compared to yesterday (SPX: 0.84%, NDX: 1.32%), another indicator showing increased expected volatility for the coming day. Apple and Amazon released their quarterly earnings after the bell yesterday, with mixed results, which will also add to market volatility in this week’s last trading session. Today's key economic events include Average Hourly Earnings, Nonfarm Payrolls, and the Unemployment Rate at 14:30. Which will be closely monitored as they could have influence on the Fed’s monetary decisions. Yesterday’s top traded stock options were Nvidia, Tesla, AMD, Apple, Meta Platforms, Amazon, Snap, Microsoft, Intel, and Arm Holdings.

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