Global Market Quick Take: Europe – July 17, 2023

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US equities (US500.I and USNAS100.I): S&P 500 slightly down, healthcare shines, banks beat forecasts, Nasdaq flat

On Friday, the S&P 500 edged down 0.1%, closing at 4,505. Among the sectors, healthcare stood out as the best performer, gaining 1.5%. United Health Group (UNH:xnys) jumped by 7.2% after raising its earnings guidance. The energy sector had the largest setback, declining by 2.8% due to a nearly 2% drop in crude oil prices.

The financials sector fell by 0.7%, making it the second worst-performing sector within the S&P 500 for the day. JPMorgan Chase (JPM:xnys), Citigroup (C:xnys), and Wells Fargo (WFC:xnys) initiated the Q2 earnings season for US banks with strong results, surpassing both revenue and profit forecasts. JPMorgan's share price increased by 0.7%, but Citigroup experienced a decline of 4%, and Wells Fargo slid by 0.3%. The KBW Bank Index, representing 24 large banks, shed 2.4%. Some investors expressed concerns that the performance of the three best-positioned large money-center banks might not be indicative of the rest of the banking sector, which could face more challenges. Additionally, Wells Fargo's cautious tone on commercial real estate further worried investors.

In the tech-focused Nasdaq 100, the market opened on a positive note but gradually declined throughout the session, ending nearly flat at 15,566. Nvidia (NVDA:xas) experienced a decline of 1.1%, while Microsoft (MSFT:xnas) saw an increase of 0.8%. These two companies played a significant role in Nasdaq's overall activities. Notably, there were approximately 1.4 million Nvidia calls traded during the day, indicating active investor engagement.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): CSI300 declines by 1.1%, HK closed due to typhoon

After a mixed bag of data, with GDP slightly disappointing but industrial production surprising upside, the CSI300 shed 1.1%, dragged down by coal mining, oil, property, insurance, auto, semiconductor, and pharmaceutical while cybersecurity, environmental protection, and construction machinery gained. The People’s Bank of China left its policy 1-year medium-term lending facility rate unchanged at 2.65% but the roll-over volume fell more than expected to RMB 103 billion in July from RMB 237 billion in June.

FX: USD in focus after a tough week

The US dollar was marginally higher on Friday but slumped last week and DXY Index remains below the key 100-mark as the new week kicks off. JPY remains a key focus as the highly anticipated BOJ July meeting draws closer and expectations of an uptick in inflation forecasts or a tweak in YCC remain rampant. Japan will report June CPI figures on Friday this week. USDJPY trades near 138.50 in early European trading today after a low of 137.25 on Friday (just above the 200-day moving average). EURUSD facing resistance ahead of a major Fibo of the entire sell-off wave from the pandemic highs to last fall’s lows coming in at 1.1275. CAD weakened Friday as oil prices slumped, with USDCAD bouncing back above 1.3200 after posting lows for the year below 1.3100 briefly Friday.

Crude Oil: signs of tightness overshadowed by higher inflation expectations

Crude oil recorded a third straight week of gains amid increasing supply side issues. However, oil prices slumped on Friday amid profit-taking, and with US consumer inflation expectations remaining anchored higher suggesting risks of higher-for-longer interest rates and underpinning demand concerns. The decline in oil prices extended in early Asian trading hours on Monday with WTI below $75/barrel and Brent below $80 with supply concerns also easing as Libyan oil field resumed production after a disruption last week. Money managers meanwhile lifted bullish crude oil bets by 30% in the week to July 11 to near a three-month high. Brent support at $78.50

Wheat: China output and Black Sea grain deal concerns underpin price action

Chicago wheat futures extended its three-day gain to 6.5% during Asian trading as uncertainty looms over the Ukraine grain deal. The current agreement is set to expire on July 18, and traders are mulling the risk of Russia leaving the deal. The Black Sea grain deal allows for commercial food and fertilizer exports from three key Ukrainian ports in the Black Sea despite the Russian invasion of the country. Meanwhile, risks of tightness in wheat market also increased with heavy rain taking a toll on China’s summer crop.

