Global Market Quick Take: Europe – 5 July 2024

Key points:

• Equities: Chinese equities headed for longest losing streak since 2012. Samsung Q2 profits beat
• Currencies: Weekly dollar loss, GBP hold gains after Labour win
• Commodities: Silver and copper top the table on US rate cut focus
• Fixed Income: UK labour party victory in focus together with U.S. Non-farm payrolls.
• Economic data: US jobs report

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

Saxo’s Quarterly Outlook is out and can be accessed here

The title is Sandcastle economics reflecting that the economy and financial markets look pretty with resilient growth and equities at an all-time high. We expect favourable market conditions to continue in Q3, but sandcastles are naturally fragile and thus our clients should be aware of the potential risks lurking around the corners ranging from geopolitics, US election in Q4, unsustainable fiscal trends, and demographics longer term.

In the news: Labour wins landslide UK election (BBC), UK election results (Reuters), Le Pen Rivals Set to Block Far-Right French Majority, Polls Show (Bloomberg), Biden Heads Into Make-or-Break Weekend for 2024 Election (Bloomberg), SoftBank in talks to get its hands on large volumes of Nvidia’s GPUs: Report (Investing), London stocks, pound climb as Britons vote (Yahoo),  EU slaps Chinese electric cars with tariffs of up to 38% (Yahoo)

Equities: Hong Kong equities down 1.1% in Asia with the broader Chinese equity index set for its seventh straight weekly loss, its longest losing streak since 2021. The slide increases the pressure on Chinese policymakers ahead of the Third Plenum later this month. In the UK, the election is coming out as expected with Labour at 405 seats with 627 of 650 seats counted for turning the UK election into a landslide victory for Labour. However, the election result is not a surprise for the market with futures indicating UK equities to open 0.3% higher and the UK 10-year yield is also holding steady at 4.20%. Samsung reports preliminary Q2 operating profit of KRW 10.4trn vs KRW 8.3trn with 2024 set to become best year ever as the AI boom is lifting all boats in the semiconductor industry. The biggest volume mover in Europe yesterday was Volvo Car down 6.2% as the EU confirmed tariffs on Chinese EV imports.

Macro: Germany continues to show signs of weakness as the largest European economy, with an unexpected decline in factory orders and a persistently contracting construction sector. Minutes from the ECB's June meeting revealed doubts about the Euro Area recovery, as it hinges on private consumption, which lacks supporting data. Policymakers are also uncertain about reaching the 2% inflation target by 2025. In June, the ECB cut key interest rates by 25 basis points, ending nine months of stable rates, and emphasized a data-dependent, meeting-by-meeting approach without pre-committing to a specific rate path. They remain committed to ensuring inflation returns to the 2% target and will keep policy rates restrictive as needed. UK’s centre-left Labour was set to win a massive majority in the 650-seat parliament with Rishi Sunak's Conservatives poised to suffer the worst performance in the party's long history as voters punished them for a cost-of-living crisis, failing public services, and a series of scandals. UK equity-index futures climbed, and the pound held recent gains after the Labour Party won a clear mandate to deliver on its pledge for greater economic stability.

Macro events (times in GMT):  Ger industrial production (May) exp –4.3% vs –3.9% YoY (0600), Can employment change (Jun) exp 25k vs 26.7k (1230), Can unemployment rate (Jun) exp 6.3% vs 6.2% (1230), US non-farm payroll (Jun) exp 190k vs 272k (1230), US unemployment rate (Jun) exp unch at 4% (1230), US avg. hourly earnings (Jun) exp 3.9% vs 4.1% (1230)

Earnings events: There are no important earnings releases this week.

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

Fixed income: European sovereign bonds closed slightly lower yesterday, with French sovereigns underperforming their German counterparts. Despite this, France successfully issued over 10 billion euros worth of long-term OATs with maturities spanning 9, 10, 30, and 40 years, demonstrating strong demand across all tenors. This positive investor sentiment towards longer durations indicates that investors do not anticipate Marine Le Pen’s National Rally party securing an absolute majority in the upcoming weekend elections. Consequently, the OAT-Bund spread could tighten further, potentially reverting to 50 basis points. For more details, click here. In the UK, the Labour Party won the elections, with Rishi Sunak conceding to Keir Starmer. This morning, the sterling and futures on the FTSE 100 are slightly higher, suggesting a likely rise in Gilt yields today(click here to know what's happening in the Gilt market). After a holiday, U.S. markets will reopen with attention focused on the Non-Farm Payrolls, which are expected to show a solid increase at 190,000.

Commodities: The sector is heading for a +1% weekly gain with losses in natural gas and softs being more than offset by gains led by silver and copper, crude and fuel products. Gold and silver are showing signs of breaking their recent trading ranges, while copper has stabilized following the May correction, supported by a softer dollar amid further signs that the US economy is slowing, thereby raising the prospect of the Federal Reserve pivoting towards more than just one rate cut this year. Crude oil and especially the fuel products trade higher as Hurricane Beryl raises concerns of a supercharged storm season disrupting production and flow of crude and fuel products to and from the Gulf of Mexico, and together with heightened geopolitical risks, these developments have offset signs of demand weakness in Asia.

FX: The Bloomberg Dollar index is heading for its first weekly decline in eight weeks ahead of the US jobs report, following a week that saw sluggish US economic data lift the prospect for a September rate cut. Gains among its peers are broad and led by MXN, EUR and GBP.  The EURUSD rose to $1.08, its highest in three weeks, after ECB meeting minutes revealed concerns about inflation trends and hinted at potential future rate cuts. GBPUSD climbed above $1.276, also a three-week high, as Labour secures a landslide election victory, a development analysts believe could boost the pound and UK investments. Investors are also anticipating a rate cut in August following the Bank of England's steady interest rate decision in June.

Volatility: The VIX ended Wednesday at $12.09 (+0.06 | +0.50%), with the SKEW index rising to 148.83 (+1.67 | +1.13%), indicating a slight increase in perceived tail risk. The VIX1D rose significantly to 11.11 (+2.29 | +25.96%), reflecting heightened volatility around the upcoming unemployment release on Friday, which could provide more clues about future interest rate cuts. Today's key economic events, which could impact market movements, include Average Hourly Earnings, Nonfarm Payrolls, the Unemployment Rate, and the Fed Monetary Policy Report. VIX futures are at $13.190 (-0.080 | -0.60%). S&P 500 and Nasdaq 100 futures show minimal movement: S&P 500 futures are at 5594.50 (+4.25 | +0.08%) and Nasdaq 100 futures are at 20424.00 (+12.50 | +0.06%). Wednesday's top 10 most traded stock options included Nvidia, Tesla, Apple, Amazon, Advanced Micro Devices, Nike, Rivian Automotive, Sirius XM Holdings, Nio, and JP Morgan Chase.

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