Global Market Quick Take: Europe – July 21, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Tech Stocks Plunge on Post-Earnings Selloff

Tesla and Netflix’ post-earnings selloff weighed on the Nasdaq 100, which plunged 2.3% while the S&P slid 0.7%. In addition, semiconductor stocks declined after TSMC revised down its 2023 sales outlook (more below), seeing the PHLX Semiconductor Index tumbling 3.6%, Nvidia (NVDA:xnas) shedding 3.3%, and Intel (INTC:xnas) dropping by 3.2%.

The performance of the banking sector was mixed, with the KBW Bank Index gaining 0.7% while the SPDR S&P Regional Bank ETF (KRE:arcx) slid 0.4%. Zions Bancorp (ZION:xnys) jumped 10% after reporting better than expected pre-provision net revenues and deposit trends, as well as improved guidance,  KeyCorp (KEY:xnys) added 4% while Fifth Third Bancorp (FITB:xnys) climbed 2.7% following the regional lending reporting increases in deposits from a quarter ago. On the other hand, Truist Financial (TFC:xnys) plummeted 7.1% after reporting largely flat deposit growth.

Johnson and Johnson, gaining 6.1%, was the second-best performer among the S&P 500, after reporting adjusted EPS of USD 2.80, beating consensus USD2.62 and raising its 2023 earnings guidance.

FX: Dollar pushed higher on gains in yields

The Dollar index rose sharply yesterday and tested above the key 100.80 double bottom from Feb-Apr at one point, coming in at that 100.80 level this morning after the strongest weekly jobless claims number since early May (more below) and as US treasury yields rose sharply all along the curve. USDJPY rose back above 140.00 overnight on in-line CPI data (more below) and EURUSD plunged a big figure to lows of 1.1119 yesterday and GBPUSD tested the 1.2848 prior cycle high before finding support. USDCNH was steady after tumbling early yesterday from 7.23+ to 7.17 on China’s central bank moves to support the yuan.

Gold sent lower by rising yields and stronger US dollar

Gold’s rally was cut short yesterday by a rise in US treasury yields and a stronger US dollar. The first area of support is just above 1,960, a resistance level on the way up, although more significant support comes in at 1,950 and especially the 1,930 area.

Crude Oil: Brent retakes 80

Crude oil saw a choppy session yesterday after the prior day’s rally was rejected, but Brent managed to regain 80 in overnight trading. The high for the cycle fo September Brent is 81.75. Signs of flows from Russia dropping this week have weighed, as have the long term impact of Saudi Arabia’s latest output cut.

US Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields resume their rise

US Treasury yields resumed their rise yesterday amid an unexpected drop in weekly jobless claims. However, a solid 10-year TIPS auction showed that investors are comfortable buying Treasuries at current levels. Yesterday’s auction recorded the lowest primary dealer award at 1.5%, while indirect rose to 85%. The market believes that despite the Fed may hike once more next week, it will be the last rate hike of the cycle, leaving room for the yield curve to steepen.

UK Gilts (IGLS:xlon, IGLT:xlon)

A Gilt rally amid a bigger-than-expected drop in inflation this week has proved to be short-lived. Yields resumed their rise yesterday and are likely to move higher today after retail sales show that consumer sentiment remains strong.  With core inflation remaining at 6.9%, the BOE needs to be more aggressive to resolve inflationary pressures. We expect 2-year yields to continue to soar towards 5.25%, as the markets resonates with a peak rate of 5.75%.

What is going on?

US initial claims come in below expectations

US initial jobless claims fell to 228k from 237k in the latest week, coming in short of the expectations at 240k. This marked the lowest number of claims since early May and the second lowest since February, and has once again sparked concerns that the labor market remain tight. The weekly continuing claims numbers get less coverage, but did show a sharp unexpected rise to 1754k from 1721k the prior week. The Philly Fed index marginally improved to -13.5 from -13.7, short of the consensus -10.0.

Janet Yellen’s Vietnam visit highlights the fragmentation game

US Treasury Secretary Yellen was in Vietnam to push for reshaping of logistics as US tries to cut its dependence on China. She said that diversified global supply chains are key to achieving long term economic resilience and that the US will pursue a strategy of friend-shoring. We have highlighted earlier that Vietnam, Mexico, Brazil, India, Indonesia and others are the likely winners of the global fragmentation game.

