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Global Market Quick Take: Europe – June 22, 2023

Macro 9 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  Weaker risk sentiment all over in equity markets after Europe and US closed weaker yesterday and Asia’s session was generally downbeat, particularly for Australian shares. Gold remains heavy after a half-hearted rejection of yesterday’s sell-off to new multi-month lows. Intense focus today on the four central banks set to deliver their decisions, especially the Bank of England after the recent shocking core inflation data.

What is our trading focus?

US equities (US500.I and USNAS100.I): Third straight session lower

US equities extended the risk-off move yesterday falling for the third straight session and this morning the slide continues with S&P 500 futures trading lower and around the important 4,400 level. The VIX Index continued to fall to new lows at 13.20 marking an extraordinary calm posture given the macroeconomic outlook and recent red-hot rally in AI-related stocks. Today, we get Chicago Fed National Activity Index, initial jobless claims, and leading indicators on the US economy which will provide fresh data points on the where the economy is headed. The SOFR Dec 2023 futures contract, which is pricing the Fed policy rate, declined yesterday on Fed Chair Powell’s comments about higher rates for longer as inflation remains sticky.

FX: GBP in the spotlight today, but much at stake for NOK as well

The US dollar saw little volatility on Fed Chair Powell’s rhetoric at testimony before a House Panel yesterday. Sterling is more volatile after another hot UK inflation print yesterday and on anticipation ahead of today’s BoE meeting (more below). GBPUSD poked below 1.27 before before bouncing as markets weigh whether BOE can address the inflation concerns. EURGBP surged to 0.86 from 0.8525 and EURUSD surged back towards 1.10 with ECB officials reiterating that the battle against inflation is not won. USDJPY remains locked in range with Japan’s May CPI due tomorrow. NOK is also in the spotlight on a Norges Bank decision this morning, as the size of today’s hike is debated (more below).

Crude oil: recover as demand situation remained stable

Crude oil prices rose 1.5% yesterday before easing back slightly in the Asian session. Expectations for further measures from China on policy easing also continue to underpin expectations for demand recovery. Meanwhile, API inventory data showed that US stockpiles dropped by more than 1 million barrels last week and official DOE inventory data will be eyed today.

Gold still trades heavily. Silver at key support

Gold sold off yesterday to new multi-month lows below 1,925 but managed to rally back into the range, if not convincingly so. Another failure to find support would take the focus to the last Fibonacci retracement level of note for the last rally wave near 1,903, with a capitulation below 1,900 possibly triggering a slide to the 200-day moving average, currently just above 1,850. Meanwhile, silver has suffered a steep sell-off over the last two sessions and is challenging its 200-day moving average near 22.50, with an important 61.8% Fib retracement of the March-April rally wave just below there at 22.28.

The US yield curve inverts further following the hawkish Powell’s testimony. (2YYM3, 10YM3, 30YM3)

Yesterday, Powell reiterated in front of the House that the Fed’s goal is to fight inflation and that two more hikes are “a pretty good guess.” Two-year yields rose to 2.7% while long-term yields remained pinned down, with 30-year yields falling slightly after a solid 20-year Bond auction. The auction saw the highest bid-to-cover on record, and the yield stopped through by 1.8bps. The further inversion of the yield curve points to the fact that markets disagree with Powell’s view: there might be a rate hike, but not two. Today the focus is on jobless claims and the issuance of $149 billion in bills. A hawkish BOE might shake US Treasury also, with US Treasury yields rising following the monetary policy meeting.

UK core CPI numbers show inflation is accelerating, and the market expects a hawkish Bank of England (GB00BK5CVX03 , IGLS:xlon)

Accelerating CPI numbers in the UK are calling for aggressive monetary policies. Two-year yields remain in an uptrend, accelerating as the market is pricing the BOE to hike rates to 6% until February. Markets put a 40% in a 50bps rate hike today, but economists expect the central bank to hike only by 25bps. The risk is that if the Bank of England does not sound hawkish enough, the market will push back its stance, pricing even a higher terminal rate.

The German yield curve is the most inverted since 1992. (IS0L:xetr, D5BC:xetr)

The inversion of the yield curve is accelerating in Europe, as weak growth sentiment intensified. The spread between 2-year and 10-year German government bonds fell to -70bps a level not seen since 1992. Yesterday’s Germany 30-year auction was strong with a bid-to-cover a2.3x. Two-year Schatz are testing resistance at 3.13% as the market prepares for more ECB hikes. We expect Schatz yields to continue to soar towards 3.35% as the July ECB meeting approaches. Ten-year yields remain rangebound but are looking to break resistance at 2.5%.

What is going on?   

Powell sticks to the script, other Fed members lean dovish

Fed Chair Powell started two days of Congress testimony yesterday. For now, Powell didn’t offer much different from what we have heard in the past. He said the Fed will raise rates twice more this year, calling that "a pretty good guess" although he agreed that officials can now move at a more moderate pace to bring down inflation. Fed Chair Powell said the economy is very strong with a very strong labour market driving the economy and that inflation is moving down gradually. Other Fed speakers were somewhat dovish. Goolsbee (voter) and Bostic (2024 voter) both highlighted a preference to wait and watch due to the lags of monetary policy.

