Summary: A risk-on tone in U.S. equities overnight, along with weaker dollar and capped oil prices, provided a boost to Asian markets. China’s central bank kept the loan prime rates unchanged, and Bank of Japan is likely to maintain its easy-policy as well, but bigger focus is turning to the European Central Bank which is touted to be considering a 50-bps rate hike this week. In addition, easing gas supply concerns are boosting EURUSD. Company earnings remain on watch after Netflix outperformed expectations, and Tesla will be key to watch today.
The S&P 500 (US500.I) moved up 2.7% taking the market to 4-week high moving above its 50-day moving (DMA) average, while the Nasdaq 100 (USNAS100.I) charged 3.1%, extending its move above its 50 DMA, entering a short term technical rally higher. That doesn’t mean we won’t see a pull back over the longer term, it’s just we think the market is speculating company earnings will hold up this year, despite the Fed aggressively hiking rates. To that end, we see a short, broad technical rally in the S&P500 and the Nasdaq continuing, supported by the USD rolling over as the ECB is set to make a rate hike on Thursday. We stress, with bond yields rising back to 3%, and company earnings expectations for the year ahead to be adjusted down, the market is still at a risk of a broader pull back.
Solid gains in US equities last night prompted a positive open for the Asian equities on Wednesday, helped by oil prices still remaining capped. Japan’s Nikkei 225 (NI225.I) was up over 2% led by tech, spurred on by with a technical rally in US stocks (as we mentioned above). The Bank of Japan decision is due tomorrow but no change is expected to its ultra-easy stance – more important to watch will be the update to growth and inflation forecasts. ASX200 up 1.8% with all sectors in the green. Singapore’s STI (ES3) was up close to 1% as well. China and HK stocks were also positive with the PBoC keeping lending rates unchanged. CSI300 was up 0.7% while HSI was in gains of 2%.
EURUSD surged on Tuesday amid a possible Reuters leak about the European Central Bank considering a 50bps rate hike this week. The report also suggested that the central bank may also have some light on their anti-fragmentation strategy ready to protect peripheral European markets. With market pricing still at 37.5bps for the July meeting, this could mean some potential upside for EURUSD at the knee-jerk. A separate Reuters story also hinted that Russia could restore the gas supplies once maintenance works on the NordStream 1 pipeline is completed this week. If both these tailwinds materialize, EURUSD could be on track to re-test the 1.0350 resistance.
GBPUSD reclaimed the 1.2000 handle after better-than-expected jobs data yesterday and there were also comments from BoE Governor Bailey that 50bps is among the choices at the next meeting but is not locked in. UK CPI is due today and new highs will likely be printed further into October, so that is unlikely to be a big mover for the sterling.
While supply concerns, including lack of commitment on Saudi supply, have been driving price action in the oil market this week, the weakness in the dollar also remains a big factor. Brent futures are testing the $108/barrel resistance while WTI futures were above $104 overnight. The API report showed a slight build in US oil inventories last week, with US crude stocks rising by 1.9 million barrels for the week. Official weekly crude and fuel inventory data from the U.S. Energy Information Administration (EIA) is expected to be released today at 1430 GMT.
Netflix (NFLX) shares jumped 7.9% after hours on seeing a return to growth this quarter. The streaming service giant lost 970,000 paying customers this quarter, much less than the than the 2 million Netflix predicted, which was helped by the success of a new series of Stranger Things. Growth in the Asia-Pacific region offset most declines with Netflix adding 1.1 million customers in APAC, after cutting prices in India. This quarter, Netflix expects subscriber growth to rise by 1 million. These were both surprises to the upside. The company still plans to introduce a lower-priced version of Netflix with advertising around early 2023, and is testing ways to charge customers for password sharing while it also tapped Microsoft Corp. to handle ad sales and technology
Nvidia (NVDA) shares rose for the 5th straight day, also flagging a technical shorter rally could continue, which is evident on its chart. Intel (INTC) has more momentum, trading up for the 6th day, and up for the 3rd week. Fresh steam has been put under chip makers as some raw materials prices have fallen, but more broadly, US domestic semiconductors/chip manufacturers, could get a $52 billion government subsidy, aimed at making the US self-sufficient and less reliant on China. The US senate votes on Tuesday and after the Senate vote, the House of Representatives will need to approve the CHIPS Act funding before submitting it to the White House for signing. Funding was originally part of a larger competition and innovation bill, that was held up in Congressional negotiations. However now, Congress leaders hope to get funding passed before they go on recess on August 8. If passed into law, it will be a huge victory for chipmakers like Intel, Taiwan Semiconductor etc.
