Global Market Quick Take: Europe – July 11, 2023

What is our trading focus?

US and European equities (US500.I, USNAS100.I, and EU50.I): First inflation, then earnings

The US equity market rose yesterday with S&P 500 futures rallying 0.8% from the intraday lows into the close ending three trading sessions of straight losses driven by short covering in the most shorted stocks and gains in stocks with the highest upside revision to earnings. The market is in waiting mode ahead of tomorrow’s US June inflation report and the Q2 earnings season on Thursday with earnings from PepsiCo and Delta Air Lines. STOXX 50 futures in Europe rallied for the second straight session yesterday and is extending the momentum this morning up 0.7% trading around the 4,306 level driven by more positive sentiment in China following the government’s decision to add more support to the real estate developer industry.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets rally as China extend financial supports to property developers

Hong Kong and Chinese equities rallied for the second day in a row as the People’s Bank of China and the National Financial Regulatory Administration jointly announced extending the 16-point financial measures to support the property sector by one year to December 2024. The Chinese financial authorities also asked banks to extend outstanding loans to developers that mature before the end of 2024 for another year beyond their original maturities. The Hang Seng Index gained 1.5%and the CSI300 Index added 0.5%. EV makers outperformed, with Nio (09866:xhkg) surging 11.5% and XPeng (09868:xhkg) advanced 9.2%. Alibaba continued to rally, rising 2.4%. In the A-share market, automakers and semiconductors led the market higher.

USD under broad pressure, led by USDJPY correction

The US dollar index (DXY) fell below the June lows, opening up the range toward the cycle lows from February and April near 100.80, with EURUSD rising above 1.1000.  The dollar weakness was broad but was led by the steep sell-off in USDJPY. The Japanese yen continues to strengthen broadly, helped yesterday and overnight by the drop in US Treasury yields. In addition, a Bank of Japan report highlights moderate upward pressure in wages across all regions in Japan. USDJPY fell through 141.00. New initiatives from China to shore up the property market overnight saw USDCNH selling off toward 7.20.

Crude oil: challenging resistance ahead of monthly oil market reports

Crude oil prices remain firm with Brent continuing to challenge resistance in the $78.50-75 area, and despite continued macroeconomic headwinds, a break may attract additional short-covering and fresh momentum buying from funds. OPEC and the IEA will issue their monthly oil market reports Thursday while the EIA will release its Short-term Energy Outlook later today. The market will be looking out for any change in their demand growth outlooks, not least considering how the bulk of the 2023 growth has been penciled in to occur during the next few months.

Gold: low risk appetite ahead of CPI despite softer dollar and yields

Gold continues to toy with resistance around the 21-day moving average, today at $1928, supported by a softer dollar and lower US bond yields. However, the question remains how much risk appetite can be mobilised ahead of Wednesday’s key CPI print. Resistance at $1935 followed by $1950.

US Treasury yields retreat, but this week’s CPI and PPI numbers remain in focus (2YYN3, 10YN3)

Yields retreated yesterday as markets considered deflationary trends. The belly of the curve leads gains with 5-year yields dropping almost 12bps. Yet, several Fed’s speakers supported the dot plot yesterday, showing two more rate hikes, putting yesterday’s rally at risk. Core CPI numbers on Wednesday and PPI data on Thursday are in focus. With unemployment rate stable and inflation elevated, more tightening might be suitable in the eye of the central bank, forcing yields higher.

Today’s UK labour data might weight on Gilts (IGLS:xlon, GLTS:xlon)

Today’s labour data are expected to see the unemployment rate unchanged and wage data remaining stable above 7%. That could be enough to see yields resume their rise ahead of the BOE August’s meeting. The 2-year UK swap spread remains elevated indicating that there might be more room for 2-year gilts to rise to 5.50%.

What is going on?

UK labour market/earnings data for May and June

The UK released a somewhat confusing mishmash of labor market and earnings data this morning. On the negative side, the Jun. Jobless Claims Change registered an ugly turn to +25.7k from –22.5k (revised down from –13.6k) in May, while June payrolled employees fell –9k vs. +23k expected. The May ILO Unemployment rate rose to 4.0% versus 3.8% expected and 3.8% prior. On the brighter side, despite that unemployment rate drop, the May Employment Change registered a +102k gain vs. +85k expected. May Earnings were strong again and the April wage data was revised higher: May earnings ex-bonus rose 7.3% YoY vs. 7.1% expected and 7.3% in April (revised up from 7.1%).

