Summary: US equities rallied yesterday together with US bond yields as the US 10-year yield hit 3% again. Commodities have also staged a comeback with Brent Crude pushing back above $105/brl. Elsewhere it is quiet with currencies slowing down, most notably in USDJPY, and the holiday season is visibly pulling liquidity of the market. Today’s big event is naturally US Jun Nonfarm Payrolls and Hourly Figures which could push interest rates higher, and equities lower on an upside surprise on wages which will feed directly into inflation expectations.
IMPORTANT NOTICE
US equities had a strong session yesterday with S&P 500 futures rallying beyond the 3,900 level closing at 3,905, but the index futures are retreating a bit this morning. If S&P 500 futures fail to push higher today it confirms that they could find themselves in a range from around 3,745 to 3,915 over the coming months. Today’s US June nonfarm payrolls and hourly earnings figures are the main event to watch as an upside surprise to hourly earnings could push the USD and US interest rates higher and US equities lower.
Chinese equities indices gained modestly, with coal miners, steel makers, and auto makers outperforming in the Hong Kong bourses and tourism, catering and consumer electronics led in mainland bourses. China’s Premier Li Keqiang chaired a meeting with top officials from south-eastern coastal provinces and municipalities including Shanghai, Fujian, Jiangsu, Zhejiang and Guangdong and urged these provincial and municipal governments to do more to boost the Chinese economy. The positive momentum yesterday from a Bloomberg report suggested that China was considering allowing local governments to bring forward 1.5 trillion yuan of special bond issuance quota from next year to the second half of 2022 to boost infrastructure construction has waned.
Yen stuck in a range
USDJPY is still trading around the 136-levels, but upside surprises on US Nonfarm Payrolls and Hourly Earnings later today could ignite further pressure on the JPY. Reports have suggested that the Bank of Japan may consider moving its inflation forecast higher at the next meeting, while revising down the growth forecast. This will further emphasize their accommodative monetary policy settings, which are a contrast to the global tightening wave.
Crude oil (OILUKSEP22 & OILUSAUG22) paring some gains
Crude oil prices reversed higher in the overnight session amid possible short covering and broader dip-buying. EIA inventory data was mixed with a 5.8mn barrel SPR release contributing to a massive 8.2mn barrel build even as production remained unchanged at 12.1mn barrels/day. Gasoline and distillate, however, saw a drawdown in inventories of -2.5mn and -1.3mn respectively.
GBPUSD charged higher on PM’s resignation
Cable reclaimed 1.20 handle after reports in the European session on Thursday suggesting UK PM Johnson will be resigning. Gains were extended in Asia, despite a softer dollar, and GBPUSD rose further to 1.2056 highs after printing multi-year lows of 1.1877 on Wednesday. Sterling gains reflect a relief and hope that the new leader will help restore stability to the government and perhaps public perceptions too. EURUSD continued to slide further below the 1.02 handle despite ECB minutes hinting at a jumbo rate hike for July. EURGBP slid to over 1-month lows of 0.8445.
US Treasuries (TLT, IEF)
The US 10-year yield rallied yesterday to 3% but is selling off a bit this morning. The key event today for US interest rates is naturally the June payrolls and hourly earnings figures in the US with latter having the biggest impact on inflation expectations should they deliver an upside surprise.
What is going on?
According to an article in the Washington Post, Elon Musk’s deal to take over Twitter is being jeopardized because is due diligence team cannot verify spam bot figures provided by Twitter. However, Twitter has subsequently reiterated that it will continue to pursue the deal and provide any information necessary.
Former Japan Prime Minister Abe is in critical condition
Shinzo Abe, the longest serving premier in Japan, was shot at a campaign speech earlier today in Japan which has shocked the country. There has been no impact on financial markets in Japan from the incident. His conditions are unclear at this point.
Boris Johnson resigns as UK Prime Minister
After months of scandals and ministers resigning the turn came yesterday for Prime Minister Boris Johnson who resigned after three tumultuous years. The GBP initially rallied on the news pushing the GBPUSD above 1.2000 yesterday, but already this morning this key level of 1.2000 is a key battleground for the GBP.
Fed’s hawkish stance reaffirmed
Fed Governor Waller reiterated his call for a 75bps rate hike at the July meeting, but added he is probably in favour of a 50bps rise in September, reaffirming our view that the path beyond July will get slower. He also echoed the views we heard in the minutes that hinted that Fed may move to a restrictive setting. Moreover, Waller said he needs to see Core PCE inflation coming down to 2.5-3% by year-end before feeling comfortable on really reducing interest rate hikes, and there is "not a chance" that he'd be okay with 3% inflation. Fed’s Bullard also backed a 75bps rate hike for July, but a possible Fed pivot too into the next year as he added possibility of 'tweaks' including possible rate cut after 3.5%.
ECB minutes back a jumbo July hike, but without yield management
ECB minutes confirmed that most members prefer a larger hike at the July meeting and noted a larger increment would be appropriate at the September meeting if the outlook for medium-term inflation had not improved by that time. Still, the lack of a fragmentation tool suggests the hands of the European Central Bank on aggressive tightening may remain tied.
Semiconductors charge after Samsung’s results
Semiconductors see their biggest gains with two months with AMD (AMD) shares up 5%, NVIDIA Corp (NVDA) up 4.8%, while Taiwan Semiconductor (TSM) led the way up 6.7%; with the Philadelphia semiconductor index up 4.5%. These are the biggest jumps in almost two months with 30 members of the index ending in the green. It comes as traders absorbed Samsung’s better than expected earnings; with Samsung reporting a 21% jump in preliminary quarterly revenue. AMD, Nvidia and Taiwan Semiconductor, like Samsung, are all involved in manufacturing and designing microprocessors for electronics, computers, and mobile phones.
What are we watching next?
Today’s US Jun Nonfarm Payrolls figures and hourly earnings will give the FOMC further evidence of whether its tightening of monetary policy is having any impact on cooling labour market and inflation. The hourly earnings are expected to increase 0.3% m/m, but an upside surprise could send interest rates higher and equities lower, and more importantly push EURUSD closer to parity adding more pressure on the ECB to be aggressive on policy rates at its next rate decision meeting.
Low liquidity feeds volatility
With most of Europe away on holiday, market liquidity is usually thinner in July and moves can be amplified. It is prudent to give less weight to volatile market moves and focus on the long-term fundamentals, this is especially the case for investors. Holding the USD and cash may be the kings for now, along with selective quality stocks, perhaps in coal given coal prices seen to be supported. However, when it comes to cash positions, remember that with inflation remaining higher for longer, cash value will erode. Also bear in mind that the supply side of the economy is still not fixed, and the focus will move back to bringing that in balance, once the market moves away from speculative trading.
Earnings Watch
Today we will release a preview of Q2 earnings releases over the next two weeks which can be read on analysis.saxo.
Economic calendar highlights for today (times GMT)
Saxo’s Q3-2022 Outlook has been released
Titled "The Runaway Train” and can be accessed here.
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