Global Market Quick Take: Europe – 6 August 2024

Key points:

• Equities: Japanese equities rebound 10% after historic day with VIX touching 65. Futures point to a higher open.
• Currencies: A weaker JPY helps steady global risk appetite
• Commodities: Crude bounce back, gold holds support, copper weighed down by bulging stockpiles
• Fixed Income: Bond rally stalls amid strong ISM data.
• Economic data: US trade balance

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

In the news: Fed policymakers signal rate cuts ahead, but not recession (Investing), Japan's June real wages rise for first time in nearly two years (Investing), $6.4 Trillion Stock Wipeout Has Traders Fearing ‘Great Unwind’ Is Just Starting (Bloomberg), Google loses antitrust case over search (CNBC), Harris to unveil vice presidential pick in race against Trump (Reuters)

Macro: US ISM services PMI rose back into the expansionary territory at 51.4, above the expected 51.0, and the prior 48.8. Within the report, business activity jumped to 54.5 (exp. 51.5, prev. 49.6), while employment and prices paid lifted to 51.1 (prev. 46.1) and 57.0 (prev. 56.3), respectively. The print highlighted that the economic progress remains in the US remains mixed and eased fears of a recession. Japan’s wages for June reflected the strong outcome of the shunto wage negotiations with labor cash earnings up 4.5% YoY vs. 2.0% prior and 2.4% expected. Real cash earnings also turned positive for the first time in 27 months to come in at +1.1% YoY. This will be welcome news for the BOJ that was under the radar for raising rates last week and causing market havoc. Reserve Bank of Australia kept interest rates unchanged at a 12-year high as it waits for sticky inflation to abate before signaling any move toward joining global peers in easing. The bank held its cash rate at 4.35% for a sixth straight meeting on Tuesday and restated that it isn’t “ruling anything in or out” on policy. The RBA aims to bring down consumer prices while holding onto significant employment gains made since the pandemic.

Macro events (times in GMT): Eurozone June Retail Sales, exp –0.1% MoM & 0.1% YoY vs 0.1% & 0.3% prior (0900), US June Trade Balance, exp. -$725b vs -$75.1b prior (1230), API’s weekly crude and fuel stock report (2000)

Earnings events: Palantir reported better than expected Q2 results last night after the close and lifted FY guidance on adjusted operating income to $966-974mn vs est. $883mn. Shares rose 12.2% in extended trading hours. Today’s key earnings focus is Super Micro Computer reporting Q2 earnings after the close. Read our preview from yesterday here.

• Today: Caterpillar, Duke Energy, Amgen, Airbnb, Uber, Zoetis, TransDigm, Suncor Energy, Bayer, Fortinet, Super Micro Computer, Coupang, Globalfoundries, Illumina
• Wednesday: DBS Group, NTT, Novo Nordisk, Sony, SoftBank Group, McKesson, Walt Disney, CVS Health, Shopify, Nutrien, Maersk, Sampo, Siemens Energy, Glencore, Ahold Delhaize, Rockwell Automation, Monster Beverage
• Thursday: Kweichow Moutai, China Mobile, China Telecom, Zurich Insurance, Siemens, Allianz, Recruit, Tokyo Electron, Brookfield, Gilead Sciences, Eli Lilly, Deutsche Telekom, Parker-Hannifin, Genmab, Rheinmetall, Datadog
• Friday: Constellation Software, Generali

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

Equities: Japanese equities have catapulted back from yesterday’s abyss rising 10.2% today in what seems to be the end of the immediate technical blowup. The VIX was another big casualty in yesterday’s violent moves reaching 65 intraday before settling at 38.57 which is twice the historical average. The so-called “dispersion trade” blew up yesterday, but again a very technical microstructure behaviour. As we wrote in yesterday’s client note, the two key fundamental questions for the medium-term outlook are those of whether we get a recession and whether AI spending is sustainable. Equity futures in Europe and the US are pointing to a higher open with focus on technology stocks as those have been the biggest losers in this selloff.

Fixed income: The global bond market rally continued on Monday, though U.S. Treasuries closed lower than their peak levels of the day. This shift followed stronger-than-expected ISM Services data, which dampened growth fears. The main index, along with the orders and employment components, reached their highest levels for the year. Consequently, although 10-year Treasury yields initially dropped to 3.66% following a selloff in European and Asian stock markets, they ended the day around 3.77%. The 2s10s spread briefly turned positive for the first time since July 2022 before reversing due to the ISM services data. By the end of the day, bond futures were pricing in a 50 basis point rate cut in both September and November, with an overall 120 basis points reduction anticipated by December. In Europe, German bonds ended Monday little-changed, reversing an earlier sharp rally fuelled by expectations of aggressive interest rate cuts by central banks. The 10-year yield rose 2 basis points to 2.19%, after initially dropping 10 basis points. This reversal followed the stronger-than-expected U.S. ISM services data. Meanwhile, the money markets now signal 27 basis points of ECB cuts in September and 76 basis points through 2024. Similarly, UK gilts reversed earlier gains, with the 10-year yield climbing 4 basis points to 3.86%. Today the focus is on European retail sales and a 3-year U.S. Treasury auction.

Commodities: The sector saw broad weakness on Monday, alongside global equities due to the current loss of risk appetite amid fears of a U.S. recession negatively impacting demand. In this update, we explain why a volatility event like the one we are currently witnessing in equities impacts positioning across other markets, including commodities, and it helps to explain why gold, due to elevated positioning, also fell on Monday, as investors sought safety in bonds and cash. For now, traders will be watching the yen and global stock markets as they hold the key to the short-term direction. Brent crude touched its USD 75 floor before bouncing back with focus on geopolitical developments and OPEC+ response to the latest drop. Gold was dragged down by a big drop in silver but managed to bounce back before any damage was done to the technical setup. Copper, meanwhile, remains under pressure after the LME recorded the biggest stockpiles in three years, which suggests the global market is too amply supplied for the metal to make a comeback anytime soon.

FX: The US dollar was slightly lower at the start of the week as market drawdowns escalated and called for the Federal Reserve to cut rates. However, some calm was seen returning on Tuesday as the Japanese yen weakened again after sharp gains of 4.6% since July 30 on the back of Bank of Japan’s hawkish pivot. This helped the activity currencies to recover, and the Australian dollar led the gains. The AUD held steady after the Reserve Bank of Australia, as expected kept rates unchanged, while the euro trades calmly around 1.0950 after touching the key level at 1.10 on Monday. ror more on our FX view, go to the Weekly FX Chartbook.

For a global look at markets – go to Inspiration.