Financial Markets Today: Quick Take – July 18, 2022

Financial Markets Today: Quick Take – July 18, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  US equity futures traded higher overnight following last week’s roller-coaster with gains supported by a weaker dollar and stronger Asian markets after Chinese regulators and central bank offered more support with a funding crunch across the property sector and fresh covid cases posing risks to China’s economy. Commodities trade higher as a result with oil receiving a bid after President Biden, as expected, left the Middle East with no promise of extra barrels. The week will be thin on data and no FOMC comments as Fed members are in a blackout period ahead of the July 27 meeting. Focus instead on ECB and its potential first-rate hike since 2011, US corporate earnings season and Russian gas supplies to Europe.


Note: The Saxo Market Daily Podcast will return on Monday July 25

What is our trading focus?

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

US equity futures trade higher amid scaled back bets on how aggressively the FOMC will hike interest rates on July 27 and after China stepped up its efforts to support its beleaguered property sector and the economy in general. The corporate earnings season will see results from a very diverse group of companies this week with focus today on IBM as well as Bank of America and Goldman Sachs.

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

Hang Seng Index (HSI) rallied 2.58% overnight, the most in three weeks, after Chinese regulators  asked lenders to extend loan to eligible developers in order to defuse a growing consumer boycott of mortgage payments by urging banks to increase lending to developers so they can complete unfinished housing projects. Country Garden surged 8.5% to HK$3.59 while China Overseas Land added 4.3% to HK$23.15. China Resources Land climbed 3.9% to HK$34.70. Meituan jumped 6.8% to HK$191.30, while Alibaba Group Holding added 1.7% to HK$103.90. China Merchants Bank rose 2.9% to HK$42.55. In addition the PBOC’s Govenor Yi Gang said the central bank will step up with stronger support for China’s struggling economy amid a covid crisis not yet under control. 

The dollar dips ahead of ECB and BOJ meetings

The greenback trades lower after hitting multi-decade highs against the euro and the yen last week, the change in direction being driven the market has scaling back bets on how aggressive the Federal Reserve will hike rates when they meet on July 27. In addition, with no comments from FOMC members as we enter the blackout period ahead of the meeting, the attention will instead turn to ECB and BOJ meetings on Thursday with the European central bank expected to hike rates for the first time since 2011.  The gas market will also hold a major sway on the euro with the market waiting to see whether Gazprom will resume flows on the Nord Stream 1 pipeline when maintenance ends around July 21. No flows will add further pressure on Europe and with that the euro. A break above €1.02 will as a minimum be needed to start a potential run on short euro positions. 

Crude oil (OILUKSEP22 & OILUSAUG22)

WTI and Brent crude oil futures trade higher after President Biden, as expected, left the Middle East with no promise of additional barrels to help suppress record high US gasoline prices. Instead, the Saudi ministers said that oil policy decisions will be taken based on market moves and within the framework of the OPEC+. According to the current OPEC+ agreement, the four Gulf countries and OPEC members that participated in the meeting can boost production by around 1 million barrels per day by the end of next month. Libya meanwhile has said plans to restart all its oil exports and production as a recent blockade looks set to be lifted. Gasoline prices have eased recently on a combination of lower oil prices and lower refinery margins (crack spreads). The same goes for diesel although last week saw the crack spreads move higher again, highlighting a continued tightness.

Gold, silver and copper trade higher supported by weaker dollar and China

The yellow metal has bounced back after twice finding support in the $1700-area last week, supported by profit taking on long dollar positions ahead of Thursday’s ECB meeting which is expected to yield the first-rate hike since 2011 (see below). Easing selling pressure from speculators also expected after 24k lots selling in the week to July 12 brought the net back to neutral. Increased short positions in silver and platinum also reflecting the latest onslaught with a change in the technical and or fundamental outlook potentially supporting a rebound on short covering. In addition, copper interestingly saw net buying despite falling further as recent short sellers started to scale back their exposure. HG copper found support at $3.15/lb last week, a key level representing a 61.8% retracement of the 2020 to 2022 rally. 

What is going on?

