Global Market Quick Take: Europe – June 14, 2023 Global Market Quick Take: Europe – June 14, 2023 Global Market Quick Take: Europe – June 14, 2023

Global Market Quick Take: Europe – June 14, 2023

Macro 9 minutes to read
Saxo Strategy Team

Summary:  The rally in US equities extended yesterday after the May US CPI report showed core inflation rising in-line with expectations. Sentiment stayed positive even as US treasury yields closed higher all along the curve after initially falling in the wake of the inflation report. Still, the market is expecting the Fed to hold its fire on further rate tightening at today’s meeting, with only slightly better than even odds of one last rate hike for the cycle in July.

What is our trading focus?

US equities (US500.I and USNAS100.I): conditions are aligning for a melt-up move in equities

Yesterday’s US May inflation report showed headline inflation is coming down while the core inflation remains stubbornly stickier. However, the equity market decided that the figures were good enough for the Fed to enter “pause mode” and thus adding more fuel to the already strong momentum. S&P 500 futures rallied beyond the 4,400 level closing around the 4,417 level taking the US equity market back to levels not seen since April 2022. If tonight’s FOMC rate decision delivers the “pause mode” scenario and the Fed chooses not to mention the growing financial speculation in equities, then the right conditions could emerge for a further melt-up.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Investor sentiment remains cautious

In addition to cutting the 7-day Open Market Operations (OMO) reverse repo rate, the PBoC also reduced the rates for the Standing Lending Facility (SLF) by 10bps across the overnight, 7-day, and 1-month periods. This move has raised expectations of a potential cut in the crucial Medium-term Lending Facility (MLF) rate on Thursday. Although the monetary easing measures have had a positive impact on market sentiment to some extent, investors' risk appetite toward Chinese equities remains subdued. They are eagerly awaiting a larger-scale stimulus package aimed at boosting demand. The fact that credit data reported yesterday was disappointing and the activity data to be released overnight is expected to be weak adds to the cautious market sentiment. The Hang Seng Index showed minimal changes after returning from the lunch break. On the other hand, the CSI300 index experienced a 0.5% gain, primarily driven by sectors such as food and beverage, lodging, and educational services.

FX: USD dipped on CPI. G3 central bank meetings over the next three days.

The US dollar generally traded softer after the US CPI release, although the action wasn’t consistent as traders eye today’s FOMC meeting as the critical event risk. Only a small minority are looking for the Fed to hike again today, although yesterday did see US treasury yields lifting all along the curve as the market prices a later start to the Fed’s eventual easing. More on FOMC below. Higher US yields saw USDJPY bid back above the 140.00 level and the recent turn higher in central bank tightening expectations elsewhere is increasing the pressure on the Bank of Japan, which meets on Friday. GBPUSD jumped back above 1.2600 as the far stronger than expected labor market data saw 2-year UK gilt yields soar some 25 basis points on the day. NOK recovered after a weak GDP report and EURNOK is poking at an important support area near 11.48 this morning.

Crude oil receives a boost from signs of broad China stimulus plan

Crude oil held onto yesterday’s strong gains after a surprise rate cut by the People’s Bank of China raised expectations that more would follow to support a sputtering economy. In addition, the US is planning to buy 12 million barrels of oil for its strategic reserves while an in-line CPI print on Tuesday raised expectations for a hawkish pause on rates at today’s FOMC meeting. OPEC maintains an upbeat estimate for global oil demand in 2023 but with half of the expected 2.5m b/d rise pencilled in for the next quarter, there will be some room for disappointment should demand fail to rise at that rate. Today, the IEA will release its monthly oil market report. Crude oil remains rangebound with the third consecutive rejection below $72 in Brent highlighting an area with strong support, possibly on concerns OPEC could announce an even deeper cut.

Gold: trades softer as yields rise ahead of key central bank decisions

Gold dropped to near support on Tuesday after with yields rising amid a wall of new issuance and after inflation fell in line with expectations, thereby supporting appetite for riskier assets. The CPI print gave the FOMC a reason for doing nothing at today’s meeting, but a peak rate scenario is not yet expected with the market pricing a July rate hike at 60%. A recent series of lower highs, especially the inability to find fresh momentum above the 21-day moving average has raised the short-term risk of a deeper correction. Key support levels to watch are $1935 vs the dollar and €1800 vs the euro.

US Treasury auctions continue to receive solid demand. Another $166bn is coming today and tomorrow (2YYM3, 10YM3, 30YM4, TBIL:xnas).

