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What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US stocks traded softer overnight after finishing lower on Wednesday following a roller-coaster session after the hot US inflation report rattled financial markets. Hawkish signals from several FOMC members saw the swap market price in a full percentage point rate hike on July 27. What does this mean for shares? History tells us when CPI is hotter than expected, markets fall, pre-empting more aggressive rate hikes. With this in mind, and ahead of a crucial earnings season, the risk of additional selling pressures remains.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Both indices consolidated with modest gains after opening with a weak tone. Technology stocks led, with Hang Seng TECH Index (HSTECH.I) climbing 1.7%. Chinese healthcare service providers and autos did well. Hygeia Healthcare (06078:xhkg) and Aier Eye Hospital (300015) gained around 6%. A-share Electric equipment stocks had notable gains.
USDJPY trades above 138 as market awaits bumper FOMC rate hikeThe Japanese yen trades at the lowest level against the dollar in 24 years after USDJPY broke above 138 in overnight trading. The move driven by the monetary policy divergence play between US and Japan got more acute on the back of the firmer than expected US CPI print driving swap markets to price in more accelerated rate hikes from Fed. Overnight the Japanese government expressed concerns by the recent rapid weakening of the yen and said they are watching the rapid weakening with a sense of urgency. As bond yields in other countries, especially in the US, have moved up, the yen has increasingly been challenged by the Bank of Japan’s policy of yield curve control keeping the upside for 10-year Japanese government bond yields limited to 0.25%.
EURUSD continues to challenge parity
The dollar’s continued push higher against most major currencies saw it briefly print parity again on Wednesday following the US CPI print. With US rate hikes potentially accelerating and the ECB stuck in neutral amid a sharp European economic slowdown, the market has not yet given up the idea of a break lower towards the next key support level around €0.96. For now, a wall of derivatives bets is keeping the euro above with traders holding options defending the parity strike which has steadily become the most traded options strike. The market will be watching developments in the European gas market, not least whether supplies on the Nord Stream 1 pipeline will resume next week following maintenance.
Crude oil (OILUKSEP22 & OILUSAUG22)
The price action in crude oil continues to be dictated by the battle between traders looking for an economic slowdown and the physical market which continues to signal tightness. Demand, however, has started to show signs of weakness with the EIA reporting a counter-seasonal drop in US gasoline consumption to the lowest on a seasonal basis since 2000. Crude oil and fuel stocks all rose last week supported by another big release from Strategic Reserves and refineries operating at their highest levels since 2018. Focus on President Biden’s visit to Saudi Arabia, and his call on OPEC to produce more, a request that most likely will yield little in terms of additional barrels. The battle between “paper” and physical oil traders will keep volatility elevated but, in our opinion, the market remains too tight to trigger an industrial metal styled correction. In Brent, the key area of support can be found between $97.5 and $97.
Bond markets flash more recessionary warnings
From early July the curve between the 2 year and 10-year treasury yield became inverted. It went further inverted from minus 8 bps a day ago to minus 26 bps after yesterday’s CPI data. In other words, the 2-year treasury note is yielding 26 basis points more than 10-year note which are at 2.95%, the highest level in 22 years. This is watched by the market as a recessionary indicator. The 3-month vs 10 year spread, as being perhaps a more reliable precursor to a recession according to research from the Fed, has also sharply contracted to 53 basis points, trending toward zero. It last fell below zero back in March 2019 (11 months before the Feb-Apr 2020 recession) and July 2006 (17 months before the Dec 2007-Jun 2009 recession).
What are we watching next?
US inflation shocker raising odds of a 1% rate hike on July 27
June U.S. headline CPI and Core-CPI (ex-food & energy) jumped to 9.1% YoY and 5.9% YoY respectively, much higher than the median forecast from economists. The notable strength in rent inflation, which tends to be sticky, will be a key concern for the Fed when they meet later this month. Short-term money market yields shot up and market expectations have shifted from a 75bp hike towards the now significant probably of a 100bp hike on the July 27 FOMC. None of the three Fed officials who spoke yesterday ruled out the possibility of a full percentage rate hike. Atlanta Fed President Bostic said that “everything is in play”. Cleveland Fed President Mester suggested at least 75 basis points but declined to comment if she would favor going even bigger.
Bank of Canada hike rates by a full percentage point
The Bank of Canada hiked interest rates by a full percentage point on Wednesday, a surprise move that supercharges efforts to withdraw stimulus amid fears four-decade-high inflation is becoming entrenched. The unexpected monetary jolt illustrates the extent to which officials are spooked by soaring inflation, electing to take decisive action even at the risk of causing severe economic pain The Canadian dollar strengthened moderately and more so versus most currency crosses and nearly 1% versus the Japanese yen.
The EC trimmed this year's GDP Outlook
The reduction to 2.6% being caused by the risk of energy shortages and slowing demand due to inflation, according to draft projections. The Commission now sees GDP growth at 1.4% in 2023, down from a May projection of 2.3%. The EC raised its inflation estimate to 7.6% this year, versus the previous 6.1%. The official report is due today at 11 am CEST.
What are we watching next?
JPMorgan and Morgan Stanley kick off the US earnings season.
The top five Wall Street banks are expected to haul in $27.8 billion, or a 16% increase, in trading revenue. The gains from wild market swings will help temper declines from investment banking. Wells Fargo and Citi are due tomorrow, with BofA and Goldman coming next week. Investors will scrutinize any comments on the economic outlook.
A preview of Q2 earnings releases over the next two weeks can be read on the trading platform or at analysis.saxo.
- Thursday 14 July: Fast Retailing, Ericsson, SEB, EQT, JPMorgan Chase, Morgan Stanley, Cintas
- Friday 15 July: Investor, Sandvik, EMS-Chemie, UnitedHealth, Wells Fargo, Charles Schwab, BlackRock, Citigroup, Progressive, US Bancorp, PNC Financial Services
Economic calendar highlights for today (times GMT
0900 – EC Publishes Summer Economic Forecasts
1430 – EIA Natural Gas Storage Change
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