Global Market Quick Take: Europe – June 29, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Markets have reached crossroad

US equities range traded yesterday, and S&P 500 futures are trading around the 4,417 level this morning with strong comeback in technology sentiment pulling in a positive direction while Powell’s comments at the Sintra central bank conference suggested the Fed would keep policy rates higher for longer. Our focus remains on the AI-related cluster of stocks with Nvidia at its centre. As we wrote in yesterday’s equity update the considerations by the US government to expand export controls on Nvidia’s AI chips could severely impact the revenue outlook for Nvidia, so traders and investors should have this risk on the radar. The Wall Street Journal article on Nvidia is suggesting that a decision could come as early as the beginning of July.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): EV stocks continue to shine

Hong Kong and Chinese equities had a reversal after a two-day rally, as the Hang Seng Index plummeted 1.6% and the CSI300 Index dropped 0.4% during mid-day local time. The decline was widespread, with notable weaknesses observed in China's property, consumer, and Internet sectors. However, XPeng (09868:xhkg) defied the trend and continued its upward trajectory, registering a 1.7% as the EV maker launched its G6 model today. Meanwhile, Nio (09866:xhkg) also saw a modest increase in its stock price, extending the gains from the previous day's announcement of a strategic partnership with CNOOC, a Chinese oil giant. The collaboration aims to jointly develop electric vehicle charging and battery-swapping infrastructures across China. In the A-share market, manufacturers of robotic equipment and auto parts stood out by resisting the overall market decline.

FX: USD continues surge. Sterling hits air pocket

USD resilience is increasingly turning into a USD rally as the greenback has firmed across the board of late, also against the euro yesterday, though the EURUSD remains a choppy affair of late, with focus on the 1.0850 area lows of last Friday for whether a breakdown develops.  Sterling hit an air pocket yesterday as BoE Chief Economist Pill noted that the BoE’s policy moves are showing transmission into private rents and as BoE Governor Bailey stated that headline UK inflation will fall “markedly” this year, even as he acknowledged sticky inflation and hinted that the BoE expects keeping the policy rate high for a long period. EURGBP jumped to multi-week highs above 0.8640 yesterday before easing back, while GBPUSD spilled well below the 1.2700 area support, although it may need to spill down through 1.2500 to suggest a full reversal of the recent rally.

Crude oil: US stockpile drop versus a combatant Powell

Crude oil spent most of Wednesdays session toying with key support, in Brent around $71.50 and WTI around $67, before a 9.6 million barrel drop in US stockpiles helped boost demand optimism. In addition, ahead of the July 4 holiday weekend implied gasoline on a four-week average basis while jet fuel demand climbed to the highest since 2019. rose to the highest level since December 2021. Both signs that the US may avoid a recession, and while it may reduce some of the current price pressure, a pickup in demand from China, the world’s biggest importer still holds the key that can unlock a recovery. Hawkish rate comments from central bank chiefs, including Jerome Powell, at Sintra Portugal highlights the continued risk higher rates may have. Resistance in Brent at $75 and WTI at $70, both their 21-day moving average.

Gold: rate hike(s) versus recession risk

Bullion prices has spent the past 24 hours hanging onto support in the $1900 area, the lowest level since March, and so far, it has managed to find buyers despite another onslaught of hawkish rhetoric from central bankers gathered in Sintra, Portugal. Not least from Fed chair Powell after repeating his concerns about resilient inflation and that the Fed may hike rates again in July and September. His comments, however, helped drive bond yields lower as the market worry a hawkish Fed will push the world’s largest economy into recession. In our latest gold market update we highlight some of the current drivers and where it may go from here. 

