Global Market Quick Take: Europe – July 20, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): mixed, turn lower after key earnings.

Key benchmark indices pared initial gains and finished mixed, with the S&P500 gaining 0.2% while the Nasdaq 100 ticked down by 0.1%. Real estate, utilities, and consumer staples were the top winning sectors among the S&P500. Banks extended their rally after U.S. Bancorp (USB:xnys), M&T Bank (MTB:xnys), Citizens Financial (CFG:xnys), and Northern Trust (NTRS:xnys) reported largely in line to better than expected pre-provision net revenues and stabilization in deposits. Northern Trust jumped 13.4% while US Bancorp and Citizens surged over 6%. The SPDR S&P Regional Banking ETF (KRE:arcx) extended its recent rally to gain 3.1%.

Movements in megacap tech stocks were muted in the regular section pending for earnings to be released post-close. In the extended-hours trading, Netflix (NFLX:xnas) and Tesla (TSLA:xnas) traded lower after reporting results (more below). IBM (IBM:xnys) slid 1% after reporting Q2 revenues below estimates.

FX: PBOC move to support CNH overnight weighs on USD

The US dollar found renewed support yesterday, with sterling nosediving after a softer-than-expected June CPI data yesterday morning. The selling GBPUSD was corralled at 1.2868 yesterday, just ahead of the prior major top at 1.2848. EURGBP peaked out at at 0.8701 before consolidating. As further cautious ECB commentary weighed. The ECB’s Stournaras warned that more tightening could hurt the economy and just one more 25bps hike would be enough, Simkus called on the need for a July hike with debate still over September, while Nagel warned about pulling back from tightening too quickly. USDJPY tested 140 ahead of CPI due tomorrow in early Asian hours. AUDUSD spiked above 0.68 on upbeat employment data which was released just after a concerted CNH boost as China’s central bank moved to support the yuan with a strong fixing and a tweak to rules on how much Chinese companies can lend in foreign currencies.

Gold tests high overnight on weaker US dollar

Gold poked to new local highs in sympathy with the weaker US dollar as China intervened heavily against the weaker yuan, with spot trading above 1,987 at one point before reversing back lower in early European trading. The 1,980+ area is an important last area of resistance ahead of the psychologically key 2,000 and the triple-top highs of 2,050-2,075.

Crude Oil: fresh attempt above 80 from Brent rebuffed

Crude oil prices rallied yesterday as supply tightness concerns weighed, with reports suggesting that Russian oil exports for July have been set at 370k BPD below the quarterly plan initially set out. But gains in crude oil were reversed later as USD strength weighed, and EIA inventory report had little impact. EIA data showed US stockpiles of crude oil fell 708k bbls last week, less than expected.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): pare initial gains after mixed retail sales data

US Treasuries gained after a choppy session. The market rallied, and yields fell initially following the rally in UK Gilts after UK inflation slowed more than expected. The softer-than-projected US housing starts and permits data helped extend the rally. Yields started to climb and pair early market gains after the announcement of several large corporate bond insurance. A strong 20-year auction, however, triggered a recovery in the long end of the curve. The 2-year yield finished unchanged while the 10-year yield dropped by 4bps to 3.75%. The 2-10 yield curve flattened by 4bps to -101.

UK Gilts (IGLS:xlon, IGLT:xlon)

The UK yield curve steepened yesterday as two-year yields fell by 20bps following a bigger than expected drop in inflation. Yet, the rally might not last. Core inflation remains at 6.9% indicating that the BOE needs to do more to resolve inflationary pressures. The market expects the BOE to hike rate to 5.75%, implying that that 2-year yields might soar to 5.25%.

What is going on?

Wheat: heating geopolitical climate

Wheat futures jumped Wednesday by 8.5% after Russia's defense ministry released a memo on Telegram indicating all vessels sailing to Ukraine ports in the waters of the Black Sea will be "regarded as potential carriers of military cargo" beginning on Thursday. Reports also suggested intense drone and missile attacks from Russia on Ukraine’s critical port infrastructure including grain and oil terminals. This adds to concern after the Black Sea deal was terminated earlier this week.

Apple finally jumps on to the AI bandwagon

Reports suggested that AppleGPT or Ajax may be the generative AI tool that Apple is working on. The company has been slow to get into the AI chatbot game after the success of OpenAI's ChatGPT. Details in the report were thin and no timeline for the launch was given.