Sharp worsening in UK Consumer Confidence

The July UK GfK Consumer Confidence release overnight suggests a material worsening of UK confidence as it came in at –30 v. -25 expected and –24 in June. This confirms the increasing softness in UK labor market data and comes after a string over improving confidence figures since January.

Japan June CPI data largely in-line with expectations

Japan’s CPI data was out in line with expectations, as headline inflation rose 3.3% Y/Y vs. 3.2% expected, while ex Fresh Food and Energy, inflation rose 4.2% as expected and versus the cycle high of 4.3% in May. The JPY fell against the US dollar as US treasury yields rose sharply all along the curve yesterday, in part on strong jobless claims numbers.

TSMC Q2 earnings beat but lowers full-year sales guidance

Taiwan Semiconductor Manufacturing (TSM:xnys) shed 5.1% overnight in ADR trading after the largest chip foundry in the world reported Q2 earnings beat analyst estimates but lowered its full-year 2023 revenue guidance to a 10% Y/Y decline from previously suggested low-to-mid single digit decline. The management attributed the downward revision to weaker economic environments and a deeper than expected downturn in smartphone chips and end-market handset demand. TSMC also said that it is postponing the start of production at its new Arizona plant to 2025.

What are we watching next?

Three central banks meetings up next week

Next week sees the three most important central banks meeting, with the Fed and ECB expected to hike rates 25 basis points. The Fed has projected in its most recent “dot plot” that it could hike once more after next week, but the market is fairly convinced that a hike next week will be the last for the cycle. Recent less hawkish rhetoric from a string of ECB officials suggests that the bank doesn’t want to commit to further tightening after next Thursday’s meeting. The Bank of Japan has the most potential to impact financial conditions as the market is uncertain whether the Bank of Japan is ready to tweak policy yet, perhaps with a widening of the yield-curve-control bank on 10-year JGB yields (currently set at 0.50% either side of 0.0%).

Technical Analysis

• S&P 500. Top reversal pattern. Correction unfolding likely down to 4,400.
• Nasdaq 100. Correction unfolding. Likely to test support at 14,687
• DAX Range bound. Rejected at key resistance at 16,210
• AEX25 Range bound between 781 and 748
• CAC40 Range bound between key resistance at 7,403 and key support at 7.080. 
• EURUSD uptrend. Correction down 1.11 maybe 1.10 before uptrend resumes. Medium-term room to 1.1485
• Dollar Index testing strong resistance at 100.68. Could bounce to 101.73 before down trend likely resuming
• GBPUSD correction could take it down to 1.28 before uptrend resumes.
• USDJPY Rebounded to 140. In limbo – could rebound to 142.25 but if breaking below 13875 likely move lower
• EURJPY bouncing from rising trend line and 153. Could re-test 158 
• EURGBP Double bottom pattern confirmed with potential to 0.88 but struggling for upside momentum
• US 10-year Treasury yields resuming uptrend. Could re-test 4%
• 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 resumed uptrend. Resistance at 83 and 79.18 respectively
• Wheat Dec. uptrend resumed but rejected at 200 MA
  

Earnings Watch

Earnings season picks up pace further next week after the first flush of reports from financials boosted sentiment this week, only to see Tesla and Netflix results spoil the party. The highlights of the very busy week ahead include the first megacaps reporting next Tuesday.

Earnings today: American Express (1100 GMT), Schlumberger (1100 GMT)

Earnings next week:

• Tuesday: Snap, Microsoft, Alphabet, LVMH, Visa, Texas Instruments, Danaher, NextEra Energy, Verizon
• Wednesday: Meta, Coca-Cola, Thermo Fisher Scientific, Christian Dior, Union Pacific, Rio Tinto, Boeing, ServiceNow
• Thursday: Samsung, Amazon, MasterCard, Nestle, Roche, L’Oreal, AbbVie, McDonalds
• Friday: ExxonMobil, Procter & Gamble, Chevron, Hermes, AstraZeneca, Sanofi, Keyence, ITC

Economic calendar highlights for today (times GMT)

1230 – Canada May Retail Sales