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Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities tried to tread water during the cash session yesterday but spilled lower and below the key local support (3,900 area in S&P 500 and 12,000 area in the Nasdaq 100) in late trading after Fedex reported a huge profit miss and dropped its forward revenue forecast (more below). The break below support sets the market on tilt on the quarterly “witching” day for index futures and options today.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hang Seng Index fell 1% in early trading on a weakening Chinese Yuan, USDCNH surging to as high as 7.0350, but pared some losses to be down around half a per cent after the stronger than expected prints of China’s August industrial production, retail sales and fixed asset investment. CSI 300 slid throughout the session and was off 1.6% as of writing. While other activities improved in August, the decline in the fixed asset investment in the housing sector accelerated in August and reflected a still weak property sector.
USD rises to new highs against several currencies
The risk off tone yesterday helped support the US dollar despite US yields trading largely sideways and a mixed bag of US economic data. The US dollar rose almost across the board, with the important exception of USDJPY, as the market is wary of the risk of official intervention. GBPUSD is back poking toward the cycle lows, while USDCAD has cleared the big 1.3200 resistance area, USDNOK rose to new local highs and NZDUSD traded to new lows since early 2020 below 0.6000. Any further deterioration in risk sentiment will likely continue to drive USD strength, with US yields also an important coincident indicator.
Gold slumped below support-turned-resistance at $1680 on Thursday as the market was overwhelmed by momentum and technical-driven selling related to the prospect of a 1% rate hike next week and the terminal rate, expected next March, being lifted to around 4.5%. At a near 2-½-year low, the metal has struggled to find a defense against the FOMC hawkish tone which has driven the dollar and Treasury yields sharply higher. Gold and other investment metals may struggle while the focus remains on FOMC hiking rates and not the increasingly inevitable economic fallout (see FedEx and freight rate comments below) from these actions. A weekly close below $1680 could see the market target the 50% retracement of the 2018 to 2020 rally next at $1618.
Crude oil (CLV2 & LCOX2)
Crude oil prices slumped again on Thursday with demand concerns once again being the focus as the market prepares for another growth dampening rate hike from the US FOMC next week and demand in China continues to linger after the IEA said the world's largest importer of oil was heading for its biggest annual drop in demand in more than three decades. The US Department of Energy meanwhile walked back on its SPR refill stance by saying that it didn’t include a strike price (that was said to be around $80/barrel) and it isn’t likely to occur until after fiscal 2023. WTI futures trades around $85/barrel with Brent holding above $90/barrel, both well above last week's lows.
The groundbreaking and long expected upgrade to the second-largest cryptocurrency, Ethereum, was rolled out successfully yesterday morning. Despite this, Ethereum has dropped more than 7 % over the past 24 hours in what seems to be a "sell-the-news" event, as the hype around the upgrade has faded.
US Treasuries (TLT, IEF)
US yield trade near the cycle highs at the long end of the yield curve, as we await a test of the key cycle top at 3.50%. The short end of the yield curve continues to drift higher, with the 2-10 yield curve inversion below –40 basis points and nearing the cycle low from August which saw the lowest daily close at –49 basis points. Key
What is going on?
Fedex falls over 15% after hours on big profit miss, withdrawing of 2023 forecasts
The company CEO said that “global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US.” The company expects that business will worsen further in the current quarter. EPS for the quarter were in at $3.44 vs. $5.10 expected despite revenue only narrowly missing expectations.
Global container freight rates seeing an accelerated slump
The Drewry composite container freight benchmark rate which tracks the cost of shipping containers on the busiest routes, especially from Asia to Europe and the USA slumped 8% this week to $4.9k pr 40ft box. The index is now down more than 50% from the record seen this time last year but remains around 3.5X above the pre-pandemic average. Weakness was seen on all the major China to US and EU routes. Maersk (MAERSKb:xcse), one of the world’s largest container shipping companies has seen its share price slump 38% from a March peak to a 15-month low, another sign that global trade is weakening fast following the pandemic-led boom.
