Note: The Saxo Market Daily Podcast will return on Monday July 25
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equity gains continued on Thursday for a third consecutive day as earnings upside surprises continued, but futures have turned negative in Asia. ECB’s 50-bps rate hike along with the anti-fragmentation tool announcement did little to lift sentiment, rather suggesting that the window for the ECB to tighten is fast diminishing and this could have repercussions on the weaker Eurozone economies. US economic data continues to under-deliver, but the focus remains on Fed’s announcement next week and the Q2 GDP report. More big companies report earnings next week, and energy and tech sectors will be key to watch.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) had lackluster trading this morning
Autos in general outperformed. Li Auto (02015:xhkg) and NIO (09866:xhkg) were 2%-3% higher. The Cyberspace Administration of China released its verdict on Didi Global (DIDIY:xnas) with a RMB8 billion fine, saying Didi had neglected to comply with specific regulatory demands and avoided oversights from regulators and committed offences under the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. Market took it positively as investors believe that it might pave the way for Didi Global to seek listing in Hong Kong. Hang Seng TECH Index (HSTECH.I) opened nearly 2% higher but pared gains later to end the morning session only 0.5% higher.
EURUSD downside returns
EURUSD saw a knee-jerk reaction to ECB’s 50bps rate hike, also helped by relief on gas supply front as Nord Stream started flowing again at about 40% capacity, much like before the maintenance. However, as we have noted earlier, EUR rallies will unlikely be sustainable given that the Eurozone economy faces far worse economic risks than the U.S., and now political risks are intensifying as well. Faster tightening by the ECB only suggests that the window to tighten is diminishing fast, and EURUSD was seen back below 1.02 levels overnight. July PMIs due in the day ahead and may likely be a further dampener for the single currency as recession concerns inflate for some of the countries in the region.
USDJPY tested the 137 support but paring losses
The slump in US yields on Thursday spelled some relief for the Japanese yen. USDJPY slipped to 137 although some of the decline was retraced in the overnight session as dollar strength returned. With Bank of Japan being one of the very few central banks still sticking to an easy money policy, the pain for the yen isn’t over, however. The key level to watch is 140, beyond which the potential for a currency intervention will increase.
Oil (OILUKSEP22 & OILUSAUG22)
Oil prices saw a modest recovery in the overnight session but WTI futures are still well below the $100/barrel mark while brent is below $105. The restoration of Russia’s gas supplies to Europe and restart of Libya’s production spelled some relief for the oil prices on Thursday. This week’s EIA report that showed US stockpiles of gasoline rose by 3.5mbbls last week also continued to hang over the market. This has been driven by weaker demand, despite being in the middle of the US driving season. At 8.52mb/d, demand is at its lowest seasonal level since 2008, as high gasoline prices take their toll on consumers.
Caution picks up ahead of next week’s big eco & earnings releases
Equity sentiment will probably cool following more signs the US economy is showing signs of fatigue, while company outlooks get darker. The latest results from Snap (SNAP) show big business is reluctant to spend on advertising in 2022. Not only do we think markets are on edge for more company’s outlooks dropping, with Twitter’s results ahead. But caution is in the air ahead of Apple’s (AAPL) and Microsoft’s (MSFT) results next week. While critically, the Fed is due to hike rates next week, with US GDP and Eurozone GDP out for Q2 could show the US is getting is closer to a recession, along with the EU area.
What is going on?
European Central Bank (ECB) hiked by 50 basis points to 0% - a first in 11 years
This is the end of zeronomics, the natural experiment of negative nominal interest rates. This is certainly a relief for the banking and financial sector. We are a bit puzzled on the future of forward guidance. Until the last moment, most ECB Governors hinted at a 25-basis points interest hike. There was clearly a case for a 50-basis points hike, however. We believe the pace of interest hike will be unpredictable in the coming months, thus resulting in higher volatility in financial markets. As expected, the ECB unveiled its anti-fragmentation tool: the Transmission Protection Instrument (TPI). There are mostly four country’s criteria for the ECB’s TPI: 1) compliance with EU fiscal rules. The recipient must not be in excessive deficit procedure, for instance; 2) absence of severe macroeconomic imbalances; 3) the trajectory of government must be sustainable; and 4) sound and sustainable macroeconomic policies. The likelihood is high that Italy will not meet these criteria when the general election will come in September/October. But who cares. The TPI is actually a perfect black box. The ECB will decide when to apply, how to apply, and whether or not to sterilize according to zero real binding. The below rules are just there to placate any potential legal challenge on the German constitutional court. This is not « whatever-it-takes » anymore. This is « whatever-we-want ».
