Financial Markets Today: Quick Take – August 17, 2022
Saxo Strategy Team
Summary: The US equity market rally extended modestly yesterday, but turned tail upon the cash S&P 500 Index touching the key 200-day moving average at 4,325. Market today will eye the latest US Retail Sales report from July, which saw peak gasoline prices in the US mid-month, while the FOMC Minutes may prove a bit stale, given they were created before three weeks of the market rallying sharply and financial conditions easing aggressively, likely not the Fed’s intention.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures broke above the 200-day moving average yesterday and then got rejected. Momentum in US equities got a bit more fuel from two good earnings releases from Home Depot and Walmart rising 4% and 5% respectively. S&P 500 futures are pushing higher again this morning and will likely attempt once more to break above the 200-day moving average. Long-term US interest rates are still well-behaved trading around the 2.8% level and the VIX Index has stabilised just below the 20 level.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Hang Seng Index rallied 1% today, reversing yesterday’s loss. Meituan (03690:xhkg) bounced nearly 5% after its 9% drop yesterday due to a Reuters story suggesting that Tencent (00700:xhkg) plans to divest its 17% stake (USD24 billion) in Meituan. Tencent denied such a divesture plan last night. Power drills and floor care equipment maker and a supplier to Home Depot (HD:xnys), Techtronic Industries (00669:xhkg) jumped more than 7% after better-than-expected results from Home Depot overnight. On Tuesday, China’s Premier Li Keqiang held a video conference with provincial chiefs from Jiangsu, Zhejiang, Shandong, Henan, and Sichuan to reiterate the central government’s push for full use of policies to stabilize the economy. CSI300 gained 0.6%.
USD pairs, including GBPUSD, which bounced strongly off 1.2000 supportA mixed overnight session for FX as the US yields wobbled. Risk sentiment held up with the mixed US data accompanied by a less bad outcome in the US retailer earnings than expected. This made the safe-haven yen a clear underperformer, and USDJPY rose back above 134. But a clear trend in the pair is still missing and a break above 135 is needed to reverse the downtrend. Cable teased key psychological support at 1.2000 yesterday before rising later in the day above 1.2100 ahead of today’s UK CPI report, which may confirm the need for further BOE action after labor data showed wage pressures. EURUSD bounced from session lows at 1.0123 but has posted a recent bearish reversal that keeps the focus lower, particularly on any breakdown through 1.0100, the multi-week range low. USD traders will focus on today’s US Retail Sales and FOMC minutes.
There was a brief spike higher in USDCNH earlier this week as China moved to stimulate with a small 10-basis point rate cut of the key lending rate – no drama yet, but traders should keep an eye on this very important exchange rate for larger volatility and significant break above 6.80, as Chines exchange rate policy shifts can provoke significant moves across markets.
Crude oil (CLU2 & LCOV2)
touched a fresh six-month low on Tuesday with Brent trading lower, in anticipation of the Iran nuclear deal being revived, before bouncing in response to the API reporting a draw in crude oil and especially gasoline stocks. While a deal with Iran could see it raise production by around one million barrels per day, Goldmans talks about a mutually beneficial stalemate for both sides with Iran wanting to avoid sanctions while the US wants to avoid higher oil prices but also the political backlash from a potential deal. EIA’s weekly crude and fuel stocks report on tap later with the market also focusing on gasoline demand and the levels of exports. Over in Europe meanwhile the Dutch TTF benchmark gas trades near an eye-popping $400 per barrel crude oil equivalent, a level that will continue to attract demand for oil-based products due to switching.
CopperCopper (COPPERUSSEP22) continues to trade within its established upward trending range after China’s Premier Li Keqiang asked local officials from six provinces to bolster pro-growth measures after weaker financing and activity data were reported earlier this week. In addition, copper is also enjoying some tailwind from rising zinc and aluminum prices after Europe's largest smelters said it would halt production and after producers in China were told to curb production in order to preserve electricity supply during the current heatwave. HG copper’s trading range has narrowed to between $3.585, the uptrend from the July low and $3.663 the 50-day moving average.
What is going on?
US housing scare broadens, industrial production upbeat
US Housing starts fell 9.6% in July to an annualized 1,446k, well beneath the prior 1,599 and the expected 1,537k. Housing starts are now down for five consecutive months, and suggest a cooling housing market in the wake of higher borrowing costs and higher inflation. Meanwhile, building permits declined 1.3% in July to 1,674k from 1,696, but printed above the expected 1,650k. There will be potentially more scaling back in construction activity as demand weakens and inventory levels rise. On the other hand, industrial production was better than expected at 0.6% m/m (prev: -0.2%) in July, possibly underpinned by holiday demand but the outlook is still murky amid persistent inflation and supply chain issues.
UK headline inflation hits 10.1%
The highest in decades and above the 9.8% expected and for the month-on-month reading of +0.6%, higher than the +0.4% expected. Core inflation hit 6.2% vs. 5.9% expected and 5.8% in Jun. That matched the cycle high from back in April. Retail inflation rose +0.9% MoM and +12.3% YoY vs. +0.6%/+12.0% expected, respectively. The Bank of England has forecast that inflation will peak out this fall at above 13%.