The market doesn’t buy central bankers' hawkish stance, but today’s German CPI numbers and tomorrow US PCE data might change that (2YYM3, 10YM3, 30YM3, EXVM:xetr, IGLS:xlon)

Central bankers reiterated their concerns regarding inflation at yesterday’s Sintra forum. However, it wasn’t enough to push yields higher, showing that markets do not believe rates can further rise. Gilts outperformed European sovereign bonds sensibly, with 2-year Gilt yields dropping -12bps versus -4.7bps by German Bund yields as expectations for the BOE base rate to peak soften from 6.2% to 6.11%. Bond markets’ focus is on today’s Germn CPI numbers and tomorrow PCE data, which if they surprise on the upside, might send yields higher on both sides of the Atlantic. Although yield curves are deeply inverted, expect them to flatten further ahead of July’s monetary policy meetings.

What is going on?

Micron shares rise on outlook

The US-based memory chipmaker reported better than expected FY23 Q3 revenue and earnings as the industry has turned a corner. Micron said that the industry outlook is improving but still forecasted a negative gross margin for the current quarter. FY23 Q4 revenue guidance was $4.1bn vs est. $3.9bn. While the industry has turned a corner on revenue, management said that the Chinese government’s recent decision that some of Micron’s products are a security risk would be a headwind for some time. Shares were up 3% in extended trading.

H&M Q2 operating income beats estimates

The Swedish fast fashion retailer has reported this morning Q2 operating income of SEK 4.74bn vs est. SEK 4.26bn despite gross margin at 52.7% was a bit below the estimate of 52.8% suggesting operational efficiencies have been achieved at H&M. The retailer is saying that Q3 is off to a good start with summer collections having been well received. Inventory was down 20% y/y with markdowns flat compared to a year ago suggesting strong performance. H&M also puts out next fiscal year guidance on operating margin suggesting it can achieve 10% ahead of schedule.

Siemens Energy concerned turbine flaws could prove more costly

According to Bloomberg in a story out this morning, executives at Siemens Energy expressed concerns that fixing issues with some of its wind turbines could end costing the company far more than the EUR 1 billion original estimate, as one crucial component that moves and twists during operation risks damaging other important components of the turbines. Some 15-30% of Siemens  Energy’s turbines are known to be affected by the issue, but the company is expanding its investigation of other turbines. The company’s shares dropped over 35% last week in a single day after the original issue and cost estimate were revealed. The shares rallied more than 6% yesterday.

All 23 large US banks pass Fed stress tests

The Federal Reserve has announced the results of its annual stress test conducted on the 23 large banks in the U.S The test concluded that each of these banks possesses adequate capital to absorb losses and maintain lending operations even under highly challenging conditions. The hypothetical stress scenarios employed in the test encompassed various adverse factors, including a 10% rise in the unemployment rate, a 38% decline in house prices, a 40% decrease in commercial real estate prices, widened corporate bond spreads, and heightened market

Under the stress test, the aggregate of the 23 large banks’ common equity tier-1 (CET1) ratio drops to a minimum of 10.1 before bouncing to 10.7 in Q1 2025, the end of the 2-year stress test period. On the individual bank level, the 5-quintile or the bottom five banks ranked by the minimum CET1 are Citizens (6.4), US Bankcorp (6.6), Truist (6.7), M&T (7.0), PNC (7.9). All of them, despite being relatively weaker than the others, have a minimum CET1 ratio comfortably above the required 4.5 under the Basel III.

Bank of America sitting on $100bn paper loss in its bond portfolio

The FT notes that the Bank of America is sitting on a paper, mark-to-market loss of some $100 billion on its bond portfolio as of the end of the first quarter after the company supersized its purchases of longer maturity debt when yields were at extremely low levels during the pandemic years and deposits were ballooning from the stimulus measures introduced at the time. Bank of America is the second largest US bank, measured in total assets. The largest, JP Morgan, only has paper losses of some $40 billion, as did the third-largest bank Wells Fargo, while fourth largest Citigroup had $25 billion in paper losses on its bond portfolio.

Grain prices tumble on forecasts for much-needed US rains

US corn and soybean futures extended their week-long sell-off yesterday on a combination of forecasts for beneficial rains in the Midwest where crops have been struggling lately leading to the worst crop conditions since 1988, and speculators being forced to exit recently established longs. Wheat also declined amid the prospect of a larger-than-expected Canadian acreage while Ukraine’s 2023 wheat harvest may exceed official expectations by a considerable margin. The recent, and in some cases extreme price movements have in some part been caused by funds chasing the market, something we highlighted in our latest grain market update

What are we watching next?

