What is our trading focus?
US equities (US500.I and USNAS100.I): Broad-based selloff across cyclical and defensive sectors
Sentiment was bad yesterday in S&P 500 futures taking out the previous two trading sessions’ ranges hitting a new low on the close for the current downward cycle. The industry groups that were driving the decline were energy as the oil price was weak, banks due to the Fitch downgrade warning, and transportation stocks. However, it is worth noting that it was not a negative session with a sharp selloff in cyclicals or AI related stocks but a broad-based sell-off. S&P 500 futures are trading at the 4,455 level this morning with the 4,370 level being the next key support level to watch.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index slides for fourth consecutive day amid concerns about China's economy
The Hang Seng Index declined for the fourth consecutive day as pessimism regarding China’s economy and risks in the Chinese property and shadow banking sectors continued to impact market sentiment. The financial sector was the worst-performing, with Chinese banks and insurance companies experiencing falls due to investor concerns about their exposures to the shadow banking sector. Home prices in the top 70 cities in China fell by 0.23% month-on-month in July. The downward revision of China's 2023 GDP growth forecasts by JPMorgan and Barclays to 4.8% and 4.5%, respectively, also weighed on market sentiment. As a result, the Hang Seng Index saw a significant decline of 1.6%, while the CSI300 dropped 0.5%.
FX: GBPUSD gives back post-labor data gains
GBPUSD rose to highs of 1.2753 after a strong wage report on Tuesday cemented a rate hike for the September BOE meeting. However, the pair reversed back to the 1.27 handle subsequently, and inflation data will be on the radar today. Weak China sentiment, lower wage index and less hawkish RBA minutes weighed on AUDUSD which dipped to 0.6428, reversing from 0.65+ after China’s announcements to cut rates and consideration to cut stamp duty for stock trades. NZDUSD also plunged to 0.5932 amid a less hawkish RBNZ but recovered to 0.5960+ later.
Crude oil: correction extends on China weakness
Crude oil prices slid on Tuesday to two-week lows, with Brent falling below $85/barrel as weakness in China’s economic data reverberated through the markets, spelling a broader risk off. The selloff came despite the API reporting a large crude draw of 6.2mn barrels vs. 1.7mn barrels expected. Crude inventories at the Cushing hub are seen to be falling to their lowest level since April and there has been a sharp rise in refining margins in recent weeks. More measures from Chinese authorities are awaited and focus today apart from EIA’s stock report will be the FOMC minutes.
Gold: battle for $1900 heats up
Spot gold prices briefly dipped below $1900 on Tuesday after a surprisingly strong US retail print bolstered the case for further rate hikes, but just like the previous attempt on June 29 when XAUUSD hit $1893, the break was met with strong buying interest with futures volumes spiking. For now, the short-term downtrend remains intact and while a move above $1910 may signal consolidation a break above $1940 is needed to challenge the current negative sentiment.
European gas trades above €40 as LNG strike risks drag on in Australia
European gas trades back above €40/MWh for the second time in a week amid concerns of disruptions to LNG supplies. Discussions between union officials and Woodside in Australia progressed slow and concerns that a lack of an agreement by Friday could see industrial action commence underpinned. With the threat of possible strikes looming, the facility operated by Chevron Corp is also holding back some supply from the spot market, adding to the tightness. The surge being driven by worries that a disruption from the world’s top supplier would raise competition for LNG and with that the price.
The US yield curve bear steepens amid strong retail sales (2YYU3; 10YU3, 30YU3)
Retail sales surprised on the upside, showing that the economy remains resilient. However, higher borrowing costs, higher credit standards, and the return of student loan repayments are going to put the US economy to the test during the last quarter of the year and lead it toward stagflation. Overall, we expect the front part of the yield curve to remain anchored while long-term rates have the potential to continue to soar, with 10-year yields heading towards 4.5% and 30-year yields to 4.75%. Once rates stabilize higher, they are likely to trade rangebound until the rates-cutting cycle begins.
Inflation in focus for UK Gilts (IGLS:xlon, GLTS:xlon)
Jobs numbers showed yesterday that more tightening is needed from the BOE, but the economy is deteriorating quickly. Wages continue to put upward pressure on inflation, and the economy is resilient. That strengthens the picture for a 6% peak rate, implying that 2-year gilts might soar to test resistance again at 5.5% and potentially breaking above it. July inflation prints out today show that core inflation remains sticky, beating expectations slightly. The data cement a rate hike for September with the only question being if it will be 25bps or 50bps. We believe that 50bps might be on the table, but it depends on August inflation and jobs data. We expect the UK yield curve to bear flatten further, with two-year yields soaring to test again 5.5%.
What is going on?
FOMC focus switch from how high to how long
As Federal Reserve officials close in on the end of their tightening campaign, the debate is shifting from how high interest rates need to go to how long they should stay elevated. Inflation pressures are easing, which could give policymakers room to keep interest rates at or near current levels for the time being. Still, price gains remain well above the central bank’s 2% target, making policymakers hesitant to declare victory.
Fitch warns it may have to downgrade many more US banks, including JPM
Fitch Ratings warned on Tuesday that dozens of U.S. banks, including JPMorgan, the largest bank in the country, could be at risk of sweeping rating downgrades. Fitch lowered its "operating environment" rating for U.S. banks to AA- from AA in June, citing pressure on the country's credit rating, regulatory gaps exposed by the March regional bank failures and uncertainty around interest rates. Fitch said that higher borrowing costs and tighter lending standards have created a pressure cooker environment for many bank and non-bank businesses with large corporate debts.