Gold’s rally halted by surging US consumer confidence

Precious metals ran into profit taking on Friday after US consumer sentiment surged to an almost two-year high forcing the market to rethink its recent lowering of Fed rate hike expectations. Gold’s best week since April was entirely due to a weaker dollar and a break above $1980 is needed for the yellow metal to find its own positive momentum. Support: 1951, 1936 & 1929

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): Front end sells off as strong consumer sentiment triggers yield surge

Treasuries sold off and yields rose, driven by large block sales in the 2-year notes futures (ZTU3) and cash selling across the front end of the yield curve. This selling pressure was triggered by the release of the University of Michigan Sentiment Index, which revealed surprisingly strong results, reaching the highest level since September 2021. Additionally, both short-term and long-term inflation expectations exceeded median forecasts. The 2-year yield surged 14bps to 4.77% while the 10-year yield climbed by 7bps to 3.83%, flattening the 2-10 curve by 7bps to -94bps

What is going on?

JP Morgan, Citigroup and Wells Fargo beat consensus estimates

Three of the four largest US banks reported Friday and beat consensus forecasts for earnings on strong net interest income, although their share prices closed sharply lower from opening levels Friday. JPMorgan Chase reported Q2 Adjusted EPS of USD 4.75, 24% above the USD 3.83 consensus forecast. Adjusted income came in at USD 14 billion, a 71% increase from a year ago. Net interest income reached USD 22 billion in Q2, beating the consensus of USD 21 billion, driven by an improvement of net interest margin to 2.62% in Q2 from 2.57% in Q1. The bank’s common equity Tier-1 (CET1) ratio remained unchanged at 13.8% from the previous quarter. Management raised full-year 2023 net interest income guidance to around USD 87 billion from USD84 billion while maintaining the expense guidance at USD 84.5 billion for 2023. It was a set of overall better-than-expected results.

Citigroup reported Q2 Adjusted EPS of USD 1.37, a 37% decline from a year ago quarter but 4% higher than the consensus estimates of USD 1.315. Adjusted net income was USD 2.61 billion, falling 39% Y/Y but 2.4% better than consensus. Net interest income increased 4% Q/Q to USD 13.9 billion. Its CET1 ratio declined to 13.3% in Q2 from 13.4% in Q1. The management raised net interest income guidance for 2023 to USD 46 billion from USD 45 billion while revenue and expense guidance remains unchanged.

Wells Fargo reported Q2 EPS of USD1.25, growing 69% Y/Y and beating the consensus estimate by 7.7%. Adjusted net income grew 64% Y/Y to USD 4.66 billion. Net interest income of USD13.2 billion, increasing 29% Y/Y. The management raised the full-year 2023 net interest income margin guidance to +14% Y/Y from +10% Y/Y while expected expenses to increase to around USD51 billion from the previous guidance of USD50.2 billion. CET1 ratio fell to 10.7% in Q2 from 10.8% in Q1. Wells Fargo added USD949 million to its credit loss reserves, primarily due to deterioration in commercial real estate loans. The management said that the office portfolio had the “most nonaccrual loans in the highest level of allowance for credit losses,” and the allowance for credit losses coverage ratio for the office loans increased to 8.8% from 5.7%.

While the earnings results for JPMorgan Chase, Citigroup, and Wells Fargo beat estimates, there are concerns regarding the performance of smaller banks, particularly regional banks. The deterioration in commercial real estate loans as reflected in Wells Fargo’s results also worries investors.

