Financial Financial Financial

Financial Markets Today: Quick Take – July 21, 2022

Macro 7 minutes to read
Saxo Strategy Team

Summary:  US equities were higher for the second consecutive day, but with the Fed still in a blackout period, the focus is squarely on Europe. Some concerns have been eased with gas supply on Nord Stream 1 pipeline being restored, but plenty of risks with the ECB meeting and Italian political saga unfolding in the day ahead. The Bank of Japan maintained its dovish policy, as expected. US 10-year Treasury yields jumped higher to 3.04% as Europe opened, but crude oil prices were lower amid weak demand concerns. On company earnings, hiring freezes appear to be broadening as cost pressures reign, and American Air (AAL), Travelers (TRV), Domino’s Pizza (DPZ) and Nucor (NUE) will be on tap today.


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)


Cautious gains were in the US equity futures in the overnight session continued, after Tesla reporting a Q2 earnings beat. Still, risk sentiment remained fragile ahead of the European Central Bank lift-off likely in the day ahead, and the Italian political crisis likely to unfold further. More job cuts continue to be announced, signaling cost pressures will remain the key highlight of the Q2 earnings season. Russia’s resumption of gas supply on the Nord Stream 1 pipeline soothed some fears, but uncertainty is likely to continue and pressure on Europe is only going to increase into the winter.

EURUSD now faces political headwinds

EURUSD retreated from 1.0273 highs printed on Wednesday as the Italian political crisis unfolded, but some gains returned overnight as Russian gas supplies were restored. Still, with the ECB meeting up next and Italian Prime Minister Mario Draghi’s government fractured with three parties boycotting a confidence vote, the pain for EUR doesn’t seem to be over. Draghi is expected to resign on Thursday, and if that gets accepted, that will prompt fresh elections and mean weak policy credibility until a new government comes in. This comes on the heels of an expected rate hike from the European Central Bank, which is likely to be a worry for Italian bonds as well. A test of 1.0350 resistance therefore seems unlikely for now. Even if we do get there, EURUSD will likely start to get worried about further recession fears sooner rather than later.

Oil (OILUKSEP22 & OILUSAUG22)

Oil prices were lower again with WTI futures now back below $100/barrel on fears of demand destruction amid high inflation and interest rates. Brent crude oil held up at the $106/barrel level. US gasoline demand remains below where it was this time two years ago as historically high prices keep more drivers off the road than Covid-19 did in the summer of 2020. Meanwhile, US gasoline stockpiles climbed by 3.5 million barrels last week, according to the EIA, as elevated pump prices continue to weigh on demand. The restart of Russian gas flows has also helped to calm the oil market.

Tesla produces a record number of EVS, but sells less while dumping 75% of Bitcoin to shore up cash

Tesla (TSLA) sold 254,695 EVs in the quarter ending June 30. That’s a 27% jump from same quarter last year, but a 18% drop from the prior quarter, meaning EV sales are slowing as demand destruction is kicking in from higher rates. That also means, less revenue is coming through than expected ($16.93b in Q2, vs $17.1b expected (by Refinitiv). Higher costs are also a factor and aren’t going away. New factories are “gigantic money furnaces” according to Musk and although commodity prices have come down, you can take that with “a grain of salt” as Musk seeing supply issues continuing. Despite Musk saying he had “diamond hands” in May, in the quarter Tesla sold $936 million worth (that’s 75% of Tesla’s holding), in order to prop up Tesla’ cashflow. Tesla shares were up 1.5% up in afterhours trade. TSLA shares are in technical uptrend from their May 2022 lows, but until commodity costs come down further and revenue rises, we don’t think this rally can be validated.

Alcoa kicked off metal earnings in the US, guiding for higher profits

Alcoa (AA) was one of best performers afterhours in NY, up 5% after growing earnings more than expected, up 48%, while sales rose 29% in Q2. Although it produced less production than expected, which is a major theme for commodity companies this year, due to a labour shortage, Alcoa expects higher profitability for its Bauxite business as it sees demand rising. Alumina and aluminum shipments are also expected to rise. Although that will not fully offset higher costs for energy and raw materials, Alcoa committed to making an extra $500 million of share buy backs to support its share price.

Iron ore headwinds intensify 

Shares in Rio Tinto (RIO) and BHP (FMG) fell back to new lows today in the APAC session today after the iron ore (SCOA) price lost 1.4% falling to $98.73. The iron ore price erased the day prior’s gain of 3% for two reasons; firstly Bloomberg expects China’s steel output to fall 4% in 2022, and secondly China stepped up efforts to import less iron ore from Australia and Brazil and formed a state backed iron ore company. This means iron price volatility could be the new norm for some time and if you reflect on BHP and Rio Tinto’s quarterly results, this theme was amplified. In this case, for those investing in major Australian commodities, it worthwhile consider companies with more diversification, as opposed to companies who make the majority of their profits from Iron ore, like Vale, Mineral Resources and Fortescue Metals.               
                           

What is going on?