Sweden’s Riksbank set to hike this morning

Sweden’s central bank is expected to hike its policy rate 25 basis points to 3.75%, the highest level by far since 2008 as it continues its inflation fight. A small minority of observers anticipate a large 50 bps move after recent hot Swedish inflation data and the Swedish krona’s extremely weak performance weigh. Guidance from the Riksbank will be critical in the market’s reaction function . Sweden’s economy has been flattened by this rate cycle, which was very quick to transmit into the economy and credit as so many Swedish homeowners financed with adjustable-rate mortgages. The latest May household lending data shows credit growth of only 1.5% year-on-year, the lowest level in a generation.

Inflation data from Europe and the US today and tomorrow

In some of the smaller economies recently, including Norway and the United Kingdom, inflation readings, and core inflation readings in particular, have come in hotter than expected. Then we saw a slightly softer core inflation reading reported yesterday for May in Canada and even a softer than expected Australia May CPI number reported overnight (only a headline number, the core inflation data is only reported quarterly there). Today, Germany reports its preliminary June CPI data after the May data showed a lower print than expected. Friday, the Eurozone will report flash June inflation numbers for headline and core inflation, with the latter surprisingly dropping 0.3% to 5.3% YoY in May. The US May PCE inflation data, the key inflation input for Fed policy decisions, is up tomorrow, with consensus expecting a drop below 4.0% for the headline, but showing a steady 4.7% YoY at the core. Should inflation numbers come in-line and lower than expected, it could take the steam out of central bank expectations, Besides the focus on the short-end of the yield curve, we still also need to consider the longer end of global sovereign yield curves, which have shown no directional clues for weeks. The US 10-year benchmark has been poised in a tight range with key resistance near 3.85%, although 4.00% is the attention-getting level.

Technical update

• Was this the correction in US Equities? Indicators suggest higher levels after correction. However;
• S&P500. Could still perform a correction to 4,300
• Nasdaq 100 possible correction to 14,500-14,300
• DAX key support at 15,625. Above 16K uptrend set to resume – test all-time highs
• AEX25 back above rising trend line. Could re-test 777 resistance
• EURUSD rejected at 1.10. Likely range bound short-term between 1.08 and 1.10 but uptrend intact. Resistance at 1.1180
• GBPUSD below support at 1.2667. Could correct to 0.618 at 1.2515. Uptrend intact
• USDJPY above key resistance at 142.25. Uptrend to 146.60
• EURJPY above resistance at 157.00. Uptrend very stretched but could continue to 160 Correction should be expected
• EURNOK testing rising trendline. Support at 11.40 is key. Below downtrend confirmed
• EURSEK uptrend very stretched. Support at 11.50 is key. Below downtrend/correction confirmed
• Wheat 0.618 correction to 643. Expect bounce from that

Earnings to watch

Our next earnings focus is Nike expected to report FY23 Q4 (ending 31 May) results after the US market closes tonight with analysts expecting revenue of $12.6bn up 3% y/y as revenue growth has slowed from the previous two strong quarters. The headwinds during the quarter have been heavy promotions to clear excess inventory. Read our preview of Nike earnings here.

• Thursday: H&M, Nike, Paychex, McCormick
• Friday: Constellation Brands

Economic calendar highlights for today (times GMT)

• 0730 – Sweden Riksbank Rate Announcement
• 0830 – UK May Mortgage Approvals
• 0900 – Eurozone Jun. Confidence Surveys
• 1200 – Germany Flash Jun. CPI
• 1230 – US Weekly Initial Jobless Claims
• 1430 – US Weekly Natural Gas Storage Change
• 2330 – Japan Jun. Tokyo CPI
• 2330 – Japan May Industrial Production
• 0130 – China Jun. Manufacturing and Non-Manufacturing PMI