Reserve Bank of New Zealand hikes 50 basis points to 3.00%, forecasts 4% policy rate peakThe RBNZ both increased and brought forward its peak rate forecast to 4.00%, a move that was actually interpreted rather neutrally – more hawkish for now, but suggesting that the RBNZ would like to pause after achieveing 4.00%. 2-year NZ rates were unchanged later in the session after a brife poke higher. RBNZ Governor warned in a press conference that New Zealand home prices will continue to fall. This is actually a desired outcome after a huge spike in housing speculation and prices due to low rates from the pandemic response and massive pressure from a Labor-led government that had promised lower housing costs were behind the RBNZ’s quick pivot and more aggressive hiking cycle in 2021.
Walmart shares rally on improved outlook
The largest US retailer surprised on both revenue and earnings in its Q2 report with most of the revenue growth coming from higher prices and not volume. The retailer now sees an EPS decline of 9-11% this fiscal year compared to previously 11-13% suggesting input cost pressures are easing somewhat. Walmart is seeing more middle and high-income customers and the retailer has also cancelled orders for billions of dollars to lower inventory levels suggesting global supply chains are improving. Walmart shares were up 5%.
Home Depot still sees robust market
The largest US home improvement retailer beat on revenue and earnings yesterday in its Q2 results with Q2 comparative sales up 5.8% vs est. 4.6% highlighting that volumes are falling as revenue growth is below inflation rates. The US housing market figures on housing starts and permits cemented that the US housing market is slowing down due to the recent rally in mortgage rates. Home Depot is taking a conservative approach to guidance, but the market nevertheless pushed shares 4% higher.
Apple supplier Foxconn suspends its factory in Chengdu due to a power crunch
Foxconn’s Chengdu factory is suspending operations for six days from August 15 to 20 due to a regional power shortage. The suspension is affecting Foxconn’s supply of iPad to Apple. The company says the impact “has been limited at the moment” but it may affect shipments if the power outage persists. The Chengdu government is imposing power curbs on industrial users to ensure electricity supply for the city’s residents. At the same time, Foxconn has started test production of the Apple watch in its factories in Vietnam. With the passage of CHIPS and Science Act earlier this month in the U.S., there have been speculations that Taiwanese and Korean chipmakers and their customers may be accelerating the building up of production capacity away from China.
Big European aluminium plant to halt production
Norsk Hydro’s aluminium plant in Slovakia is halting primary production by end of September due adverse conditions such as elevated electricity prices. The aluminium company would incur significant financial losses should it continue its operations.
What are we watching next?
Eyes on US retail sales today
US retail sales will be next test of the US consumer after less bad retailer earnings last night. Retail sales should have been more resilient given the lower prices at pump improved the spending power of the average American household, and Amazon Prime Day in the month possibly attracted bargain hunters as well. However, consensus expectations are modest at 0.1% m/m compared to last month’s 1.0%.
FOMC minutes to be parsed for hints on future Fed moves
The Federal Reserve had lifted rates by 75bps at the late July meeting to bring the Fed Funds rate to a level they have previously considered neutral, but stayed away from providing any forward guidance. The minutes of that July meeting are to be released later today, and member comments will be watched closely for any hints on the expectation for September rate hike or the terminal Fed rate. The hot July US jobs report and the cooling July inflation number, as well as a blistering three week rally in equity markets have further confused the markets since the Fed meeting, even as Fed speakers continue to push against any expectations of rate cuts as soon as ‘early’ 2023. The next chief focus for Fed guidance will remain on the Fed’s Jackson Hole, Wyoming symposium next week.
Earnings to watch
Today’s European earnings focus is Carlsberg and Coloplast with the former reporting strong first-half organic growth of 20.7% vs est. 15.5% suggesting breweries are seeing healthy volume and price gains. Tencent is the key focus in Asia and especially given the recent developments in China on anti-monopoly laws and its decision to divest its $24bn stake in Meituan. In the US the focus will be on Cisco which saw its growth grinding to a halt in the previous quarter.
- Today: Tencent, Hong Kong Exchanges & Clearing, Analog Devices, Cisco Systems, Synopsys, Lowe’s, CSL, Target, TJX, Coloplast, Carlsberg, Wolfspeed
- Thursday: Applied Materials, Estee Lauder, NetEase, Adyen, Nibe Industrier, Geberit
- Friday: China Merchants Bank, CNOOC, Shenzhen Mindray, Xiaomi, Deere
Economic calendar highlights for today (times GMT)
- 0900 – Eurozone Q2 GDP Estimate
- 1230 – US Jul. Retail Sales
- 1430 – US Weekly Crude Oil and Product Inventories
- 1800 – US FOMC Minutes
- 1820 – US Fed’s Bowman (Voter) to speak
- 2110 – New Zealand RBNZ Governor Orr before parliamentary committee
- 0130 – Australia Jul. Employment Change (Unemployment Rate)
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