Global Market Quick Take: Europe – July 19, 2023

What is our trading focus?

US equities hit new highs (US500.I and USNAS100.I)

Equities extended their advance higher, with the S&P 500 gaining 0.7% to 4,554 and Nasdaq 100 rising 0.8% to 15,841, led by strong performance in the information technology, financials, and energy sectors. Microsoft (MSFT:xnas) up 4% and Nvidia (NVDA:xnas) up 2.2% were among the top winners in tech. In financials, banks surged on earnings beats. Charles Schwab (SCHW:xnys) soared 12.6% while Morgan Stanley (MS:xnys) surged 6.5%, both helped by upbeat full-year guidance. Bank of America (BAC:xnys) rose by 4.4% on an earnings beat. The SPDR S&P Regional Banking ETF (KRE:arcx) surged 4.3%.

FX: NZD pumps and dumps on CPI, JPY weaker

The JPY traded on the weak side as US short Treasury yields edged back to the higher end of the range of the last several days, trading well above 139.00 this morning after testing below 138.00 yesterday on the knee-jerk reaction to the US retail sales report (more below). Overnight, the kiwi was lifted sharply by a stronger than expected Q2 CPI report, but the rally quickly deflated versus both the Aussie and the US dollar. EURUSD yesterday tested 1.1275, an important Fibonacci level, the 61.8% retracement of the entire sell-off from the pandemic highs of 1.2349 to the 2022 low of 0.9536. Sterling impacted heavily this morning on the UK CPI figures (more below)

Gold tests above pivotal 1,980 area

Gold finally made strides to get back to key 1,980 level yesterday, which was a former area of support in April and then resistance after Gold failed to sustain the rally in May. The 61.8% retracement of the sell-off from the 2,063 high in May to the June 1,893 comes in just ahead of the psychologically important 2,000 level.

Crude Oil: bounced higher on weakening Russian exports

While demand concerns continue to underpin the oil outlook, supply concerns and signs of market tightness are also becoming key for oil traders. Russian exports for seaborne crude dipped to 6-month lows in the latest data, suggesting Russia may be making good on its threats to reduce supply. Crude loadings are down sharply at three Russian western ports averaged 1.78mb/d in the four weeks to 16 July, according to ship tracking data. Russia’s Energy Ministry said it will reduce its Q3 export plans by 2.1mt, or 500kb/d in August. WTI rose over 2% while Brent was up 1.4%.

Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): pare initial gains after mixed retail sales data

Treasuries had a choppy session on Tuesday as the market rallied, with the 10-year year falling as much as 6bps due to a rally in German bunds on dovish comments from ECB Governing Council member Klass Knot. The price actions however revered in New York afternoon as traders digested the mixed retail sales data and the risk-on sentiment in equities. The 2-year yield finished 2bps higher at 4.77% while the 10-year pared initial gains to close only 2bps lower at 3.79%. The 2-10-year curve flattened 4bps to -98.

What is going on?

Chip equipment giant ASML beats on top-line, guidance

The Netherlands-based maker of high-end lithography machines critical for the manufacture of the highest-end semiconductors reported stronger than expected top line results in Q2 of EUR 6.9 billion vs. EUR 6.69 consensus forecast and a gross margin of 51.3% vs. 50.6% expected, while raising its 2023 financial year guidance to 30% growth. It’s net income was slightly weaker a EUR 1.94B as compared to EUR 1.96B in Q1. Company management said that some customers were more cautious due to an uncertain outlook, the company touted its strong backlog of orders, currently at EUR 38 billion.

Microsoft leaps to new all-time highs on AI product

Microsoft surged almost 4% to a new all time high, adding some $150 billion in market cap as it announced the pricing for a set of AI tools used in its Office product suite for its corporate customers, saying it will cost some $30 per user per month in addition to current pricing.

UK June core CPI falls unexpectedly

After the prior two months saw UK core CPI spiking unexpectedly to new multi-decade highs, the June data finally showed some relief, as the core reading dropped to 6.9% vs. 7.1% expected and 7.1% in May, with the headline also lower than expected at +0.1% M/M and 7.9% Y/Y vs. 0.4%/8.1% exp. and 8.7% Y/Y previous. GBPUSD dropped below 1.3000 and EURGBP surged above 0.8650.

