Global Market Quick Take: Europe – May 30, 2023 Global Market Quick Take: Europe – May 30, 2023 Global Market Quick Take: Europe – May 30, 2023

Global Market Quick Take: Europe – May 30, 2023

Macro 9 minutes to read
Saxo Strategy Team

Summary:  The Biden White House and House speaker McCarthy reached an agreement-in-principle over the holiday weekend in the US, though important steps remain to put the issue to rest. Markets are cautiously optimistic on the announcement, but the US dollar leaning stronger still after its recent run higher suggests that USD liquidity concerns could rise as the US Treasury will need to rebuild its reserves in the month to come after scraping the bottom of the barrel for funds.


What is our trading focus?

US equities (US500.I and USNAS100.I): US debt ceiling debate takes center stage

Equities bounced back on Friday with S&P 500 futures closing above the 4,200 level as investors extended the gains in AI related stocks and the US debt ceiling got a bit closer to a deal. With the US debt ceiling deadline approaching on Thursday, it will be the all-consuming event this week for markets. In addition to news coming out on the US debt ceiling, we will get May figures from the Conference Board on consumer confidence and Dallas Fed on manufacturing activity, with both expected to remain in subdued territory. The 4,200 level in S&P 500 futures remains the key level to watch on the downside for support.

Chinese equities (HK50.I & 02846:xhkg): Offshore listed Chinese equities entered a bear market

Chinese equities continued their downward spiral, reaching a new nadir, despite the recent upward trajectory of US markets. Chinese companies traded outside of the mainland performed more poorly than their domestic A-share peers as foreign investors’ confidence in China’s economic recovery has been fading by the day. While the CSI300 Index shed only 11% from its January high, both the MSCI China Index and the Hang Seng China Enterprise Index fell more than 20% from their January highs and technically entered a bear market. Hong Kong’s Hang Seng Index, extending its loss by 0.7% today, was 18.9% below its peak in January.

FX: dollar grinds to new highs after debt ceiling deal

The US dollar continues to grind stronger and has posted local highs versus several currencies this morning, likely in part on the US debt ceiling deal. Once the ceiling is formally lifted, presumably in the coming days, USD liquidity could come under pressure on the blitz of US treasury issuance needed for it to rebuild its reserves by some hundreds of billions of US dollars in the coming months. EURUSD traded sub-1.0700 this morning for the first time since March, with the next support the range lows into 1.0516. USDJPY is well back above 140.00, GBPUSD is eyeing the local lows just above 1.2300 and AUDUSD nearly touched 0.6500 this morning, near the lows of the year posted last week.

Crude oil remains stuck with focus on debt ceiling deal and OPEC+

Oil prices remain stuck while awaiting the response from the Congress on the debt ceiling deal. WTI and Brent futures traded lower during Asian hours but overall, within small uptrends that was supported last week by the Saudi Arabia’s Energy Minister warning that short speculators should “watch out”. A warning that helped increased the Brent crude net-long by the most in two months in the week to May 23. Focus is on the OPEC 3-4 June meeting, with increasing prospects of a production cut, after Russia also walked back on comments that OPEC wouldn’t intervene at the June meeting. Russian Deputy Prime Minister Alexander Novak said they will engage in discussions with partners to determine what is best for the market.

Gold remains challenged by recent shift in focus to rate hike from cuts

Gold trades near support at $1934, the 50% retracement of the February to May rally after slumping last week as the dollar strengthened in response to continued strength in US economy data raised the risk of further rate hikes and with that a postponement of the timing of a gold supportive peak rate situation. However, with elevated rate cut expectations now priced out, gold will be in a better position to respond to price supportive developments. Focus this week on the US debt ceiling deal and Friday’s US jobs data.

The US yield curve (2YYK3, 10YK3, 30YK3) bull flattens following news surrounding the debt ceiling

The risk of a substantial financial contraction coming from a debt ceiling deal is removed if the bill presented by Biden and McCarthy passes Congress. However, the risk of a liquidity squeeze rises significantly as the treasury has to issue a total of $1 trillion to replenish its reserves. $600 billion will need to be raised in just six weeks. That will likely dry up liquidity from risky assets and continue to bear flatten the curve. In the short term, we expect the two-year yields to break above resistance at 3.63% and soar to 4.8%. Ten-year yields will rise at a slower pace but will be likely to test resistance at 4%. Thirty-year yields are likely to soar to 4.07%.

UK Gilts (FLGM3, FLGU3) are likely to continue to tumble amid soaring US Treasury yields

Although 10-year yields are likely to test and break resistance at 4.59% and 2-year yields might soar test resistance at 4.68%, we believe rates will unlikely soar to break 5%. As yields rise towards the 5% level, the financial sector will begin to suffer as happened last September during Truss’ mini-budget crisis. Therefore, the BOE will need to step into rescue, limiting rates’ upside to avoid a financial crisis.

What is going on?

US debt ceiling deal back in focus today as Congress returns from holiday

While Biden and McCarthy reached an agreement-in-principle on lifting the debt ceiling deal over the weekend, they will still have to secure enough backing from the Republican majority in the House and eventually the Democratic majority in the Senate to move forward. The deal’s details immediately triggered a backlash from right wing conservatives. The first critical test will be a vote in the House expected on Wednesday. The Senate is due to follow with votes that could slip into the weekend. The US Treasury has declared that if no legislation is enacted by June 5, the US will run out of cash to pay all its bills. If the deal is passed as currently agreed, it would lift the debt ceiling until early 2025, importantly punting this perennial showdown to the other side of the November 2024 US Presidential election.

