Global Market Quick Take: Europe – August 23, 2023 Global Market Quick Take: Europe – August 23, 2023 Global Market Quick Take: Europe – August 23, 2023

Global Market Quick Take: Europe – August 23, 2023

Macro 5 minutes to read
Saxo Strategy Team

Summary:  Markets largely in a holding pattern after an extension of the rally yesterday ahead of the US market open was erased during the trading session, while risk sentiment in Asia brightened. All eyes on chip giant Nvidia’s earnings report after the market close today, as its recent meteoric rise on AI-linked hype requires stellar numbers and guidance to support the share price. Meanwhile, markets are hotly anticipating whether Fed Chair Powell’s speech at Jackson Hole will bring longer term policy hints.


What is our trading focus?

US equities (US500.I and USNAS100.I): Nvidia earnings tonight is next key event for equities

S&P 500 futures attempted to rally yesterday but ended giving up all gains and closed lower for the session. This morning S&P 500 futures are trading around the 4,414 level, attempting again to rebound, with Nvidia earnings tonight after the US market close being the key event risk in global equity markets. If Nvidia’s outlook disappoints it will ignite significant volatility in technology stocks and likely weigh on equity indices.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): mixed performance; Anta and Baidu lead winners on strong earnings

Anta Sports (02020:xhkg), rising nearly 11%, and Baidu (09888:xhkg) adding more than 4% topped the performance within the Hang Seng Index, which climbed 0.4%. Anta reported stronger-than-expected earnings growth on margin expansion. Baidu’s Q2 results beat in revenue and earnings, driven by stronger advertising. Sentiments have somewhat become more steady, seeing bids for Chinese consumers, particularly food and beverage names. In the mainland bourses, the CSI300 Index declined by 0.8%, dragged down by software, semiconductors, defense, and brokerage stocks.

FX: EUR slumps ahead of PMIs and Jackson Hole

The US dollar was firmer on Tuesday as 2-year Treasury yields climbed further higher, and EURUSD was the G10 underperformer as focus turned to August flash PMIs due to be reported today ahead of the Jackson Hole symposium (Fed Chair Powell speech on Friday – more below). EURUSD slipped to lows of 1.0833 and EURGBP is now getting in close sight of 0.85 despite GBPUSD returning from the 1.28 barrier to 1.2730-levels. The EURUSD 200-day moving average comes in near 1.0800 and was last crossed in November of last year. The Yen has been mixed, coming back higher versus the euro as it remains sensitive to longer global bond yields, which retreated yesterday even as US short yields rose.

Crude oil: tight supply concerns continue to fade

Crude oil prices continue to consolidate near $85 in Brent and $80 in WTI with the upside risks reduced on signs supply tightness could ease with additional barrels flowing from OPEC members that are not restricted by quotas. The Brent prompt spread trades near the lowest backwardation in a month at 30 cents per barrel, another sign of supply tightness easing. Ahead of today’s weekly stock report from the EIA, the API reported a 2.4mn barrels stock draw last week. With the recent loss of momentum, the market will look to Friday’s Jackson Hole speech for inspiration as well as an update from Saudi Arabia regarding their production intentions for October.

Gold: BRICS and Jackson Hole the current focus

Gold is holding up well despite the recent surge in US Treasury yields with current inverse correlations being strongest against the dollar. Gold, however, rose back above $1900 overnight as 10-year Treasury yields softened and discussions around a common currency at the BRICS summit continued (see below). Powell’s Jackson Hole speech on Friday could be key, and should he highlight concerns about the banking sector or economic momentum at the symposium, gold could be one of the key beneficiaries.

Copper bounce back with focus on $3.8350 level

Copper prices trade higher for a fifth straight session helped by surprisingly upbeat copper consumption data in China, speculation about more support measures from the Chinese government and the currency intervention which has seen the yuan strengthen against the dollar. In addition, stockpiles monitored by the three major futures exchanges hover just above a 15-year low at 170k tons. In the two weeks to Aug 15, hedge funds sold 40k lots of HG futures, the most for a two-week period since the pandemic panic sell-off in February 2020. In the December HG contract, the volume weighted average price (VWAP) for this period is $3.8350, meaning a break above may trigger additional buying back of recently sold positions.

The US Treasury will sell 20-year notes today (2YYU3, 10YU3, 30YU3).

Before the anticipated Jackson Hole at the end of the week, the U.S. Treasury will sell 20-year US Treasuries today and 30-year TIPS tomorrow. Both maturities are usually disliked by investors, especially the 20-year notes, which have been re-introduced recently after the pandemic. The focus is going to be on both auctions’ bidding metrics and whether demand remain strong despite the recent increase in supply, coupled with QT and a retreat of Japanese investors home. US Treasury yields remain in an uptrend, and as explained here, higher yields may be in the cards with 10-year yields aiming to 4.5% and 30-year yields going to 4.65%.