The market has seen one of the best 30-year auctions on record, with the highest bid-to-cover since January 2020. Demand for bills was also solid, and the use of the RRP facility fell gradually, signaling that support might come from money market funds and not excess bank reserve, sending a positive signal to the market. The yearly CPI number surprised on the downside, yet the monthly core CPI is steady at 0.4% indicating that the fight against inflation is not over. Markets decreased interest rate cut expectations pushing yields higher. The 2-year yield broke above 4.58%, and it will find resistance next at 4.75%. Today’s FOMC meeting will be decisive for the direction of rates. So far, rates remain on an uptrend.

Demand for Gilts is unlikely to return until inflation is under control (IGLS, GLTY, VGOV , FLGU3).

Hot labor and wages propelled Gilt yields higher yesterday, particularly in front-end maturities, further inverting the Gilt yield curve. The spread between 10- and 2-year Gilts hit -45bps, a level not seen since September. Markets are now pricing the BOE Rate to peak at 6% in February. Hence, two-year yields broke above resistance at 4.48% soaring by 25bps towards the 5% resistance level. The question, however, is how long can the financial system endure this level for? Last September, the BOE had to step in to save the financial sector. This time around, it may need to choose between financial stability or inflation.

What is going on?

US CPI slows, giving room for a Fed pause

US CPI in May rose 0.1% MoM (exp. 0.2%; prev. 0.4%) and 4.0% YoY (exp. 4.1%; prev. 4.9%). The core, however, was slightly higher than expectations at 5.3% YoY (exp. 5.2%; prev. 5.5%) but stayed in-line on a MoM basis coming in at 0.4% (exp. 0.4%; prev. +0.4%). The main downside pressures came from gasoline prices falling 5.6% MoM. The main upside pressures came from two of the biggest components – shelter (43% weighting within core CPI basket) continues to run hot at 0.6% MoM while used cars jumped 4.4% MoM. Shelter prices could see downward pressure in the coming months as most US cities see rents peaking out. Meanwhile, car prices usually track Mannheim used car auctions with a lag, and this has fallen over the last two months. So further downside in CPI remains likely, which together with weakening near-term inflation expectations, could provide room for Fed to pause its rate hike cycle for now.

US judge temporarily blocks Microsoft-Activision deal

Recently it was a report from UK regulators that laid out roadblocks in front of Microsoft in their attempt to acquire the gaming giant Activision Blizzard, but yesterday a federal judge in California followed suit putting the deal on pause the Federal Trade Commission has had enough to thoroughly investigate the deal and what it means for competition.

Bunge acquires Viterra to form agribusiness giant

The US-based agribusiness Bunge announced yesterday a $8.2bn takeover of Viterra in a bid for creating an industry giant in agriculture storage, trading, fertilizer, import/export, and food processing. The two companies expect the merger to go through by mid-2024 with Glencore becoming a 15% shareholder in the combined company after the deal closes. The key risk is Argentina’s antitrust regulator which might be worried that competition will be too limited in its agriculture sector.

China's May Credit Data Disappoints

China's May credit data disappointed as new RMB loans fell short of expectations, reaching RMB1,360 billion instead of the forecasted RMB1,550 billion. The growth rate of outstanding loans slowed to 11.4% year-on-year, mainly due to a significant decline of 44% in corporate loans. On the other hand, new loans to households rebounded. New aggregate financing for May also fell below expectations, representing a 45% decline from last year. The growth rate of outstanding aggregate financing decelerated to 9.5% Y/Y in May, down from 10.0% Y/Y in April. Furthermore, the growth rate of M2, a measure of the country's money supply, slowed to 11.6% Y/Y from 12.4%. The disappointing data highlights challenges for China's economy, indicating weak loan demand and potential growth headwinds in the upcoming months.

Industrial metals: China rate cut drives gains

Copper rose after China cut its short-term policy interest rate. The PBoC cuts its seven-day reverse repo rate by 10bp to 1.9%. This came after data showed credit demand weakened in May, with aggregate financing at CNY1.6tn. Beijing is also said to be considering a broad package of stimulus measures focused on supporting the real estate market. Meanwhile, supply side issues continue, and at $3.825/lb copper currently trades above a trifecta of previous resistance levels.

What are we watching next?