US retail sales showed surprise strength
Headline retail sales rose by 0.7% in July, accelerating from the upwardly revised 0.3% and above expectations of 0.4%. The core measure, ex-autos, was an even bigger surprise and rose 1%, above the 0.4% expected and 0.2% prior. The super core, ex gas and autos, rose 1% (prev. +0.4%), while the control metric, which feeds into the GDP numbers, was also hot, rising 1.0% (exp. 0.5%, prev. 0.5%). Atlanta Fed GDP Now estimate for Q3 be revised up to 5.0% from 4.1%, previously signalling little scope for now for Fed to pivot to rate cuts.
Home Depot surprise on revenue growth, shares up 0.7%
Home Depot reported Q2 comparative revenue growth of –2% y/y vs est. -4.1% y/y and revenue of $42.9bn vs est. $42.1bn still underscoring the continued pressure on big ticket items. The home improvement retailer confirmed its 2023 guidance and announced a $15bn buyback programme replacing the old authorization. Shares rose 0.7% beating the market on a negative day.
More upbeat Japan data
After a blowout Japan GDP print yesterday, the Reuters Tankan survey reported today highlighted an improvement in sentiment from large manufacturers and non-manufacturers. Large manufacturing sentiment index rose to +12 in August from +3 in July, and outlook was also strong at +14 in the next 3 months. Non-manufacturing sentiment, meanwhile, surged to +32 in August from +23 in July and is seen at +26 in three months. Firms still faced challenge to pass on high input costs.
UK jobs data emphasises wage concerns again, inflation up next
UK labor data for July was reported yesterday, and there were only modest signs of a cooling while wage pressures continued to complicate the inflation trajectory. The number of payrolled employees increased by 97k in July against consensus estimates of a 12k drop, while the June figure was also revised higher to 47k from -9k previously. Unemployment rate ticked up to 4.2% in 3m to June from 4.0% previously but the biggest shock was the average weekly earnings which came in at 8.2% YoY for the 3m to June from 7.2% previously and 7.4% expected. A September pause from the BOE now looks unlikely and more than a 25bps rate hike is priced in by markets.
What are we watching next?
Yuan intervention risk on the rise
Forex regulators have sent a clear signal that policy tools will be used in due course should depreciation pressure on the yuan increase, said Wang Qing, chief macro analyst at Golden Credit Rating. The People’s Bank of China said on Tuesday it will issue CNY20 billion three-month and CNY15 billion one-year central bank bills in Hong Kong on August 22, the fifth time this year. Wang said the issuance scale has increased significantly, which tightens yuan liquidity in the offshore market and increases the cost of shorting yuan. Overnight the USDCNH reached a fresh nine-month high at 7.3387, just 0.5% below a multi-year high reached last October.
Cyclical vs defensive sectors
With cyclical equity sectors peaking out against defensive sectors back in July there is an ongoing downward trend in place as investors are positioning themselves more defensively. Further rotation among investors could accelerate the downside move in equity indices.
- S&P 500. Downtrend. Broken below key support at 4,455. Likely to drop below 4,400. Next support at 4,340
- Nasdaq 100. Down/trend. Support at 14,750
- Hang Seng bearish. Testing support at 18343. Next support at 18,052
- DAX Bearish. Rejected at 16K. Likely to drop to 15,482 support area
- AEX25 Bearish. Support at 748
- CAC40 Key support at 7,251. If broken downtrend to 7,100
- EURUSD Likely to be range bound between 1.0833 and 1.1065. Key support at 1.0833. Close below leading to short- and medium-term trend down.
- Dollar Index rejected at key resistance at 103.28. Close above uptrend on medium-term.
- GBPUSD is struggling for upside momentum. Key support at 1.2590. a close below likely sell off to 1.23 area. RSI still bullish
- USDJPY broken resistance at 145. Next is 148
- EURJPY above strong resist at 158. Likely to move to 160.60
- AUDUSD forming bottom and reversal pattern
- Gold XAUUSD Close to testing June low at 1,892. RSI bearish. 200 MA giving some support
- Silver XAGUSD testing support at around 22.15
- Copper below 370. Next support at 360-356
- Brent rejected at resistance at 88.20. Expect correction down to around 83
- Dutch Gas uptrend.
- US 10-year uptrend. Could move to 2022 peak at 4.32
Earnings to watch
Today’s US earnings focus is on Cisco and Target with analysts expecting Cisco to report FY23 Q4 (ending 31 July) revenue growth of 15% y/y and EBITDA of $5.5bn up from $4bn a year ago driven by a strong backlog helping Cisco navigating the weak IT spending environment. Cisco reports earnings after the US market close. Analysts expect Target to report FY24 Q2 (ending 31 July) revenue growth of -4% y/y and EBITDA of $1.6bn up from $1.1bn a year ago. Negative revenue is obviously a sign that volume growth is under pressure.
- Today: Tencent, JD Health, JD Logistics, Cisco, TJX, JD.com, Target
- Thursday: Telstra, Coloplast, CNOOC, Adyen, Nibe Industrier, Geberit, Walmart, Applied Materials, Ross Stores
- Friday: Kingspan, Deere, Palo Alto Networks, Estee Lauder, XPeng
Economic calendar highlights for today (times GMT)
- 0600 – UK Jul CPI
- 0600 – UK Jul RPI
- 0900 – Eurozone 2Q GDP
- 1230 – US Jul Housing Starts
- 1315 – US Jul Industrial Production
- 1430 – EIA's Weekly Crude and Fuel Stock Report
- 1800 – FOMC Meeting Minutes