Summary: Equities trade firmer in early trading following a tech-led sell-off on Wall Street on Wednesday as investors await US monthly inflation data that may help shape the outlook for the Federal Reserve’s next steps. A slight increase in the headline figure is expected due to higher energy prices while core inflation is expected to fall, potentially supporting a pause. WTI crude oil prices reached a nine-month high on tight supply concerns, the US yield curve flattened after a 10-year auction was well received while the dollar was mixed with USDJPY hitting a one-month high.
US equity futures pushed lower yesterday with S&P 500 futures hitting a new low at the 4,485 level on the close for the downward cycle that started on 1 August; S&P 500 futures are rebound a bit this morning trading slightly above the 4,500 level. The market is waiting for the US July inflation report later which will provide fresh information on the underlying inflation in the US economy. Yesterday’s big moves across energy markets and new highs in price of rice might indicate that inflation can quickly come back to haunt the market.
Stocks declined in Hong Kong and mainland bourses after the Biden administration signed a well-anticipated executive order to curb US investments into China. The relatively narrow scope of the curb in terms of industries was in line with expectations leading to the announcement but the “intangible benefits” phrase and the possibility that Congress might push for a broader coverage such as including biotechnology and energy investments remain an overhanging concern among investors. Consumer discretionary, property, and Internet stocks were laggards in Hong Kong trading. Telco, oil and gas, coal mining, and tourism names gained. Cathay Pacific (00293:xhkg) rose 1.7% after reporting a 13-year high profit for H1. The Hang Seng Index shed 1% while the CSI300 slid around 0.4%.
Dollar is little changed ahead of the US inflation release due for today. Despite a likely soft print today, inflation expectations may surge as crude oil and natural gas prices have been rising. EURUSD recovered from Tuesday’s lows of 1.0929 and 1.10 may come in focus again after Italy government decided to soften its stance on the windfall taxes on banks. USDJPY back higher to a fresh one-month high above 144, threatening more measures from authorities.
The EU gas price surged higher on Wednesday and briefly headed above €43/MWh, up 40%, before closing lower. Concerns about supply interruptions due to strike actions in Australia, which could impact 10% of global LNG shipments, may cause increased competition for gas otherwise destined for Europe. Europe has become more reliant on LNG imports following the Ukraine war. But increasing competition with Asia has seen its imports fall in recently. Strong demand amid extreme weather in Asia has seen inventories fall sharply. Moves in North Asian LNG on watch today. Daily volumes in the prompt gas contract tripled to 155k contracts with the rally being exacerbated by short covering from contango-riding short-sellers
Crude oil prices extended their month-long rally on Wednesday with WTI and Brent hitting nine and seven-month highs, as supply concerns continue to underpin prices. A Ukrainian drone attack on a Russian tanker in the Black Sea has raised concerns about the safe passage of around 15-20% of Russia’s daily oil exports, and potentially adding to the tightness already seen following recent voluntary production cuts. The EIA reported a 5.9m barrel rise in crude stocks, production was raised 0.4m b/d to a March 2020 high at 12.6m b/d while Strategic Reserves rose by 1m bbl. Focus on the US CPI print as well as OPEC’s Monthly Oil Market Report.
Gold prices extended the slide on Wednesday to reach its lowest levels in a month at $1914, breaking below its recent $1920-1937 range. Weighed down by the prospect of an energy-related rise in inflation while short-term momentum focused traders continue to exit recently established longs. Total ETF holdings meanwhile continue to slump, down 109 tons this quarter to 2821 tons and lowest since April 2020. Key support ahead of $1900 where the June low and the 200-day moving average meet.
Yesterday’s 10-year auction received strong demand, with indirect bidders rising to 72.2% and the bid-to-cover to 2.56x. Yet, the auction tailed slightly, showing investors require a higher yield to hold US Treasuries. The US yield curve flattened as China's trade slumped more than expected and entered deflation. Today the US Treasury is selling $23bn new 30-year notes, and if they are price above 4.08%, the auction would offer the highest yield in more than a decade. Therefore, we expect strong bidding metrics although the auction size has increased by 38% in size from last month. If CPI data shows an increase in core monthly inflation at 0.2% yields could fall, yet we expect their uptrend to remain intact.