Tesla earnings: Beat on top and bottom line, but margins and free cash flow disappoints

As expected, Tesla’s profit margin slipped in Q2 as price cuts weighed. However, the EV maker beat revenue and EPS forecasts, with Q2 revenue of $24.9bn (vs. $24.46bn expected) reaching a record high. Q2 adjusted EPS came in at 91c vs. 81c expected. Gross margin was however lower than expected at 18.2% (vs. 18.8% exp) and free cash flows also disappointed at $1.01bn (vs. $2.18bn exp). Tesla reaffirmed production guidance of 1.8mn units this year, but this was underwhelming as Musk earlier hinted that capacity is for 2mn units. The company said that Cybertruck remains on track to begin initial production later this year at Gigafactory Texas but delivery details lacked, and commitment to AI was reaffirmed with $1bn spending plan laid out for Tesla’s in-house supercomputer, Dojo. Results may prove to be underwhelming compared to expectations given the recent stock rally.

Netflix earnings: Blowout subscriber growth, but dismal revenues and guidance

Netflix earnings got a fillip from crackdown on password sharing which helped add 6mn subscribers, nearly three times what analysts had forecast. Revenue came in at $8.19bn, +2.7% YoY missing estimates of $8.3bn while EPS of $3.29 beat estimates for $2.85 and was above $3.20 a year ago. Guidance was on the weak side, with the company predicting that revenue would climb to $8.5bn in the third quarter, missing analyst forecasts for $8.7bn. The stock had gained more than 8% in the five days leading up to the earnings release, and it dropped by more than 8% in post-market trading after earnings report.

What are we watching next?

BOJ policy expectations: Japan CPI on watch

The expectations of a July tweak in yield curve control from the Bank of Japan are rampant and June inflation due this Friday could be key. If there are signs that inflation is cooling, as was evident in the Tokyo CPI readings for June, that could further take the pressure off the BOJ. Nonetheless, BOJ remains adept at surprising the markets and will likely tweak its YCC policy when the market pressures are possibly not pressing its nerves in order to maintain credibility. Consensus expectations have marked headline CPI for June to remain unchanged at 3.2% YoY while the ex-fresh food measure is expected to be a notch higher at 3.3% YoY from 3.2% previously even as ex-fresh food and energy is seen lower at 4.2% YoY from 4.3% previously.

Technical Analysis

• S&P 500. Rejected at 4,546 but could spike up to 4,635. 
• Nasdaq 100. Likely to test 16K nearing all-time high 
• DAX Range bound. Rejected at 16,210. Need to close above for uptrend
• AEX25 Range bound between 781 and 748
• CAC40 Range bound between key resistance at 7,403 and key support at 7.080.  
• EURUSD uptrend. Likely short-term correction to 1.11 before uptrend resumes. Medium-term room to 1.1485
• Dollar Index could rebound to 100.68 before down trend likely resuming
• GBPUSD correction could take it down to 1.28 before uptrend resumes. 
• USDJPY Correction overdone. Bouncing from consolidation area. Support at 137.85. Possible rebound to around 140 
• EURJPY bouncing from rising trend line and 153. Could re-test 158  
• EURGBP Double bottom pattern confirmed with potential to 0.88 
• Gold uptrend. Likely to test and break above 2K shortly. 
• Silver above resistance at 24.50. Next resistance at 25.85-26.45
• Copper rangebound 370-396  
• Brent and WTI uptrend but in correction mode

Earnings to watch

Earnings season continues today with a variety of companies reporting, including the US rail freight and logistics company CSX, miner Freeport-McMoran and consumer products- and pharma giant Johnson & Johnson. TSMC, the Taiwanese high-end chip producer is out this morning reporting stronger than expected results, beating on margins and net income, even if the latter was still down 23% Y/Y.

Earnings this week:

• Thursday: TSMC, Johnson & Johnson (1045 GMT), SAP, Blackstone (Before open), CSX (After close), ABB (out this morning), Freeport-McMoran (Before open)
• Friday: American Express, Schlumberger

Economic calendar highlights for today (times GMT)

• 0700 – ECB's Villeroy to speak
• 1100 – Turkey Rate Announcement
• 1230 – US Weekly Initial Jobless Claims
• 1230 – US Philly Fed Survey
• 1400 – US Jun. Existing Home Sales
• 2301 – UK Jun. GfK Consumer Confidence
• 2330 – Japan Jun. National CPI