China announces new relief measures for property market

China announced a one-year extension of loan relief to developers overnight. This after a Monday move by the PBOC and regulators to state that the intent is to ensure the homes currently under constructions are delivered to buyers. The move and the sense that China is mounting a concerted effort to bring support to the property sector saw risk sentiment brighten in China overnight.

Iron ore and copper’s muted response to China property relief measures

Iron ore futures in Singapore trades back above $105 after receiving a small boost from overnight news that Beijing had stepped up relief measures for property developers. Beijing has in recent weeks eased monetary policies but with recent economic data weakness raising the risk of deflation, some skepticism remains on whether recent announcements will be enough to steady the economy. Having recently found support at $3.70, copper prices recovered further before finding resistance ahead of the 200-DMA, currently at $3.835

Nasdaq 100 Index to reduce concentration through weighting adjustment

The Nasdaq 100 index is preparing for a significant adjustment to address the issue of concentration. Currently, seven stocks—Microsoft, Apple, Nvidia, Tesla, Alphabet, Meta Platforms, and Amazon—hold a substantial 55% of the index's total weight. To tackle overconcentration, a special rebalance is scheduled before the market opens on Monday, July 24. The aim is to redistribute the weights and reduce concentration. The new weightings will be announced on Friday, July 14. It's important to note that no stocks will be added or removed from the index during this process.

Currently, the weightings of the “Magnificent Seven” are as follows: Microsoft at 12.9%, Apple at 12.5%, Alphabet at 7.4%, Nvidia at 7.0%, Amazon at 6.9%, Tesla at 4.5%, and Meta Platforms at 4.3%. The rebalance will likely result in a reduction in the combined weight of the top five companies, which currently stands at 46.7%, down to 38.5%. Additionally, the weight of Tesla may also experience a slight decrease as component stocks outside the top five market cap companies are not supposed to have a weight exceeding 4.4%.

Technical Analysis Update

• S&P 500. Potential upside to 4,546 but uptrend weakening. Drawing a double top? Confirmed below 4,328
• Nasdaq 100 Once again rejected at strong resistance at 15,265. Close above potential to 15,653-15,882. Double top pattern? Confirmed by a close below 14,687
• DAX below support at 15,625. In down trend. Minor support at 15,482. Could drop to 15K
• AEX25 Testing key support at 748. Next support at 735
• CAC40 Range bound between key resistance at 7,403 and key support at 7.080.
• EURUSD uptrend resumed. Resistance at 1.1180. Above could lead to 1.15
• GBPUSD resuming uptrend. Potential to 1.3025
• USDJPY Correction unfolding. Below support at 142.25.Could drop to 139.18. Medium term uptrend intact
• EURJPY correction unfolding. Support at 154.40. Could dip to 152.20
• Gold bottom and reversal pattern indicating bounce to 1,964 likely
• US 10-year Treasury yields in uptrend. Correction no 3.88 likely. Upside potential to 4.3

What are we watching next?

US June CPI tomorrow could set the tone for some time

The US is set to report June CPI tomorrow, with the headline number expected to drop all the way to 3.1% YoY from 4.0% in May due to basing effects, as the worst of the spike in gasoline prices hit in June of last year. The core “ex Food and Energy” inflation is expected at +0.3% MoM and +5.0% YoY vs. 5.3% YoY in May and a peak rate last September of 6.6%. The Fed’s favoured PCE inflation data series has shown somewhat stickier core inflation than this CPI data series from the Bureau of Labor Statistics.

New Zealand’s central bank meets Wednesday

The RBNZ is set to meet tomorrow (0200 GMT) and is expected to stand pat at its current level, with the guidance interesting and the upcoming Q2 CPI report on July 18 likely carrying the most weight in determining whether the RBNZ continues to maintain the current 5.50% policy rate.

Earnings to watch

The Q2 earnings season starts this week with US banks such as Wells Fargo, JPMorgan Chase, and Citigroup kicking off the earnings season on Friday. Read our earnings preview here.

This week’s earnings releases:

• Thursday: Fastenal, Delta Air Lines, Progressive, PepsiCo, Cintas, Conagra Brands
• Friday: Wells Fargo, JPMorgan Chase, BlackRock, UnitedHealth, State Street, Citigroup

Economic calendar highlights for today (times GMT)

• 0900 – Germany Jul. ZEW Survey Expectations
• 1000 – US May NFIB Small Business Optimism
• 1600 – EIA's Short-term Energy Outlook (STEO)
• 1700 – US Treasury to auction 3-year notes
• 2030 – API's Weekly Crude and Fuel Stock Report
• 0200 – New Zealand RBNZ Rate Announcement