US data continues to send out warning signals
A big fall in the July US Philly Fed and rise in initial jobless claims is dampening the Q3 GDP growth outlook. Philly Fed printed -12.3 for July, significantly below the expected 0.0 and the prior -3.3. Both new orders (-24.8 from -12.4 prev) and employment (19.4 from 28.1 prev) showed a big drop, suggesting a 75bps rate hike at the next week’s FOMC meeting is still more likely than a bigger 100bps move. US bond yields slid sharply on the data, with 10Y back below 2.9%. Some are expecting a Fed pivot, but we believe that's still too far. Remember the horrible inflation print we got earlier, and we reiterate that the Fed will need to continue to raise rates, and force the economy into some form of a recession. July PMIs are on watch today, both in the US and the Eurozone.
Japan’s inflation above target again
Japan headline CPI came in at 2.4% for June, as expected and above BOJ's target of 2%. Core CPI edged up to 2.2% y/y in June from last month’s 2.1% despite government subsidies helping to slow price gains. Even as the drivers of inflation are broadening and consumer pain is visible, the print is unlikely to nudge the Bank of Japan to tweak its monetary policy yet. Market bets against Japan’s easy policy have also eased off, and even as the Japanese yen stays near record lows, that's not enough to move Kuroda, not this side of 140 at least. Still, Bank of Japan remains a low probability, high impact event which is worth watching in H2.
Italy’s prime minister Draghi resigned
After a week of pollical uncertainty and tension, Italy’s president Mattarella finally accepted PM Draghi’s resignation on Thursday and dissolved the parliament. Italy will hold a general election in the coming months. Opinion polling suggests that Giorgia Meloni’s far-right Brothers of Italy is most likely to win in the election and that may lead to a center-right coalition. The spread of BTP (i.e. Italian government bonds) blew out by as much as 25 basis points before settling 19 basis points wider at 232 basis points.
What are we watching next?
Preliminary July PMIs on tap today
Friday’s main focus will be the S&P PMIs for July for both the Eurozone and the US. With US data recently pointing to recession fears, the US print will likely garner significant attention. However, Eurozone economic risks still remain larger and with the ECB’s 50bps rate hike yesterday and brewing political crisis in the region will demand a closer look at the Eurozone PMI instead. Weaker-than-expected Eurozone numbers could be negative for EURUSD, while the impact from US prints is likely to insignificant with the market focused on Fed’s meeting next week and a slew of corporate earnings.
Oil and tech earnings in the week ahead
With oil prices staying higher in the second quarter, earnings for oil majors. including Shell, Exxon Mobil, TotalEnergies and Chevron, remain on watch for next week. Shell already flagged last week a potential $1 billion gain from soaring margins at the unit that processes crude into fuels and chemicals. TotalEnergies has also said recently that its refining business had an “exceptional” performance in the period. More importantly, forward guidance will be key as oil prices gains have stalled for now and some governments are demanding increased taxes on energy companies. Tech earnings will also accelerate into the next week, and we will possibly hear more of cuts in spending and hiring plans.
Next week we will see results from a very diverse group of companies. A preview of Q2 earnings releases can be read on the trading platform or here.
- Monday 25 July: NXP Semiconductors, Kuehne + Nagel, Philips, Ryanair
- Tuesday 26 July: Alphabet, Visa, LVMH, Coca-Cola, McDonald’s, UPS, Texas Instruments, Raytheon Technologies, Unilever, Christian Dior, General Electric, UBS Group, General Motors, Archer-Daniels-Midland, Southern Copper, DSV, UniCredit
- Wednesday 27 July: Microsoft, Meta, Bristol-Myers Squibb, Qualcomm, AMD, Equinor, GSK, ServiceNow, Rio Tinto, Mondelez, Boeing, Airbus, 3M, Kering, Humana, Mercedes-Benz, Ford Motor, Kraft Heinz, Shopify, BASF, Danone, Fanucm Enphase Energy, Spotify, Garmin
- Thursday 28 July: Apple, Nestle, Pfizer, Merck, L’Oreal, Shell, Comcast, Intel, Linde, TotalEnergies, Sanofi, Honeywell, Anheuser-Busch InBev, Keyence, Volkswagen, Air Liquide, Schneider Electric, Banco Santander, Valero Energy, Stellantis, Neste, BAE Systems, Arcelor Mittal
- Friday 29 July: Amazon, Exxon Mobil, P&G, Mastercard, Chevron, AbbVie, AstraZeneca, Sony, Caterpillar, Colgate-Palmolive, BNP Paribas, Twilio, Pinterest
Economic calendar highlights for today (times GMT)
0800 - S&P Global July (P) Eurozone Manufacturing PMIFollow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
1230 – Canada May Retail Sales
1345 – S&P Global July (P) US Manufacturing PMI