China’s Q2 GDP grows 6.3% Y/Y, June industrial production increases 4.4% Y/Y

China’s Q2 GDP came in at +6.3% Y/Y slightly weaker than the 7.1% expected but higher than the 4.5% in Q1.  The increase in the Y/Y growth rate in Q2 was due to the low base effect resulting from the Shanghai lockdown last year. Sequentially, growth slowed to +0.8% seasonally adjusted unannualized in Q2 from +2.2% in Q1. For the first half of the year, GDP grew 5.5% Y/Y, above the 5% target for 2023. Industrial production grew 4.4% Y/Y in June, surpassing the 2.5% median forecast and 3.5% in May. June retail sales slowed to +3.1% Y/Y, from 12.7% in May, largely due to a high base in retail sales last June when Shanghai came out of lockdown. Year-to-date fixed asset investment fell to 3.8% Y/Y from 4% but it was better than the 3.4% projected by economists surveyed. Year-to-date property investment, however, contracted 7.9%, more than -7.5% expected and -7.2% in May. The unemployment rate remained at 5.2% nationwide as well as for the 31 major cities. The unemployment rate for youth (16-24 age group) increased to 21.3% in June from 20.8% in May.

US consumer sentiment soars

Preliminary University of Michigan survey pointed to sustained strength in the US consumer. Headline sentiment improved to 72.6 for July from 64.4 previously, and well above the expected 65.5. Sentiment was likely supported by cooling inflation and strength in the labor market, while gains in equity markets also potentially underpinned. The 1yr and 5yr inflation expectations remain elevated and rose to 3.1% (prev. 3.0%) and 3.4% (prev. 3.3%), respectively, offsetting some of the relief seen with softer CPI and PPI reports last week, and will continue to give a reason to Fed hawks to guide for another rate hike after July.

Technical Analysis Update

• S&P 500. Potential upside to 4,546 – 4,635. But uptrend short-term very stretched
• Nasdaq 100. Upside potential to 16,000 but uptrend stretched
• DAX Bounced from support at 15,482. Uptrend resumed Likely test of all-time highs
• AEX25 above key resistance at 777. Likely move to 802
• CAC40 Range bound between key resistance at 7,403 and key support at 7.080.
• EURUSD uptrend. Likely short-term correction but room to 1.1485. GBPUSD broke strong resistance. Expect minor correction before moving higher
• USDJPY Correction overdone. In consolidation area. Support at 137.85. Likely rebound to around 140
• EURJPY correction bouncing from rising trend line and 153. Resist at 156.
• EURGBP bouncing from 0.85 level. Double Bottom?
• Gold bounced to 0.382 retracement at 1,963. Expect minor setback before next attempt higher
• Silver above resistance at 24.50. Next resistance at 25.85-26.45
• Copper above resist at 382. Building uptrend
• Brent and WTI rejected around 200 Moving Average. Testing support at 78.66 and74.75 support
• Soybeans Nov. moving higher. Resistance at 1,417
• Wheat Dec. testing resist at 696. Corn Dec. bouncing off lows

What are we watching next?

Japan newspaper hints at a likely increase in BOJ’s FY2023 inflation forecast

The Yomiuri newspaper reported on Friday that Bank of Japan is on course to raise its inflation forecast for this fiscal year ending March to more than 2% from current 1.8% when it reviews the outlook later this month. The central bank sees businesses increasing prices more than it expected. Forecasts for fiscal 2024 and 2025 likely to be ~2%, compared to current forecasts of 2% and 1.6% respectively. The BOJ meets July 27-28.

Earnings to watch

The pace of the Q2 earnings season picks up this week before peaking over the next couple of weeks, with more large US banks reporting Tuesday and Tesla, Netflix and ASML in focus on Wednesday. A steady stream of medium-sized and smaller banks are also set to report all week and will give a sense of how rising funding costs and declining deposits are impacting results and guidance.

Earnings this week:

• Tuesday: Bank of America, Novartis, Morgan Stanley, Prologis, Lockheed Martin, Charles Schwab, PNC Financial, Bank of NY Mellon
• Wednesday: Tesla, ASML, Netflix, IBM, Elevance Health, Goldman Sachs
• Thursday: TSMC, Johnson & Johnson, SAP, Blackstone, CSX, ABB, Freeport-McMoran
• Friday: American Express, Schlumberger

Economic calendar highlights for today (times GMT)

0815 – ECB President Lagarde to speak
1200 – Poland Jun. Core CPI
1230 – US Jul. Empire Manufacturing
2000 – US Crop Condition Report
0130 – Australia RBA Minutes