US data: mixed retail sales, weaker Industrial Production

The retail sales report came in mixed, reaffirming that the economy may be weakening as a result of the tightening policy but there are still no signs of panic. Headline retail sales rose 0.2% MoM, weaker than 0.5% expected but the prior month print was revised higher to 0.5% from 0.3%, offsetting some of the downbeat headline. Core (ex-auto) also missed expectations at 0.2% (vs. 0.3% expected) while supercore (ex-auto and gas) was as expected at 0.3% MoM. The control group, that feeds into GDP, saw a notable beat at 0.6%, above the expected 0.3% and prior 0.3%, matching the top end of analyst forecasts possibly on one-off online sales jump. Meanwhile, industrial production was much weaker than anticipated in June and fell 0.5% MoM (exp. 0.0%), outstripping the previous decline of -0.2%. This continued to suggest weakness in the manufacturing sector.

ECB officials starting to be cautious about hawkishness

Reports suggested that ECB officials are considering communication about what will happen after the July 27 rate hike as their biggest challenge. They are keen to avoid any strong signals of either another hike or a pause. ECB's Knot, a usual hawk, commented that a hike in July is a necessity and that hikes beyond July are possible but not a certainty. Knot also commented that they could have hit an inflation plateau and that more tightening shifts the balance of risks towards too much, while he added that the 2% 2024 inflation view is optimistic.

BOJ Chief Ueda’s comments hint at no YCC tweak

BoJ Governor Ueda said there is still some distance to sustainably achieving the 2% inflation target and that the BoJ has been patiently maintaining easy policy, while he added that unless the assumption on the need to sustainably achieve 2% target changes, the narrative on monetary policy will not change.

NZ Q2 CPI came in higher than expected

New Zealand’s Q2 CPI slowed down from Q1 as it came in at 6.0% YoY from 6.7% earlier but was higher than the 5.9% expected. On a QoQ basis, inflation was at 1.1% from 1.2% previously and 0.9% expected. However inflation was below RBNZ forecast, suggesting little need for another rate hike. NZD popped on the report to rise above 0.63 but gains may not be sustainable.

Technical Analysis Update

• S&P 500. Rejected at 4,546 but could spike up to4,635.
• Nasdaq 100. Likely to test 16K nearing all-time high
• 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 to 1.11 before uptrend resumes. Room to 1.1485
• GBPUSD correction could take it down to 1.28 before uptrend resumes.
• USDJPY Correction overdone. In consolidation area. Support at 137.85. rebound to around 140
• EURJPY bouncing from rising trend line and 153. Could re-test 158
• EURGBP testing 0.8660 resist. A break above double bottom confirmed with potential to 0.88
• Gold uptrend. Likely to test and break above 2K shortly.
• Silver above resistance at 24.50. Next resistance at 25.85-26.45
• Copper rang bound 370-396
• Brent and WTI could have resumed uptrend

What are we watching next?

Today's earnings focus: Tesla

Today’s focus on earnings will be on Tesla (TSLA:xnas). While Tesla has been extremely successful and executed beyond expectations for many years, the current valuation demands that Tesla deliver high double-digit revenue growth in the next ten years. For Q2, the consensus estimate, as per the Bloomberg survey, projects revenue to grow at 45% Y/Y, reaching USD 24.54 billion, and the adjusted net income to grow 33% Y/Y to USD 2.87 billion. Investors will also pay close attention to the EV giant's delivery and revenue outlooks.

Earnings to watch

Speculative favourite Tesla reports today as noted above. Elsewhere, the results from financial services companies and regional banks continue top roll in. Netflix will have to deliver strong a strong earnings report today to justify its strong run-up over the last quarter, as the focus is strong improvements in profitability as it cracks down on password sharing and the roll-out of a cheaper ad-supported service tier, but with a US writers’ and actors’ strike also weighing, though the company can produce shows elsewhere

Earnings this week:

• Wednesday: Tesla (After close), ASML (reported this morning in Europe), Netflix (After close: 2000 GMT), IBM (After close), Elevance Health (1000 GMT), Goldman Sachs (1130 GMT), United Airlines (After close), Zion Bancorp (After close), Baker Hughes (1030)
• Thursday: TSMC, Johnson & Johnson, SAP, Blackstone, CSX, ABB, Freeport-McMoran
• Friday: American Express, Schlumberger

Economic calendar highlights for today (times GMT)

• 1230 – US Jun. Housing Starts and Building Permits
• 1430 – US Weekly DoE Crude Oil and Product Inventories
• 1700 – US Treasury to auction 20-year Bonds
• 2350 – Japan Jun. Trade Balance
• 0115 – China Rate Announcement
• 0130 – Australia Q2 NAB Business Confidence
• 0130 – Australia Jun. Employment Data