As Italy backtracked parts of its windfall tax on banks, investors sold safe assets and took more risk yesterday. Yet, we might see markets removing bets of another rate hike by the end of the year if today US core CPI comes as expected at 0.2% MoM. Yet, when inflation concerns will be renewed by the fall, front-term government bonds will be in peril again before the bond bull market begins.
After a mixed US NFP jobs report on Friday failed to provide conviction to markets that the Fed can hike more from here, the focus turns to July inflation due on Thursday. The disinflation theme has so far been supported this year by the goods sector, while services have continued to create upside pressures. However, good prices may be seeing some pressures return amid an unfavourable base effect and modestly higher gas prices. Risks continue to escalate from drought conditions in the Panama Canal, El Nino weather patterns, labor strikes, and six consecutive weeks of gains in oil prices. However, shelter inflation now appears to be easing with the expected 12-month lag from measures of new rents and house prices. Shelter has been the biggest driver of services inflation, and it seems to be turning lower. Bloomberg consensus expects headline CPI to accelerate to 3.3% YoY in July from 3.0% YoY in June but stay unchanged at 0.2% MoM. On a core basis, CPI is expected to moderate to 4.7% YoY while remaining at 0.2% MoM. If inflation undershoots consensus expectations, the disinflation narrative will continue to gain traction, supporting risk assets.
The Biden administration signed an executive order that aims to limit China’s progress in “sensitive” technology that “significantly enhances” that enhances China’s “abilities to conduct activities that threaten the national security of the U.S.” To do so, it'll restrict American investments as well as “intangible benefits” accompanying these investments including market access and networking in advanced semiconductors, AI, and quantum computing in China, including Hong Kong and Macao. This signifies unprecedented federal oversight to scrutinize and sometimes hinder such investments in China's tech sector. The order prevents U.S. funds from aiding China's military modernization. However, the rules won't take effect until 2024. During this time, public input will be sought for refining these regulations before finalization. Initially broader, the administration's investment limitations were refined after engaging with the private sector for months.
The recent trial data announcement from Novo Nordisk, which we reflected on in yesterday’s equity note, has bolstered the long-term growth outlook as the company’s weight-loss drug Wegovy is shown to reduce heart risks by 20%. Despite high expectations Novo Nordisk is reporting Q2 figures this morning beating expectations in its obesity segment with Wegovy Q2 sales at DKK 7.5bn vs est. DKK 7bn, but overall revenue and EBIT slightly disappointed. In its outlook, Novo Nordisk continues to be conservative saying that it expects Wegovy to gradually be rolled out internationally, but also saying that it is adding significant Wegovy capacity daily. Finally, Novo Nordisk will split shares 2-for-1 on 13 September.
Siemens reports FY23 Q3 (ending 30 June) earnings this morning with revenue at €18.9bn vs est. €19.3bn. The industrial company is saying that it is going to continue reducing its shares in the troubled Siemens Energy, and the CEO said China’s economy is much weaker than expected earlier this year. Shares are down 4% in pre-market trading.
Disney reported last night Q3 earnings (ending 30 June) Disney+ subscriber figures of 146.1mn vs est. 154.8mn as the company is raising prices on its Disney+ streaming service. The company announced that it is raising prices by as much as 27% globally which should help drastically on profitability going forward in the Disney+ business. Investors clearly liked the message of focus on profits rather than pursuing high growth shares share up 2% in extended trading.
Alibaba is poised to unveil its Q1 FY24 results today, with consensus estimates projecting a 9% Y/Y rise in revenue, reaching RMB223.8 billion, and a substantial 27% surge in adjusted net income, amounting to RMB38.4 billion. Anticipations indicate that both Customer Management Revenue (CMR) and Gross Merchandise Value (GMV) are set to experience high-single-digit growth, leveraging the success of the robust 6.18 shopping festival. Notably, Alibaba's reporting will be structured around the six newly established business segments.
Today’s US earnings focus is Alibaba which reports FY24 Q1 (ending 30 June) earnings before the market opens with analysts expecting revenue growth of 9% y/y and EBITDA of CNY 44.8bn vs CNY 36.1bn a year ago. Given the lackluster macroeconomic performance in China the revenue expectations may be too optimistic.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