Bank of Japan remains committed to easy policy

The Bank of Japan (BOJ) announced its policy decision today, and there were no tweaks to its yield curve control policy as expected. Hedge funds seem to have backed down from big bets about a BOJ’s hawkish turn, while the yen stays close to its record lows. For now, the only material update was on the inflation and growth forecasts. BOJ reiterated no limit on JGB purchases. FY2022 GDP growth forecast was lowered to 2.4% from 2.9% while FY2023 was raised to 2.0% from 1.9%. It also raised FY2022 core CPI forecast to over 2%, while also raising core CPI forecasts for FY2023 and FY2024. National CPI is due tomorrow and is likely to remain above the central bank’s 2% target, and will be key as a weaker yen and high inflation is hurting consumers and may be the only trigger for Kuroda to consider a tweak during his remaining term, if at all.          

Nord Stream gas delivery resumed

Russia has reportedly resumed gas delivery to Europe via the Nord Stream 1 pipeline, which was under maintenance. It is reported that flows are reaching about 30% of capacity within the first hour. However, Putin has also warned that flows will remain curbed unless sanctions spat is resolved. This comes at a time when Europe is facing its worst summer. With Moscow using gas as a weapon in the war, it is unlikely that the uncertainty will go away anytime, and pressure on Europe is only going to increase into the winter.

More job cuts are coming 

Ford (F) is preparing to axe about 8,000 jobs in the weeks, in an attempt to boost profits, so it can shore up its funds to move into EVs. The job cuts are will be in the unit responsible for producing internal combustion engine vehicles, as well as other salaried employees. Google (GOOGL) will pause hiring or two weeks and review its headcount, meaning job cuts could be made soon. And Lyft said it’s cut 2% of its workforce and will stop renting cars to riders.

Shipping costs are pulling back; supporting consumer spending linked companies reduce costs

There are positive signs the virus-fuelled bottled necks are clearing and shipping costs are back at pre-pandemic levels. 40-foot container rate prices from HK to LA are now down 5.7% on the week, down 21% from the same time last year. This is supporting gains in stocks like Nike (NKE) and Lululemon (LULU).

US senate votes to approve the CHIPs Act

Chip stimulus could be coming soon. The US senate voted on $52b chip stimulus bill being passed. So now it’s over the House of Reps to approve before White House can sign it off into law, hopefully before August 8. If passed into law, it will be a huge victory for chipmakers like Intel, Nvidia and even Apple, as they’re moving into Chip production. The Chips Act is targeted to provide funding to US semiconductors/chip manufacturers so the US produces its own Chips and phases out is reliance on importing Chinese chips.

What are we watching next?

Expect the European Central Bank to finally lift rates today

This will be the first time since 2011. Until 19 July, the market consensus expected that interest rates would be raised by 25 basis points. Several Governing council members favored this option in recent weeks, including ECB president Christine Lagarde and Bank of Finland’s governor Olli Rehn. However, Reuters revealed earlier this week that the ECB may discuss the opportunity of a stronger move – meaning a 50 basis points interest hike. The timing (during the ECB’s quiet period) is questionable. Other central banks have thrown away forward guidance recently. Think the U.S. Federal Reserve that hiked rates by 75 basis points in June while communicating until the last moment a 50 basis points would be an appropriate move. There is no doubt there is a case for a 50 basis points hike in the eurozone. But it is not stronger today than it was a few weeks ago. We are a bit puzzled about what might happen this afternoon. However, we believe that even if the ECB decides to go big, it won’t change the overall macroeconomic situation. The central bank is behind the curve. 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). Expect more details on the anti-fragmentation tool this afternoon too. But it is unlikely the tool will be operational soon. There are still ongoing discussions between ECB staff and governing council members about how to define a ‘neutral’ spread.

Sri Lanka at risk of fresh protests

Sri Lanka’s new president Ranil Wickremesinghe was voted by a majority of lawmakers from ousted leader Gotabaya Rajapaksa’s party, but that could spark further street protests and thwart any hopes of an IMF bailout given that the public discontent re-emerged. The new president, like his predecessor, is also deeply unpopular among the protesters and it is feared that democracy will not be fully restored.

The two things Oil investors need to know now; and is it a good buy?

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.

  • Thursday: AT&T, Union Pacific and Travelers
  • Friday: American Express and Verizon

Economic calendar highlights for today (times GMT)
1215 – European Central Bank

1230 – US Initial Jobless Claims
1430 – EIA’s Weekly Natural Gas Storage Change

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

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.