Financial Financial Financial

Financial Markets Today: Quick Take – August 5, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Global markets are in a complacent mood even as investors seem to be hunkering down for an incoming recession, as crude oil prices continue to dip, hitting the lowest levels since the Russia invaded Ukraine. The VIX volatility measure is trading near multi-month lows despite geopolitical tensions and ahead of the July US jobs and earnings data today, the highlight of the week’s heavy data calendar.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

S&P 500 futures were choppy yesterday ending unchanged for the session while the index futures are pushing higher this morning trading around the 4,161 level. The decline in oil prices and interest rates moving lower again are both helping sentiment. Unless the US jobs report and hourly earnings disappoint later today then momentum could extend into the weekend and may attempt for a test of the 4,200 level in S&P 500 futures.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

Semiconductor names continue to rise in A-shares as well as Hong Kong trading, as investors anticipate more support from the Chinese government to bolster the development of this strategic industry amidst the escalation of tensions over the Taiwan Strait, SMIC (00981:xhkg) +4.8%, and Hua Hong (01347) +7.7%. Market sentiment was helped by the report that China’s infrastructure investment is expected to grow by 11% in 2022. Digital renminbi concept stocks soared in mainland bourses in anticipation of more policy support.  The CSI300 Index gained 0.4% while Hang Seng Index was flat. Despite reporting better-than-expected results, Alibaba (09988:xhkg/BABA:xnys) fell 2.6% following news report that Softbank had raised as much as $22 billion from sale of Alibaba shares through derivatives that allow delays in the handover of shares for two years and Softbank to hold onto the voting rights till then.

GBP pairs after dovish hike from BoE yesterday

See more on the BoE announcement below, as sterling fell on the back of yesterday’s meeting, interestingly despite only minor adjustments by the end of the day to the forecast policy tightening path from here from the BoE (after considerable intraday volatility). GBPUSD fell from near 1.2200 at the moment of the decision to well below 1.2100 before righting itself and trading back to almost unchanged on the day near 1.2150, while EURGBP rallied sharply from near range lows to above 0.8400, if still shy of the 0.8445 200-day moving average.

USD pairs over US jobs data today

The USD was mixed yesterday, staying firm against commodity currencies as prices for crude oil and other major commodities suggest a market gearing up for recession risks, but lower – after an intraday rally – against the euro and the JPY. If the US jobs data solidifies the view that the US labor market is softening and pushes yields lower, the greenback may see an intensification of this pattern, with USDJPY particularly yield-sensitive. A far stronger than expected jobs report together with a considerable upside surprise in the average hourly earnings data in particular could see the USD broadly stronger. EURUSD needs to resolve one way or another soon after nearly three weeks in the 1.0100-1.027

Gold breaking above 1,780 resistance

With rising geopolitical tensions following Pelosi’s visit to Taiwan, the demand for safe haven Gold has picked up. The strategic response will be key to watch on a medium-term basis, with China possibly choking off chip supplies. Gold has cleared the key $1780 resistance and the next test will be at the psychologically important 1800 level. A softer USD and lower yields this week have also helped support investor appetite.

Crude oil prices drop further. (OILUKOCT22 & OILUSSEP22)

Crude oil prices have now dipped to their lowest levels since Russia invaded Ukraine as weaker demand and improving supply are seen in the short term. WTI futures dipped below $90/barrel to $88/barrel, breaking a key support level. Brent futures were also seen below $95/barrel in early Asian hours. While demand destruction fears have been creating downside pressures, clear guidance for a recession by the Bank of England as well as ECB’s downbeat outlook has amplified concerns. Meanwhile, a ramp-up in Libya’s supply as well as optimism on the Kazakhstan terminal have eased concerns for a near-term supply shortage.

US Treasuries (IEF, TLT)

US yields trade quietly ahead of the US jobs report, where the nonfarm payrolls and average hourly earnings data are important inputs for US yields after the entire curve lifted sharply on Wednesday on the far stronger than expected July US ISM Services survey. To full reverse the recent dip in yields at the longer end of the curve, the 10-year benchmark needs to pull back above the 3.00% area, which appears a tough task as long as the market continues to mark the odds higher of an incoming recession as the 2-10 yield curve inversion this week has fallen to a 22-year low.