Adobe (ADBE:xnas) drops 17% on Figma acquisition announcement
The company offered $20 billion for privately held Figma, a company offering tools for collaborating on software development. This was a half-cash, half-stock deal and was the largest acquisition in the company’s history and was some 50 times Figma’s annual revenue (and over 12 months of trailing Adobe revenue). After hours, Adobe reported earnings, with top-line growth of 12.7%, but earnings dropped –2.7%. The Figma deal looks a bit desperate and suggests that Adobe has a hard time seeing organic growth from its core business.
Mixed US data, but further upward pricing of the Fed rate path
US retail sales saw the headline rising 0.3% m/m in August (exp -0.1%, prev -0.4%) but the core retail sales print was weaker than expected at -0.3% m/m (exp 0%, prev 0.0%). The slower retail spending does reflect the current slowdown in goods spending despite services remining strong and supporting the overall consumer strength in the US. Meanwhile, initial jobless claims were lower than expected at 213K (exp 226K, prev 218K). That is the lowest since early June and the 5th consecutive decline (the high reached 262K), suggesting that labor markets remain tight.
Xi and Putin meet in Uzbekistan
China’s leader Xi Jinping and Russia’s leader Vladimir Putin met yesterday for the first time since a powwow at the Beijing Olympics in which the two leaders declared that the friendship between the two countries was “without limits”. But apparently, the situation in Ukraine is testing those limits as Putin was forced to acknowledge China’s “questions and concerns” on its invasion of Ukraine. Xi did call Putin an “old friend”, however, and said the “China is willing to work with Russia, display the responsibilities of the major powers, and play a leading role to inject stability and positive energy to a world in chaos”. Still, the general impression was one of China keeping Russia at arm’s length and unlikely to extend support for Russia’s war effort.
China’s August activity data improved better-than-expected
China’s activity data for August came in at stronger than expected growth rates. Industrial production grew 4.2% Y/Y in August beating the consensus estimate of 3.8% Y/Y and improving from last month’s 3.8% Y/Y. Higher output in automobile and power generation offset the impact from slower activities in other industries such as pharmaceuticals and computers. Retail sales grew 5.4% Y/Y in August, well exceeding the 3.3% Y/Y median forecast from the Bloomberg survey and the 2.7% YoY in July. A favourable base effect and stronger auto sales during the month boosted retail sales and more than offset the drag from tightened pandemic control measures and a slow housing market. Fixed asset investment grew 6.4% Y/Y in August, notably accelerating from the 3.6% Y/Y in July, led by 14.8% Y/Y growth in infrastructure and 10.7% Y/Y growth in manufacturing investments while investment in properties slowed further to a decline of -13.9% Y/Y in August from July’s -12.1%.
What are we watching next?
The French historical energy provider EDF is in a difficult financial situation
Last Spring, the company refused to give earnings guidance for the year. Yesterday, it announced that the impact of the shutdown of all of its nuclear reactors (due to structural corrosion issues) will likely lower its 2022 EBITDA by €29bn. In the early 2000s, EDF was one of the largest and most promising companies in the CAC 40 index. Now, it is about to be nationalized. EDF’s failure is mostly explained by poor management and the French state’s pressures over the recent years to channel investments in the green transition (mostly intermittent energy) instead of focusing on nuclear energy. This is a matter of months before the nationalisation is effective. The French state is currently EDF’s main shareholder, owing 83.33 % of the shares. The stock is up 24 % YTD at the Paris Stock Exchange due to the prospect of nationalisation.
USDCNH to get increasing attention?
The USDCNH rate has risen well above 7.00 now, picking up a bit of pace to the upside again this week on an extension of USD strength. The exchange rate bears watching, as past episodes of CNH volatility, especially including the 2015 shift in China’s exchange rate regime, can aggravate global market volatility and uncertainty. The key level to the upside is the 7.20 level that was nearly touched on two occasions, first in late 2019 and then again in May of 2020.
Economic calendar highlights for today (times GMT)
- 0830 – ECB President Lagarde and ECB’s Villeroy to speak
- 0900 – Eurozone Final Aug. CPI
- 1200 – Poland Aug. Core CPI
- 1215 – Canada Aug. Housing Starts
- 1400 – US Sep. Preliminary University of Michigan Sentiment
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