Global Market Quick Take: Europe – June 20, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Chinese equities set negative mood

US equities are coming back from Juneteenth National Independence Day yesterday with the big question being whether there is more momentum or profit-taking will begin to kick following strong gains this year. Chinese equities sold off yesterday and continued in today’s session indicating that expectations for stimulus might be too high in markets as the manoeuvre room for the Chinese government is more limited compared to the past. Today’s key macro figures in the US are US May housing starts and building permits set for a solid month unchanged from the prior month.

FX: Dollar remained supported in thin overnight markets; USDJPY broke above 142

With US markets closed overnight, volumes were thin and dollar traded sideways. NOK was the underperformer on the G10 board and AUD and NZD also underperformed with China stimulus hopes getting dashed with no announcements out yet. AUDUSD reversed back from 0.69 handle to 0.6850 and RBA’s June meeting minutes will be the focus today. EURUSD also gave up the 1.10 handle and traded at 1.0920 with the ECB split emerging (read below) while GBPUSD fell below 1.28. USDCAD got some bids amid a soft Canadian PPI indicating the Bank of Canada may not need to hike as much and oil prices also softer on Chinese stimulus disappointment. USDJPY finally broke 142 to test key resistance at 142.25 in early Asian hours and will be key to watch as the Treasury market opens today.

Crude oil: China stimulus disappointment weighs

Crude oil prices fell on Monday as investors became pessimistic about China’s stimulus announcement having waited too long. The Chinese government has been debating what additional support it can provide as growth struggles to gain traction. Sentiment was further hit by reports that Iraq and Turkey are set to meet to discuss reopening a nearly 500kb/d pipeline that was shut in March. WTI futures dropped closer to $71 in thin markets while Brent reversed from $77 to close in on $76/barrel. Focus will now turn to Chair Powell’s testimony this week, and oil traders may also be watchful of Tropical Storm Bret that could strengthen to Hurricane just outside US Gulf.

Gold: risk of rate hikes weigh

Gold trades softer for a second day with the risk of additional rate hikes weighing on a market that has been drifting lower during the past month with longs scaling back amid uncertainty about the timing of peak rates in the US and surging stocks reducing demand for alternative investments such as bullion. Looking ahead, Fed Chair Jerome Powell will give his semi-annual report to Congress on Wednesday while James Bullard, the St. Louis Fed chair and his counterparts in New York and Chicago will be speaking at various events. Given the focus on the FOMC and its stated data dependency, the market will be watching these for signs of what may happen next. For the current downtrend to be broken, gold would need a break above $1984, a recent high, while support has been established around $1930. 

The US Treasury will sell $173 billion worth of bills, and Federal Reserve’s Williams will speak later during the day (2YYM3, 10YM3, 30YM3)

The spread between ten- and two-year yields fell, hitting -97bps on Friday as Fed members Waller and Barkin said additional rate hikes might be needed. The University of Michigan's 1-year inflation expectations fell from 4.1% to 3.3%, but the 5 to 10-year inflation expectations remained at 3%, showing markets forecast stickier inflation. Treasuries yields remain in an uptrend, and we expect them to continue to soar until July’s FOMC meeting, with 2-year yields heading towards 5%. Today the US Treasury will sell $173 billion in Bills.

The German yield curve continues to invert as the ECB prepares for more hikes (IS0L:xetr, D5BC:xetr)

Two-year Schatz are testing resistance at 3.13% as the market prepares for more ECB hikes. We expect Schatz yields to continue to soar towards 3.35% as the July ECB meeting approaches. Ten-year yields remain rangebound but are looking to break resistance at 2.5%. Today Germany sells 2-year Schatz. Any weakness in demand might push yields to test new resistance at 3.25%.

Gilts selloff intensifies as markets price 150bps rate hikes by February next year (GB00BK5CVX03 , IGLS:xlon)

Two-year Gilts underperformed other maturities yesterday, with yields raising by 15bps and breaking above 5% for the first time since 2008. The selloff might continue today as the DMO prepares to sell new 5-year Gilts through an auction. Investors might not be motivated to buy gilts amid rampant inflation resulting in a deeper selloff in the secondary market. The 2-year swap spread remains elevated indicating that front yields might rise further. After breaking above 5%, two-year gilts will find support at 5.55%. The UK CPI numbers will be released tomorrow, if inflation surprises on the downside, we might see rate hikes best retracing, weighing on yields. Yet, we do not expect 2-year yields to fall significantly below 5%, as they remain rich compared to their swap.

