Summary: US equities suffered another weak session, with major megacap and AI-linked names suffering their worst session in weeks. The People’s Bank of China set its currency sharply higher overnight with a pointed message in setting the daily reference stronger. The ECB hosts a two-day forum in Sintra, Portugal starting today with many prominent speakers from major central banks. In commodities, worrying crop conditions in the US are in focus.
US equities extended their decline yesterday led by carmakers, software, and media stocks as the technology rally is faded. Among the best performing industry groups were real estate, energy and transportation stocks. While S&P 500 futures are down 2.5% the market is still overwhelmingly quiet waiting for more data points on inflation and still anticipating more stimulus in China. The key support level to watch on the downside in S&P 500 futures is 4,368 which is yesterday’s low.
Hong Kong and mainland Chinese stocks rallied, with the Hang Seng Index rising 1.6% and the CSI300 Index gaining 0.7%. Chatters about stimulus measures from the politburo meeting in July continued to lend support to the market and China’s Premier Li Qiang told the audience at the annual meeting of the World Economic Forum in Tianjin that China’s Q2 GDP growth would be above the 4.5% in Q1. China property stocks led the advance in Hong Kong while the telecommunication names outperformed in the mainland A-share market. On the other hand, BYD (01211:xhkg) slid 1.3% after filings revealed that Buffett’s Berkshire Hathaway sold HKD676 million worth of the electric car and battery maker in mid-June, reducing stake to 8.98% from 9.21%.
The PBOC set is daily reference rate, or fixing at a far stronger level than expected for the second time in two days, with the move overnight pushing USDCNH sharply back lower after an extension to new cycle highs above 7.24 yesterday. The move suggests that the PBOC would like to halt the slide in the renminbi. The US dollar was broadly weaker overnight, as AUDUSD rebounded above 0.6700 and EURUSD continues to trade above 1.0900 and GBPUSD above 1.2700. A number of major central bank members will speak at the ECB’s annual forum in Sintra Portugal today and tomorrow.
Oil prices trade near their two-month averages having bounced after once again managing to find support, in Brent around $72, and WTI around $67. The market found support on Monday following weekend events in Russia but with both prompt spreads in Brent and WTI still in contango, the market is sending a signal of ample supplies. While developments in Russia will be watched, the market continues to focus on developments in China after senior officials said growth has picked up this quarter and more stimulus was in store. The movements in the US yield curve, which are currently strongly inverted as the market anticipates a recession, continue to serve as another source of inspiration, not least for macro-focused funds are utilizing the oil market to hedge these risks.
Yesterday, yields in the US and Germany dropped amid Ifo expectations miss. Despite the rally, the US Treasury sold 2-year notes at the highest yield since February, the second highest since 2007. We expect sovereign yields in the US and Germany to rise this week amid the Sintra forum, where central bankers will likely reinforce their resolution to fight inflation. Our expectation is for the front part of the yield curves to resume its rise towards 5% in the US and 4% in Germany while long-term yields remain underpinned by weak growth data.
Tesla shares fell 6.1% yesterday on a day that delivered considerable blows to recent high-flying mega-cap and AI-linked names, with NVidia also suffering its weakest session since late May. Goldman yesterday downgraded Tesla shares to “Neutral” from “Buy”, citing the large advance in Tesla shares of late as well as price cuts for its new cars.
In a short, angry speech late yesterday, Russian leader Putin condemned those involved in the brief mutiny at the weekend, saying their actions were a betrayal of their country. He demanded that Wagner operatives must either sign contracts with Russia’s Ministry of Defense to join its regular forces, go home or leave for Belarus. The speech would seem to suggest that Wagner leader Prigozhin is also in the firing line. In a recorded message yesterday before Putin’s speech, Prigozhin said his intent was never to overthrow the “current regime” but to protest against the unwinding of his organization, which he wanted to demonstrate has superior organization and morale relative to the regular army.
Carnival shares tumbled 7.6% yesterday despite Q2 revenue and adjusted EBITDA beat estimates and the cruise line operator lifted its FY EBITDA guidance. The market expectations were clearly set above analyst estimates and the market is on edge over the high net debt leverage making the company vulnerable to adverse developments in the economy.
The Bloomberg Grains Index has experienced a notable 16% increase this month, with wheat leading the way with a 22% surge, followed by soybeans at 17% and corn at 13%. The rally is being driven by the prevailing hot and dry weather conditions in crucial agricultural regions, which have raised concerns regarding this year's crop production levels. These developments have spurred a significant amount of speculative buying, although the pace seems to have moderated recently due to weekend rains in the Midwest and forecasts of more precipitation in the coming days, which have provided some relief for crops. Nonetheless, drought conditions persist, and their impact can be tracked through the weekly crop condition report released by the USDA on Mondays. In the latest report, both corn and soybeans received their lowest ratings since 1988, with 50% of corn and soybeans being rated as good/excellent, while wheat also stood at 50%. These statistics underscore the urgent need for rainfall to alleviate further upward pressure on prices.
The June US Conference Board Consumer Confidence survey is up today and has shown a significant spread between still quite elevated Present Situation readings and a generally deteriorating Expectations component – with the trend lower in Expectations of the last two years correlating tightly with the inversion of the yield curve (these two data series show a remarkable long-term positive correlation) and possibly presaging an eventual recession. Historically, the early months of a US recession are associated with a steep drop-off in Present Situation component, which has remained above 145 for the last seven months running.
Our next earnings focus is Walgreens Boots Alliance reporting at 11:00 GMT with analysts expecting FY23 Q3 (ending 31 May) revenue of $34.2bn up 5% y/y and EBITDA of $1.5bn down from $1.8bn a year ago as the retail drugstore chain is still under pressure from headline inflation and rising input costs through wage inflation.
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.
