Summary: Across markets traders are waiting for tomorrow’s US July inflation report so markets are expected to be quiet in today’s session. Chinese core inflation ticked higher in July lowering sentiment in Chinese equities while the USD remains steady across multiple currencies. Novo Nordisk’s 17% rally yesterday on trial data showing its weight-loss drug also reduces heart risk puts it closer to becoming the most valuable company in Europe and lifted the entire global health care sector.
US equity futures are hanging on to their gains for the week positioning themselves for good news in tomorrow’s US July inflation report expected to show core inflation remains steady at 0.2% m/m. S&P 500 futures are trading around the 4,525 level in early trading hours with resistance at the 4,535 level.
Both the Hang Seng Index and the CSI300 Index slid by around 0.3% as investors remain cautious. China CPI growth dipped to -0.3% Y/Y in July from 0,0% in June due to a high base last year and a large -1.7% Y/Y decline in food price. Excluding food and energy, the core CPI ticked up to +0.8% Y/Y from +0.4% driven by rise in service prices. The contraction of PPI moderated to -4.4% Y/Y from -5.4%. China property stocks stabilized after a 2-day selloff while battered pharmaceutical names rebounded. EV stocks were among the top losers. Li Auto tumbled 6.4% after the EV maker projected Q3 deliveries at the range of 100,000 to 103,000, below market expectations.
A quiet summer holiday market was seen in Asia overnight with the greenback trading a touch lower within narrow ranges ahead of Thursdays CPI release, the next major macro risk event for G-10 FX. Gains were led by the AUD after attempting to recover from Tuesday’s slump to a 7-week low amid worse than expected China trade data. Also finding a small bid following recent softness were the JPY and EUR while the Chinese off-shore Renminbi trades firmer after hitting a one-month low on Tuesday.
Following a mid-session slump WTI and Brent both rose on Tuesday to end the day close to unchanged and near resistance at the April highs, in WTI the at $83.50 and Brent at $87.50. Front end prompt spreads trade near a four-month high, a reflection of the current tightness on combination of robust demand and OPEC+ production cuts. Continued risks to Russian crude shipments from tensions in the Black Sea remain after the Ukraine’s Zelensky said that it would choose its targets if Russia blocked Ukraine’s ports. Meanwhile, the EIA said US production would rise faster than previously expected this year while an API report showed swelling US stockpiles of crude and a continued drop in distillate, the tightness in which has supported the recent crude rally. Focus on US CPI and oil market reports from OPEC on Thursday and IEA on Friday.
Spot gold prices remain in short-term downtrend after falling to a one-month low on Tuesday before a recovery in stocks and bonds helped off-set the dollar strength that followed a downgrade of 10 US small- and mid-sized banks and concerns over weak Chinese economic data. We maintain a positive outlook for gold as global growth slows, bond yields peak, and the FOMC ability to hike rates becomes increasingly challenged. Attention now turns to Thursday’s US CPI print which is expected to show a rise in headline inflation to 3.3% and a small drop in the core. Gold is currently boxed into a tightening range between $1921 and $1937.
Yesterday’s 3-year auction received strong demand stopping through When Issued by 1.8bps as investors secured a yield near multi year high. The US yield curve bull flattened as Chinas’s trade slumped more than expected and inflation expectations declined in Europe. Today the US Treasury is selling $38bn new 10-year notes, and if they are price above 3.99%, the auction would offer the second highest yield in more than a decade. Therefore, we expect strong bidding metrics despite the auction size has been increased in size by 19% from last month. That could drive yields lower, yet we expect 10-year yields uptrend to remain intact.
Bund yields dropped by 13.4bps to 2.46% yesterday amid a slump of Chinese exports, improved inflation expectations and Italy’s windfall tax on banks. As markets remove bets of another rate hike by the end of the year, we can expect the yield curve to resume its bull steepening. Yet, when inflation concerns will be renewed by the fall, front- term government bonds will be in put in peril once again before the bond bull market begins.
Following a day of heavy losses across the domestic banking sector, Italy issued a clarification of its new tax on banks’ windfall profits, saying the impact may be limited for some banks and the levy won’t exceed 0.1% of a firm’s assets. Banks that have already increased the interest rates they offer to depositors “will not have a significant impact as a consequence of the rule approved yesterday,” the finance ministry said in a statement Tuesday night.
China's Consumer Price Index fell by 0.3% y/y in July, turning negative for the first time since February 2021, compared with the -0.4% market consensus and down from June's 0.0% print, data from the National Bureau of Statistics showed Wednesday. Producer prices meanwhile fell for a 10th consecutive month, contracting 4.4% in July. With CPI and PPI both falling the need to break this debt deflation trap is becoming increasingly urgent with the Economic Daily, citing interviews with government officials, company executives and think tanks, writing that China should focus its economic efforts on driving the real economy and strengthening manufacturing sector development through innovation.
Novo Nordisk share rallied 17% yesterday on trial data showing that its weight-loss drug Wegovy also reduce heart risk by 20% relative to a control group. This news is good for Novo Nordisk as health insurers have been reluctant to provide coverage for Wegovy, but if the drug also provides heart risk benefits, then it might change the game for health insurers and that will broaden the demand picture as affordability will go up.
Eil Lilly, Novo Nordisk’s biggest competitor in insulin drugs and weight loss drugs, revised its FY23 revenue guidance higher yesterday on higher-than-expected demand for its drugs, but the shares were also boosted by the news from Novo Nordisk on. UPS lowered its FY23 revenue to $93bn from previously $97bn as the company lost more volume than expected during the ongoing labour cost negotiations with labour unions. UPS shares declined 1%. The EV maker Rivian rose 2% yesterday as the company increased its production target for the year to 52,000 EVs from previously 50,000 while narrowing its operating losses. Coupang shares rose 6% as the South Korean e-commerce company beat on revenue and profitability in Q2.
Vestas is reporting Q2 earnings this morning maintaining its fiscal year revenue and EBIT margin guidance of €14-15.5bn and –2% to +3% respectively. The world’s largest wind turbine maker is also guiding that supply chain disruptions will negatively impact the wind turbine industry in the second half of the year.
With the recent set of indicators including the US debt downgrade from Fitch the bond market has reassessed the path for the Fed funds rate now pricing in six rate cuts over the next 17 months. If the US July inflation report tomorrow shows that core inflation is easing further, then these bets on Fed rate cuts will accelerate and bond yields go move lower while boosting sentiment in US equities.
Today’s US earnings focus is on Walt Disney and Illumina which both are dealing with a set of issues. Walt Disney has been under pressure for lack of profitability in its Disney+ streaming service and investors are keen to see management lifting operating margins back to previous levels. Analysts expect Disney to report FY23 Q3 (ending 30 June) revenue of $22.5bn up 5% y/y and EBITDA of $4.1bn up from $3.9bn a year ago. Illumina recently got the biggest fine in percentage of revenue by the EU for integrating its acquisition of Grail before the EU had approved the transaction, so investors want to hear some good news soon. Analysts expect Q2 revenue of $1.2bn unchanged from a year ago and EBITDA of $70mn down from $92mn a year ago.
1200 – MX July CPI
1430 – EIA's Weekly Crude and Fuel Stock Report
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.