Turkish lira weakens as President Erdogan set to announce new cabinet

The lira lost another 0.6% from yesterday’s levels versus the US dollar after the weekend run-off saw President Erdogan emerge victorious. He met with former finance minister Mehmet Simsek, seen as a market friendly choice, as he declared that he would look to bring “international credibility” to his governing team, suggesting that the policies that have driven extreme inflation in Turkey in recent years, especially the heavy intervention in the country’s monetary policy, could come under review.

UK Shop Price data hits record high in May

The British Retail Consortium reported overnight that shop prices rose 9.0% year-on-year, a record after a slight dip from March’s 8.9% to April’s 8.8%. Official UK retail prices (the Retail Price Index) registered a significant drop in April to 11.4% YoY vs. 13.5% in March and the cycle high of 14.2% in October. Anecdotal reports suggest some UK consumers are prioritizing spending and saving on promotions and with the use of loyalty cards. The most recent April UK Retail Sales report showed retail volumes down 2.6% YoY.

What are we watching next?

Australia’s April CPI could rise, but AUD could continue to struggle

The monthly CPI for Australia is due on Wednesday, and April inflation is expected to tick higher to 6.4% YoY from 6.3% YoY previously when food prices saw notable gains. A weaker-than-expected print could confirm the bias from the Reserve Bank of Australia to pause at the next policy meeting on June 6. This would mean AUDUSD could also extend its down move further below 0.65 handle, with the only real support left on that chart the late 2022 low below 0.6200. However, if the print comes out to be firmer-than-expected, it will complicate the task of the RBA. RBA Governor Lowe will appear before a parliamentary committee ahead of the CPI release.

US Conference Board Consumer Confidence survey today

Friday’s final University of Michigan sentiment survey saw a slight improvement on the preliminary survey, as the Expectations component was revised up to 55.4 from 53.4, although this still represents a material drop from the 17-month high in February at 64.7. Importantly, the final May University of Michigan 5-10 year inflation expectations component dropped back to 3.1%, within the range since 2011, versus the 12-year high of 3.2% in the preliminary survey. Today sees the release of the Conference Board Consumer Confidence number for May. The April survey showed the expectations component dropping to 68.1, the third-worst number since 2013, with only the two summer months of June and July of 2022 posting worse numbers (likely on the sentiment impact of the spike in petrol prices in that time frame). And the April survey also showed the greatest spread between the “present situation” and expectations at –83 since 2001. Historically, overall consumer confidence correlates closely with the strength of the labor market. The survey headline is expected to soften slightly to 99.0 vs. 101.3 in April.

Economists expect China’s manufacturing to contract in May

Investors are now presented with a fresh set of insights aimed at discerning the trajectory of China's much-anticipated economic revival, ascertaining whether the weakness exhibited in April's data was merely a transient blip or indicative of a waning recovery. Economists surveyed by Bloomberg forecast that both the official NBS manufacturing PMI and the private Caixin manufacturing PMI will register at 49.5, marginally below the pivotal 50 mark, thereby remaining within contractionary terrain. Notably, economists have taken cognizance of the decline in the Emerging Industries PMI, which retreated from 53.1 in April to 50.7 in May. In addition, South Korea's exports to China, widely considered a bellwether for China’s manufacturing sectors, have recorded a contraction of 23.4% Y/Y during the initial 20-day period of May. Meanwhile, economists in the Bloomberg survey expect continued expansion in non-manufacturing activities, albeit at a more moderate pace. The NBS non-manufacturing PMI, encompassing construction and services, is projected to decelerate from April's reading of 56.4 to 55.3 in May. Similarly, the Caixin services PMI is anticipated to dip from 56.4 in April to 55.2 in the same month.

Earnings to watch

Today’s US earnings watch is HP and HP Enterprise with both reporting after the close. HP (consumer business) is expected to report revenue growth of –21% y/y and EBITDA of $1.24bn down from $1.59bn a year ago, driven by significant impact from inflation and on consumer spending on consumer electronics. HP Enterprise is expected to report revenue growth of 9% y/y and EBITDA of $1.4bn up from $1.1bn a year ago.

  • Tuesday: HP, HP Enterprise
  • Wednesday: Salesforce, Crowdstrike, Okta
  • Thursday: Broadcom, VMware, Lululemon Athletica, Dell Technologies, MongoDB, Zscaler, Dollar General, Hormel Foods

Economic calendar highlights for today (times GMT)

  • 0700 – Spain Flash May CPI
  • 0700 – Sweden Parliamentary hearing with Riksbank on monetary policy
  • 1300 – US Mar. S&P CoreLogic Home Prices
  • 1400 – US May Consumer Confidence
  • 1430 – US May Dallas Fed Manufacturing Activity
  • 2300 – Australia RBA Governor Lowe to testify
  • 2350 – Japan Apr. Industrial Production
  • 0100 – New Zealand May ANZ Business Confidence
  • 0130 – China May Manufacturing and Non-manufacturing PMI
  • 0130 – Australia Apr. CPI

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.