What is going on?   

ECB split beyond July starting to emerge

There was plenty of commentary from ECB yesterday, and a split between doves and hawks is starting to emerge which could spell bond volatility. A July hike remains likely, but the path ahead could get choppier. While Chief Economist Lane said that July hike remains appropriate, his comments from there on were less hawkish as he hinted that September is far away and “we will see.” Meanwhile, Schnabel seemed more inclined towards keep hiking rates, even if “need to err on side of doing too much.” Elsewhere, Greek central bank head Stournaras said that a further decline in inflation is expected.

Warren Buffet increases stake in Japanese trading houses again

Japanese stocks have been on a tear, up nearly 28% this year. Billionaire investor Warren Buffett's Berkshire Hathaway added a spark in April when he traveled to Tokyo and increased his investment in five of Japan's trading houses. A press release from the company Monday detailed that Buffett has further increased his stake in the trading houses, a sign that the billionaire has become more comfortable deploying capital in Japan than in Taiwan or China. Berkshire said its stakes in trading houses Itochu, Marubeni, Mitsubishi, Mitsui, and Sumitomo were raised to an average of 8.5%. It also hinted that Hathaway may increase its holdings up to a maximum of 9.9% in any of the five investments, depending on the price.

Airbus gets a record 500-plane order from Indian airline

At the Paris air show Indian airline IndiGo made a record order for 500 planes from Airbus, in an indication of the extreme demand coming from the world's most-populous nation. It surpasses the previous record order of 470 planes by Air India previously this year, and is a huge bet from IndiGo on travel demand into the next decade, further reaffirming our upbeat view as discussed in this video. The expected delivery date for the order is between 2030-2035.

What are we watching next?

UK May CPI Wednesday ahead of Thursday Bank of England meeting

Wednesday sees the release of the May UK CPI data after the April data showed a shocking acceleration in core inflation to 6.8% year-on-year, a new cycle high, versus the 6.2% that was expected and 6.2% in March. That saw BoE rate hike expectations for coming meetings notched higher, with last week’s strong revisions to April payrolls and jobless claims data and far hotter than expected wage growth data (up 7.2% year-on-year) adding further fuel to expectations that the Bank of England will have to deliver far more tightening. This Thursday’s Bank of England meeting will have to see the bank doing some soul-searching on its assumptions that the hiking it has done thus far will provide the necessary traction to begin slowing inflation and delivering a far more hawkish message to meet the market’s forward expectations. The BoE is priced to hike 30 basis points a this meeting and almost 90 basis points through the next three meeting, suggesting that some believe the bank will deliver larger hikes again. In all, the Bank is priced to hike 140 basis points through next Thursday for a “terminal rate” of 5.84% up some 100 basis points since May.

Technical update

• Nasdaq 100. Rejected at resistance at 15,265. Overbought. Correction likely down to around 14,500. RSI supports higher Nasdaq
• S&P 500. No strong resistance until 4,546
• DAX Struggling for momentum. Possibly target 16,600
• EURUSD back above 1.09. Potential to 1.1180
• GBPUSD Upside potential to 1.2940-1.3050 but support at 1.2667 could be tested before next move up
• GBPJPY above resistance at 180. Extremely stretched. Overbought. Expect a correction
• USDJPY testing strong resistance at 142.25. A correction should be expected before
• Grains building uptrend. Wheat short-term potential to 750-800

Earnings to watch

Our next earnings focus is FedEx reporting todayafter the US market close with analysts expecting revenue at $22.7bn down 7% y/y and EBITDA at $2.8bn down from $3.3bn a year ago as pricing in global logistics is coming down from elevated levels during the pandemic as global supply chains are coming back to operating smoothly again.

• Monday: Vantage Towers
• Tuesday: FedEx
• Thursday: Accenture, Darden Restaurants, FactSet
• Friday: Oracle Japan, CarMax

Economic calendar highlights for today (times GMT)

• 0900 – Eurozone April Construction Output
• 1230 – US May Housing Starts
• 1230 – US May Building Permits
• 1230 – Philadelphia Fed June Non-Manufacturing Activity
• 2000 – USDA Weekly Crop Condition and Planting Progress (delayed from Monday)