A Reuters story suggested that the ECB may look at a 50bps rate hike on Thursday. Until now, most policymakers (such as the Governor of the Bank of Finland, Olli Rehn, last week) have pledged in favor of a 25-basis points interest hike. But market pressure is increasing in favor of a bolder move due to concerns the ECB is behind the curve. Our baseline given recent forward guidance is that the ECB will commit to 25 basis points in July (this can be considered as an « appropriate step ») before a larger move in September – most likely a 50-basis points interest hike. The ECB Governing council will also likely agree on a deal to make new bond purchases conditional on the Next Generation EU targets (the stimulus plan unveiled after the Covid). This is still unclear how much details will be announced about the anti-fragmentation tool, however. At the moment, the money markets bet on about 100 basis points ECB rate hikes in September. This is optimistic.
The People’s Bank of China (PBoC) kept the one-year and five-year loan prime rates unchanged at 3.70% and 4.45% respectively as expected. Still, economic and financial risks are rising. New Covid cases have reached close to 1000, again questioning the commitment to Zero-Covid policy. Meanwhile, property market shocks continue to send ripples after homebuyers were reported to be boycotting mortgage payments. Hopes of an RRR cut arebuilding to replenish liquidity into the banking system.
The iron ore price (SCOA, SCOQ2) rose 2.3% but it holds under $100. It was boosted by Vale (VALE) the world’s second biggest iron ore supplier cutting its annual production guidance to produce 310-320 million metric tons of iron ore in 2022, compared with a previous forecast of 320-335 million tons. However, the iron ore traders and investors await the Australian Port Headland export numbers to be released. The last export figures showed Australian iron ore exports rose 2.5% m/m. We will need to see shipments rising to China before we can expect the iron ore price to move up.
U.S. housing starts fell to 1.559 million in June, its lowest since September. Demand is easing from the pandemic era boom and with mortgage rates higher, many buyers are staying on the sidelines for now. This is key for the Fed with Waller hinting earlier that they will be watching it to consider if tightening needs to be more aggressive. This has again boosted the possibility of a 75bps rate hike next week rather than 100bps at this point, but the doors of a 100bps are also still not completely shut.
BHP managed to achieve full year production guidance for iron ore and energy coal, despite China being in lockdown, while nickel production was lower than expected due to an outage. Overall, BHP’s preliminary full year results (to June 30) showed the miner was resilient in 2022, as it receiving higher realised prices in 2022; ex iron ore (falling 13%). however, most of their growth came from metallurgical and thermal coal prices rising, 225% and 271% YoY. So it’s safe to say, other global coal companies might see the similar theme, while we at Saxo expect higher coal prices for 2023. Meanwhile, Nickel and Copper prices were up 43%, 9% - this is an indication of what we can expect from other companies in the field. We also think a record and a special dividend will likely be announced as BHP will receive $8-8.3 billion for the sale of its oil and gas assets to Woodside, and a $1.3 billion for selling 80% of its coal assets. Full final financial year results will be released August 16. For 2023, BHP flagged lower production, lower prices will be expected, along with supply chain issues, and rising costs. And revenue will also be subdued as demand remains turbulent from Chinese.
Tesla (TSLA) will be the key company earnings to watch today, both because it signals the risk sentiment and because it is one of the big constituents of S&P500. Covid lockdowns in China have severely constrained the EV-maker in Q2 with deliveries falling q/q for the first time in more than two years. At the same time, the EV-maker has production difficulties at its factories in Texas and Germany, and competition is heating up from most notably Volkswagen and BYD. Also worth watching today will be earnings from the energy sector as Baker Hughes (BKR) reports after rival Halliburton (HAL) beat yesterday and guidance for ‘multi-year upside’ in oil. Semiconductor company ASML will also be on watch after warnings from Micron and Samsung previously.
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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.