What is going on?

S&P downgrades some US regional banks

Ratings agency S&P Global followed Moody's in cutting its credit ratings on some regional lenders with high commercial real estate (CRE) exposure. Ratings for Associated Banc-Corp and Valley National Bancorp were cut on funding risks and higher reliance on brokered deposits, UMB Financial and Comerica Bank on deposit outflows and higher interest rates as well as KeyCorp on the back of constrained profitability. These rising risks for the banking sector could tighten lending standards further weigh on labor markets and consumption spending. Our ‘Stagflation Light’ call for the US is based on these concerns. 

BRICS Summit touches upon expansion, de-dollarization

The meetings between leaders of Brazil, Russia, India, China and South Africa kicked off yesterday with focus on expansion of the bloc and de-dollarization. The leaders of South Africa and China said they had found common ground on expanding the BRICS emerging market bloc to strengthen strategic co-operation. However, the idea wasn’t openly accepted by leaders of Brazil and India as it risks diluting their influence in the bloc and embellishing China’s claim to lead the developing world. Putin addressed the summit by video link on Tuesday, saying that de-dollarisation was an “irreversible process”, but a common currency remains far-fetched, but members may discuss an initiative by the BRICS countries to use their local currencies in trade between themselves rather than invoicing in the US dollar.

US semiconductors association warns Huawei is building secret chips network

Friction in the global semiconductors market is still heating up and the leading US semiconductors association has warned the US government that Huawei, which has been on the US export control list since 2019, is building a large secret manufacturing network for semiconductor chips.

What are we watching next?

Nvidia earnings tonight will set direction for AI related stocks

Nvidia reports FY23 Q2 (ending 31 July) earnings tonight after the US market close with analysts expecting 65% y/y revenue growth to $11bn and EBITDA at $6.3bn up from $924mn a year ago. As we have highlighted in recent two equity notes (here and here) interest is cooling around AI and it is questionable whether there is truly a significant demand shift for Nvidia. The bear case is that the meaningful increase in revenue for Nvidia is driven by Chinese technology companies playing catchup and will not sustain. The bull case is that there is a structural shift in demand for AI chips and it will not slow down anytime soon.

Arm IPO gets closer with investors focusing on China risks

The Arm IPO is getting closer with the valuation whisper number being $60-70bn up from the $32bn SoftBank paid back in 2016. The IPO will not raise additional capital for Arm as SoftBank will only sell some of its existing shares in the IPO. FT wrote an article yesterday highlighting the high valuation relative to significant China risk as the country is a quarter of Arm’s overall business and is a subsidiary the company does not control.

Focus shifting to Jackson Hole this week

The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, is scheduled for August 24-26. This year’s theme is "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak on Friday at 1405 GMT. Other central bank heads will also likely be on the agenda. There is considerable attention on this speech and whether the Fed is set to deliver major long term policy hints, far more than any anticipation around whether the Fed has reached its peak policy rate. As noted in John Hardy’s latest FX Update, this could take the form of hints that rising fiscal dominance (massive treasury issuance projections and the pressure this will bring to inflation risks and higher long rates) will require that the Fed consider appropriate policy options. In addition, “Fed whisperer” Nick Timiraos recently penned a piece suggesting that the Fed could be set to raise its projections of the appropriate Fed policy rate for the longer run, where the median in the Fed‘s quarterly “dot plot” projections has been pinned at 2.5%. A hint that the Fed is set to raise its longer-term policy projections at the September FOMC meeting could spark significant volatility.

Earnings to watch

Today’s US earnings focus is Nvidia and snowflake which are both reporting after the US market close. Read the section above for our comments on Nvidia. Analysts expect Snowflake to report FY24 Q2 (ending 31 July) revenue of $663mn up 33% y/y and EPS of $0.10 which would be the first accounting profit since the company went public.

  • Today: Analog Devices (1100 GMT), Nvidia (after close), Snowflake (After market), Autodesk (after market), Splunk (after market)
  • Thursday: Royal Bank of Canada, Toronto-Dominion Bank, Meituan, CRH, Intuit, NetEase, Workday, Marvell Technology

Economic calendar highlights for today (times GMT)

  • 0715-0800 – Eurozone Aug. Flash Manufacturing and Services PMI
  • 0830 – UK Aug. Flash Manufacturing and Services PMI
  • 1230 – Canada Jun. Retail Sales
  • 1345 – US Aug. Flash S&P Global Manufacturing and Services PMI
  • 1400 – US Jul. New Home Sales
  • 1430 – US Weekly DoE Crude Oil and Product Inventories
  • 1700 – US Treasury to auction 20-year bonds

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