China: main PBOC policy rate likely to see a cut after recent moves

On Tuesday, the People's Bank of China (PBoC) reduced the 7-day OMO reverse repo rate by 10bps to 1.9%. After the market closed, the PBoC further announced a cut in the Standing Lending Facility (SLF) rates. The overnight, 7-day, and 1-month rates of the SLF were lowered by 10bps to 2.75%, 2.9%, and 3.25% respectively. This adjustment in the SLF rates aligns with the recent change in the OMO reverse repo rate, as the 7-day SLF typically sits 100 basis points above the 7-day OMO reverse repo rate. These strategic moves by the PBoC serve as strong indicators that the most crucial policy rate, the 1-year Medium-term Lending Facility Rate (MLF rate), is highly likely to be cut by 10bps to 2.65% on Thursday. If executed, this MLF rate reduction will pave the way for Chinese banks to lower the 1-year and 5-year Loan Prime Rate (LPR) on June 20.

China: Retail sales, industrial production, and fixed asset investment expected to slow in May

Scheduled to release on Thursday, China's retail sales growth is expected to slow to 13.7% Y/Y in May, compared to 18.4% in April, due to factors such as robust automobile demand and recovery in catering services, offset by a higher base from last year. Industrial production is projected to soften with a growth rate of 3.5% Y/Y in May, down from 5.6% in April, as suggested by weakening exports and steel production. Fixed asset investment growth is also anticipated to drop to 4.4% Y/Y from 4.7%, as indicated by the deceleration in the PMI construction sub-component. These trends indicate a moderation in retail sales, industrial production, and fixed asset investment, leading to expectations of stimulus measures from the Chinese authorities to address the slowing growth rates.

Technical update

  • Nasdaq 100. No resistance until 15,265
  • S&P 500. No strong resistance until 4,546
  • US 10-year Treasury yield. Uptrend intact. Likely to reach 4%
  • EURUSD rejected at 1.08. Likely to resume down trend towards 1.0520 support
  • GBPUSD seems likely to re-test key strong resistance at 1.2667
  • EURJPY higher. If breaking above 151.62 likely move to 155.00
  • GBPJPY likely to reach 180 resistance
  • AUDUSD rejected at 0.68. Likely set back to 0.67 before another go at 0.68
  • EURNOK below support at 11.51. Key support at 11.38
  • Dutch Gas on the move. Building uptrend

FOMC meeting today after in-line core CPI data

Expectations for Fed tightening at today’s FOMC meeting and the July meeting edged slightly lower yesterday in the wake of the May US CPI report, with only about 15% eyeing a Fed rate hike today and only slightly more than 50/50 odds for a hike at the July meeting. More interesting yesterday than any shifts in Fed hike odds was the significant adjustment higher in the yield curve further forward, as the market reduces expectations for the eventual Fed easing cycle. The expectations for the December Fed meeting, for example, are now the same as the current policy rate as the market is pricing that the Fed is likely to hold its rate at the current level for longer. The expected policy rate in 2024 has been adjusted even more sharply higher as the US 2-year treasury closed at a new cycle high since the banking turmoil of March. Key for Fed watchers today will be the message in the forward guidance and how the Fed projects its policy rate relative to the projections on the performance of the economy. The March projections suggested the Fed sees the policy rate at just above 5% (where it is currently) at the end of this year with PCE core inflation still running at 3.6% (at 4.7% through April) and unemployment rising to 4.5% (3.7% as of May) and real GDP growth of only 0.4%. The committee could raise its 2023 growth forecast while lowering its inflation forecast. That would be a dovish message and would have to be countered with enough hawkish commentary to keep a July rate hike in play.

Any dissenting votes at today’s decision will be worth monitoring. Members like Lorie Logan, Neel Kashkari, Christopher Waller and Michelle Bowman have been voicing hawkish sentiments.

Earnings to watch

Next earnings focus is Lennar earnings today after the US market close with analysts expecting revenue down 13% y/y to $7.3bn and EBITDA of $1bn down from $2bn a year ago as the US homebuilder market is seeing lower growth as the consumer is still digesting the higher interest rates. Read our Friday’s earnings preview for our take on Adobe earnings scheduled for Thursday this week.

  • Wednesday: Lennar
  • Thursday: Adobe, Kroger, Jabil, Halma

Economic calendar highlights for today (times GMT)

0800 - IEA's Monthly Oil Market Report
0900 – Eurozone Apr. Industrial Production
1230 – US May PPI
1430 – EIA's Weekly Crude and Fuel Stock Report
1800 – US FOMC Announcement/Rate Decision
1830 – US Fed Chair Powell Press Conference
2245 – New Zealand Q1 GDP
0120 – China PBOC Rate Announcement
0130 – Australia May Employment Data
0200 – China May Industrial Production
0200 – China May Retail Sales

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