What is going on?

Bank of England with a very dovish hike

The Bank of England hiked rates by 50 basis points to 1.75%, as the majority expected, with one dissenting voter looking for a smaller hike. The move was the largest rate hike since 1995. More importantly, they forecast an outright recession to start beginning in Q4 as inflation is set to peak at 13% later this year even if it is forecast to fall below target in three years. The recession is forecast to last five quarters after starting in Q4 2022, suggesting the tightening from BOE may slow down from here. At the same time, BoE plans to reduce its balance sheet by £80 billion over 12 months (range of 50-100 billion had previously been aired) starting in late September.

Alibaba earnings beat market expectations

Alibaba (09988:xhkg/BABA:xnys) reported better-than-expected June quarter (Q1FY233) results.  Revenues came in at RMB205.6 billion, flat from a year ago but 1% above Bloomberg consensus.  Non-GAAP EPS declined to RMB11.73 but 14% above consensus. Adjusted EBITA and Non-GAAP net profit were RMB34.4 billion (-18% YoY) and RMB31.4 billion (-31% YoY) but both beating expectations (by 25% and 14% respectively vs Bloomberg consensus). The better-than-expected results came primarily from cost cutting. The losses in the companies’ new ecommerce initiatives, such as Taobao Deals, narrowed. The company’s business was badly affected by the lockdowns in April and May but it began to recover from late May. The management said that the recovery continued and had become more apparent in July but customer demand was still weak overall and it would take time to fully recover.  During the quarter, Alibaba repurchased a total of USD3.5 billion worth of shares and still has an outstanding authorization to repurchase USD12 billion more of shares until March 2024.

Tesla shareholders approve a stock spilt to attract more investors

Tesla (TSLA) shares extended their bullish run and now trade up 50% from the May low. Tesla nudged up in the regular session and after the market close, after shareholders approved a 3-for-1 stock split, in a bid to attract more retail investors. The split will bring down Tesla’s spun-off new shares, down to the $300 range. At Tesla’s AGM Musk assured investors that inflation is not affecting the business as much as it did six months ago, Meanwhile Musk is pushing ahead with making in-house battery cells to control costs where possible. And in terms of new revenue streams, the Cybertruck is said to be on track to start production mid-next year. From a technical perspective, Tesla’s shares are in overbought territory, meaning they could be due for a pull back.

What are we watching next?

US July jobs report up today

After another elevated weekly initial jobless claims reading, the market may be leaning for a somewhat softer non-farm payrolls change data point in today’s US labor market data. As well, the Household Survey used to calculate the participation rate and official Unemployment Rate (expected at 3.6% again for July) has shown a stagnation that is not evident in the Establishment Survey used to calculate the non-farm payrolls data. Expectations for the nonfarm payrolls change are for a number near +250k versus a 3-month average around +375k, while the Average Hourly Earnings are expected at +0.3% MoM and +4.9% year-on-year vs +5.1% YoY in June. An upward surprise in earnings with a negative surprise in payrolls would be an interesting combination.

Earnings to watch

Today’s focus in North America is Canadian Natural Resources which is expected to post strong results, while here in Europe Allianz has already reported earnings with operating income beating estimates at €3.5bn vs est. €3.3bn. Allianz is also launching another buyback programme which is preferred over M&A transactions at this point; the Q2 result could lift the entire European insurance industry.

  • Today: Canadian Natural Resources, Suncor Energy, Allianz, Deutsche Post, Naturgy Energy Group

Economic calendar highlights for today (times GMT)

  • 1115 – UK Bank of England Chief Economist Pill to speak
  • 1230 – Canada Jul. Employment Data
  • 1230 – US Jul. Change in Nonfarm Payrolls
  • 1230 – US Jul. Unemployment Rate
  • 1230 – US Jul. Average Hourly Earnings
  • 1400 – Canada Jul. Ivey PMI

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.