Weeks of heavy commodity selling showing signs of easing

Speculators of hedge funds selling slowed in the week to July 12 according to the latest Commitment of Traders update from the US CFTC. Since early June when the FOMC 75 basis point rate hike led to an increased focus on recession, heavy selling was seen across all sectors with the Bloomberg Commodity Spot index falling by 19%. The net long across 24 major commodity futures dropped to 900,000 lots, the lowest since June 2020 but the 52k lots reduction was well below the 190k average seen during the previous four weeks. Speculators turned net buyers of crude oil, copper and sugar with selling concentrated in natural gas, soybeans, corn, wheat and coffee. The gross position, ie the long and short was cut by 177k lots, reflecting a high degree of uncertainty and vacation season lowering the general level of risk appetite. 

 

What we are watching next?

Expect the European Central Bank to finally lift rates this Thursday

This will be the first time since 2011. Based on the minutes of the June ECB meeting and recent comments from ECB’s president Christine Lagarde, the central bank plans to hike interest rates by 25 basis points this week. This is too little and too late. The first June eurozone CPI estimate is out tomorrow. The economist consensus expects a new jump at 8.6 % year-over-year. This is painful. We believe the window of opportunity to hike interest rates is rather limited. According to the new forecasts from the European Commission, the eurozone GDP is likely to advance 1.4 % next year – down from May predictions for gains of 2.3 %. This is still optimistic. We forecast GDP growth to be lower, around 1 % in 2023. Lower growth momentum will probably be reflected in the ECB’s projections towards the end of the year. This means the ECB has roughly six months to hike rates before a potential policy pivot towards a more dovish stance (on the condition that inflation is falling by then). With political risk rising in Italy again, there will be a strong focus on the ECB’s anti-fragmentation tool too. We doubt the ECB will disclose all the details this week. There are still ongoing discussions between ECB staff and governing council members about how to define a ‘neutral’ spread (in other words, could a political crisis in Italy justify the use of the anti-fragmentation tool, for instance?). Finally, the market will also look closely at any comments regarding the sharp depreciation of the euro against the dollar. But with investors now considering a 75-basis points hike (or above) by the U.S. Federal Reserve this month, we don’t see any catalyst for upside for the euro in the short-term.

The Italian PM Mario Draghi will tell lawmakers if he will resign on Wednesday

This could open the door to early elections within 70 days. According to the latest polls, a center-right tie-up led by Giorgia Meloni’s Brothers of Italy would win if its members stick together. This would be a very bad news for the eurozone at the worst time ever (lower growth, fragmentation risk and risk of energy crisis this winter).

Australian commodity companies' quarterly results

Major Australian commodities companies Q4 results will be watched this week; for clues as to what we can expect from Australian financial year results, out next month. BHP (BHP) reports quarterly numbers are due Tuesday July 19. Given Rio Tinto’s (RIO) quarterly results last week showed costs are moving higher and output is lower, while demand is lacklustre, much of the same themes will be expected from BHP this week. Other results to watch include Lynas Corp (LYC) in rare earths and Allkem (AKE) in lithium. We think sell side analysts/investment banks may start to downgrade commodity stocks like these facing headwinds. Inversely, coal giant Whitehaven Coal’s (WHC) quarterly report will likely come with an upgrade amid tight coal supply; we think analysts will also upgrade FY forecast for coal companies. Finally, oil companies like Beach Energy (BPT), and Woodside (WDS), and Santos (STO) reporting Q4 on July 20th and 21st will be watched closely after the oil price has fallen about 20% in 5 weeks.

Earnings Watch

This coming week we will see results from a very diverse group of companies.  A preview of Q2 earnings releases can be read on the trading platform or here.

  • Monday: Big banks continue with reports today, with releases from Bank of America and Goldman Sachs with IBM also in focus.
  • Tuesday: Johnson & Johnson, Netflix and Lockheed Martin
  • Wednesday: Tesla and United Airlines
  • Thursday: AT&T, Union Pacific and Travelers
  • Friday: American Express and Verizon

Economic calendar highlights for today (times GMT)

0800 – Italy and Spain May Trade Balances
0900 – BOE's Saunders Speak
1000 – Portugal June PPI
1215 – US June Housing Starts

The week ahead from Saxo’s APAC team
Saxo Spotlight: What’s on investors and traders radars this week?

Commodity Weekly
Peak recession fears bring commodities down to earth

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

Apple Sportify Soundcloud Stitcher

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
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.