Volkswagen lifts profit margin target to 9-11%

Germany’s largest car maker group announced yesterday that it is keeping its 5-7% revenue growth target until 2027, but it is lifting its net profit margin to 9-11% from 8% in its previous annual report suggesting that Volkswagen is betting the push into EVs will mean higher profit margins. The groups’ brands such as Audi, VW, and Skoda will get a higher degree of autonomy going forward in order for the group as a whole to deal faster with the new competition from BYD and Tesla.

Bitcoin breaks 30k amid ETF excitement

Bitcoin surged above $30,000 a more than one-year high on growing hopes on the prospect of a spot bitcoin exchange-traded funds, or ETF. Blackrock, Invesco and WisdomTree have made new filings for a spot bitcoin ETF, which is expected to renew demand from institutional investors.

AI focus: Accenture earnings to bring a test of corporate AI integration

Accenture’s (ACN:xnys) fiscal third quarter earnings is due before market opens today. The stock has gained about 20% YTD amid the AI impact expectations as well as cost-cutting efforts that include a plan to lay off 19,000 employees. Last week, the company announced a massive $3bn in artificial intelligence over the next three years. These plans may be elaborated further in the earnings call and could boost sentiment, further adding fuel to the recent AI wave in the market. The company is expected to deliver adjusted EPS of $2.99 on revenue of $16.49bn from fiscal Q2 EPS of $2.69 on a revenue of $15.81bn.

What are we watching next?

Bank of England faces critical test

Despite yesterday’s fresh shocker of a UK CPI report, which showed core inflation in May soaring higher than expected to a new cycle high of 7.1% vs. 6.8% expected, UK short end yields nudged only very slightly higher as the market is expecting quite a lot from the Bank of England over the next six-plus months, with some 150 basis points of tightening priced into through the February BoE meeting. Governor Bailey has shown a reluctance at every turn to turn fully hawkish, but the recent inflation data is so stark that it requires a strong response, so we must expect that the BoE does what it can to claw back as much credibility as it can. Finger pointing and a small hike, or doubts that BoE could deliver, could prove very negative for sterling.

More central banks on the agenda – SNB, Norges Bank

Hawkish rhetoric this week will also be supported by 25bps rate hikes expected for the Swiss National Bank and Norges Bank – with announcements from both due today – and there is scope for both to go 50bps as well. SNB Chairman Jordan, speaking after May’s CPI, said that inflation is more persistent than thought and both second- and third-round effects are being seen, cementing the case for another rate hike. Likewise, the resurgence in Norway’s May CPI has raised scope for a 50bps surprise as well from the Norges Bank.

Turkey’s central bank expected to announce a jumbo rate hike

The Turkish central bank is expected to normalize its policy rate to something close to actual prevailing rates in the country, so the official policy rate will be bumped from 8.50% to 20% or higher in a pivot away from its loose stance. But that will still keep the benchmark nearly 20% below zero when adjusted for inflation of 40%. That will be an interesting test for TRY after a step-wise like revaluation post-election. The language on price stability is also expected to be firm. Other policy measures should also be pro-lira, but it is likely to be a wild ride.

Technical update

  • Nasdaq 100. Rejected at resistance at 15,265. Correction down to around 14,500-14.300 likely before uptrend resumes. RSI supports higher Nasdaq
  • S&P 500. No strong resistance until 4,546. Correction likely down to 4,315
  • DAX Likely to be range bound 15,625-16,300
  • FTSE 100 could resume downtrend
  • AEX25 testing rising trendline. Break below could lead to 750-740
  • Tesla top and reversal pattern. Correction down to 242 possible. Medium term uptrend intact
  • EURUSD back above 1.09. Potential to 1.1180
  • GBPUSD Upside potential to 1.2940-1.3050. Expect short-term correction to test 1.2667
  • USDJPY testing strong resistance at 142.25. A correction should be expected before next upwards move
  • Gold testing key support at around 1,930
  • Silver in down trend testing 200 Moving Average. Support at 22.40. 

Earnings to watch

Our next earnings focus is Darden Restaurants reporting FY23 Q4 (ending 31 May) today before the market opens. Analysts expect revenue growth of 6.6% y/y and EBITDA of $474mn up from $435mn a year ago as the US consumer continues to keep up spending on discretionary items such as restaurant visits. Darden Restaurants has been aggressive on hiking prices to offset the reduced spending from low-income consumers. 

  • Thursday: Accenture, Darden Restaurants, FactSet
  • Friday: Oracle Japan, CarMax

Economic calendar highlights for today (times GMT)

  • 0730 – Swiss National Bank Rate Announcement
  • 0800 – SNB Press Conference after Rate Announcement
  • 0800 – Norway Deposit Rate Announcement
  • 0800 – US Fed’s Waller (Voter) to speak
  • 0915 – ECB's Panetta to speak
  • 1100 – UK Bank of England Rate Decision
  • 1100 – Turkish Central Bank Rate Decision
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1230 – US Chicago Fed National Activity Index
  • 1355 – US Fed’s Bowman (Voter) to speak
  • 1400 – US May Existing Home Sales
  • 1400 – US Fed Chair Powell to testify before Senate Panel
  • 1400 – US Fed’s Mester (Non-voter) to speak
  • 1500 – US Weekly Crude Oil Inventories
  • 1500 – US Jun. Kansas City Fed Manufacturing Index
  • 1900 – Mexico Rate Decision
  • 2330 – Japan May National CPI Index

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