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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)S&P 500 futures were choppy yesterday ending unchanged for the session while the index futures are pushing higher this morning trading around the 4,161 level. The decline in oil prices and interest rates moving lower again are both helping sentiment. Unless the US jobs report and hourly earnings disappoint later today then momentum could extend into the weekend and may attempt for a test of the 4,200 level in S&P 500 futures.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Semiconductor names continue to rise in A-shares as well as Hong Kong trading, as investors anticipate more support from the Chinese government to bolster the development of this strategic industry amidst the escalation of tensions over the Taiwan Strait, SMIC (00981:xhkg) +4.8%, and Hua Hong (01347) +7.7%. Market sentiment was helped by the report that China’s infrastructure investment is expected to grow by 11% in 2022. Digital renminbi concept stocks soared in mainland bourses in anticipation of more policy support. The CSI300 Index gained 0.4% while Hang Seng Index was flat. Despite reporting better-than-expected results, Alibaba (09988:xhkg/BABA:xnys) fell 2.6% following news report that Softbank had raised as much as $22 billion from sale of Alibaba shares through derivatives that allow delays in the handover of shares for two years and Softbank to hold onto the voting rights till then.
GBP pairs after dovish hike from BoE yesterday
See more on the BoE announcement below, as sterling fell on the back of yesterday’s meeting, interestingly despite only minor adjustments by the end of the day to the forecast policy tightening path from here from the BoE (after considerable intraday volatility). GBPUSD fell from near 1.2200 at the moment of the decision to well below 1.2100 before righting itself and trading back to almost unchanged on the day near 1.2150, while EURGBP rallied sharply from near range lows to above 0.8400, if still shy of the 0.8445 200-day moving average.
USD pairs over US jobs data today
The USD was mixed yesterday, staying firm against commodity currencies as prices for crude oil and other major commodities suggest a market gearing up for recession risks, but lower – after an intraday rally – against the euro and the JPY. If the US jobs data solidifies the view that the US labor market is softening and pushes yields lower, the greenback may see an intensification of this pattern, with USDJPY particularly yield-sensitive. A far stronger than expected jobs report together with a considerable upside surprise in the average hourly earnings data in particular could see the USD broadly stronger. EURUSD needs to resolve one way or another soon after nearly three weeks in the 1.0100-1.027
Gold breaking above 1,780 resistance
With rising geopolitical tensions following Pelosi’s visit to Taiwan, the demand for safe haven Gold has picked up. The strategic response will be key to watch on a medium-term basis, with China possibly choking off chip supplies. Gold has cleared the key $1780 resistance and the next test will be at the psychologically important 1800 level. A softer USD and lower yields this week have also helped support investor appetite.
Crude oil prices drop further. (OILUKOCT22 & OILUSSEP22)
Crude oil prices have now dipped to their lowest levels since Russia invaded Ukraine as weaker demand and improving supply are seen in the short term. WTI futures dipped below $90/barrel to $88/barrel, breaking a key support level. Brent futures were also seen below $95/barrel in early Asian hours. While demand destruction fears have been creating downside pressures, clear guidance for a recession by the Bank of England as well as ECB’s downbeat outlook has amplified concerns. Meanwhile, a ramp-up in Libya’s supply as well as optimism on the Kazakhstan terminal have eased concerns for a near-term supply shortage.
US Treasuries (IEF, TLT)
US yields trade quietly ahead of the US jobs report, where the nonfarm payrolls and average hourly earnings data are important inputs for US yields after the entire curve lifted sharply on Wednesday on the far stronger than expected July US ISM Services survey. To full reverse the recent dip in yields at the longer end of the curve, the 10-year benchmark needs to pull back above the 3.00% area, which appears a tough task as long as the market continues to mark the odds higher of an incoming recession as the 2-10 yield curve inversion this week has fallen to a 22-year low.
What is going on?
Bank of England with a very dovish hike
The Bank of England hiked rates by 50 basis points to 1.75%, as the majority expected, with one dissenting voter looking for a smaller hike. The move was the largest rate hike since 1995. More importantly, they forecast an outright recession to start beginning in Q4 as inflation is set to peak at 13% later this year even if it is forecast to fall below target in three years. The recession is forecast to last five quarters after starting in Q4 2022, suggesting the tightening from BOE may slow down from here. At the same time, BoE plans to reduce its balance sheet by £80 billion over 12 months (range of 50-100 billion had previously been aired) starting in late September.
Alibaba earnings beat market expectations
Alibaba (09988:xhkg/BABA:xnys) reported better-than-expected June quarter (Q1FY233) results. Revenues came in at RMB205.6 billion, flat from a year ago but 1% above Bloomberg consensus. Non-GAAP EPS declined to RMB11.73 but 14% above consensus. Adjusted EBITA and Non-GAAP net profit were RMB34.4 billion (-18% YoY) and RMB31.4 billion (-31% YoY) but both beating expectations (by 25% and 14% respectively vs Bloomberg consensus). The better-than-expected results came primarily from cost cutting. The losses in the companies’ new ecommerce initiatives, such as Taobao Deals, narrowed. The company’s business was badly affected by the lockdowns in April and May but it began to recover from late May. The management said that the recovery continued and had become more apparent in July but customer demand was still weak overall and it would take time to fully recover. During the quarter, Alibaba repurchased a total of USD3.5 billion worth of shares and still has an outstanding authorization to repurchase USD12 billion more of shares until March 2024.
Tesla shareholders approve a stock spilt to attract more investors
Tesla (TSLA) shares extended their bullish run and now trade up 50% from the May low. Tesla nudged up in the regular session and after the market close, after shareholders approved a 3-for-1 stock split, in a bid to attract more retail investors. The split will bring down Tesla’s spun-off new shares, down to the $300 range. At Tesla’s AGM Musk assured investors that inflation is not affecting the business as much as it did six months ago, Meanwhile Musk is pushing ahead with making in-house battery cells to control costs where possible. And in terms of new revenue streams, the Cybertruck is said to be on track to start production mid-next year. From a technical perspective, Tesla’s shares are in overbought territory, meaning they could be due for a pull back.
What are we watching next?
US July jobs report up today
After another elevated weekly initial jobless claims reading, the market may be leaning for a somewhat softer non-farm payrolls change data point in today’s US labor market data. As well, the Household Survey used to calculate the participation rate and official Unemployment Rate (expected at 3.6% again for July) has shown a stagnation that is not evident in the Establishment Survey used to calculate the non-farm payrolls data. Expectations for the nonfarm payrolls change are for a number near +250k versus a 3-month average around +375k, while the Average Hourly Earnings are expected at +0.3% MoM and +4.9% year-on-year vs +5.1% YoY in June. An upward surprise in earnings with a negative surprise in payrolls would be an interesting combination.
Earnings to watch
Today’s focus in North America is Canadian Natural Resources which is expected to post strong results, while here in Europe Allianz has already reported earnings with operating income beating estimates at €3.5bn vs est. €3.3bn. Allianz is also launching another buyback programme which is preferred over M&A transactions at this point; the Q2 result could lift the entire European insurance industry.
- Today: Canadian Natural Resources, Suncor Energy, Allianz, Deutsche Post, Naturgy Energy Group
Economic calendar highlights for today (times GMT)
- 1115 – UK Bank of England Chief Economist Pill to speak
- 1230 – Canada Jul. Employment Data
- 1230 – US Jul. Change in Nonfarm Payrolls
- 1230 – US Jul. Unemployment Rate
- 1230 – US Jul. Average Hourly Earnings
- 1400 – Canada Jul. Ivey PMI
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