Global Market Quick Take: Europe – August 8, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): China export data weighs on equities

The positive start to the week yesterday in equities is reversing this morning driven by worse than expected China export figures for July highlighting the slowdown in the global manufacturing sector. S&P 500 futures are down 0.3% in early trading and STOXX 50 futures are down 0.5%.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index extended decline

Hong Kong’s Hang Seng Index dropped by 1.4% in early Asian afternoon while the mainland’s CSI300 was flat. China property stocks plummeted as investors were concerned about the liquidity of leading developer Country Garden (02007:xhkg). Pharmaceutical shares extended the decline last week due to investor retreat following increased Chinese authorities' anti-corruption efforts in the industry.

FX: Yen under pressure as long-end yields continue to climb

Large funding auction kept the long-end of the US yield curve under pressure and that saw yen being the G10 underperformer once again. USDJPY rose back above 143 from lows of 141.52 in the US session as focus turns to US CPI this week to gauge how far Treasury yields could go. A stronger dollar was the key theme of the Asian session with NZDUSD back below 0.61 and AUDUSD testing 0.6540 with China imports also remaining under pressure. GBPUSD was back higher to test the 1.28 handle in the US session with BOE likely remaining as the last hiker in the G7 pack but reversed lower in Asia. BoE Pill, in a Q&A, said inflation remains much too high and he has seen a lot of news on inflation persistence, but caveated that there are risks on both sides on UK inflation. Pill warned there are risks the UK hasn't raised rates enough.

Crude oil: Boxed in with focus on EIA’s STEO and CPI

Brent crude reached a fresh four-month high on Monday at $86.73 in response to voluntary production cuts and potential risks to Black Sea supplies before trading lower towards support in the $85 area after the general level of risk appetite faded. China’s commodity imports weakened last month, including crude imports which fell 16% from the three-month high set in June, as refineries ran down inventories. While traders continue to focus on potential supply disruptions, they will also be watching EIA’s short-term energy outlook due later today and CPI releases later in the week.

Gold struggling amid rising yields

Spot gold prices remain under pressure from the recent rise in US bond yields and after Fed’s Bowman (a voting member) said more rate hikes may be needed. Following the mid-July rejection below $2000 gold has retraced 61.8% currently providing some support in the $1930 area. While Central banks recorded a record first half in terms of gold demand, traders and investors in futures and ETFs remain sceptical about the current upside potential. ETF investors have been net sellers for the past 10 weeks, in the process cutting holdings to a 40-mth low, leveraged futures funds in the last two weeks cut length by 27% to 99k lots, a 4-wk low. We maintain a positive outlook for gold as global growth slows, bond yields peak, and the FOMC ability to hike rates becomes increasingly challenged.

US Treasuries: CPI data and Treasury auctions in focus this week (2YYU3, 10YU3, 30YU3)

The US Treasury will sell $103 billions in 3-, 10-, and 30-year bonds this week, the largest increase in size for these auctions in two and a half year. The question is whether demand remains supported despite the increase in auction size. Inflation data will also be a focus this week, as the monthly CPI is expected to come at 0.2% for the second month on a row, the lowest in more than 2 years. It could accelerate the steepening of the yield curve which started last week, with the only exception that this steepening might be bullish for Treasuries as markets push back on the bets of another interest rate hike.

German sovereign bonds: the yield curve twist steepen amid Buba decision (ECHB:xetr, IS0L:xetr)

German Schatz gained yesterday as the Bundesbank stopped paying interest on bank deposits. However, Bund yields soared as yield rise in the US. Consequently, the German yield curve steepened by 7bps to -39bps, the highest since May. The steepening may continue until September, when inflation concerns will be renewed, and the front part of the yield curve will be in peril again.

What is going on?

Italy hits banks with extra tax rate on profits

The Italian government has approved a new tax package aimed to bring in €2bn in tax revenue with the biggest surprise being an extra tax on banks’ profits. The move is likely to put pressure on Italian banks (Intesa Sanpaolo and UniCredit) in today’s trading.

China’s July exports hit slowest pace since February 2020

China's exports fell 14.5% in July year-on-year, while imports contracted 12.4%, customs data showed on Tuesday, in the biggest decline in outbound shipments from the world's second-largest economy since February 2020. A Reuters poll of economists had forecast a 12.5% fall in exports and a 5.0% drop in imports. China's economy grew at a sluggish pace in the second quarter as demand weakened at home and abroad, prompting top leaders to promise further policy support at a meeting of the Politburo last month.

Earnings recap: Glencore and Palantir

Palantir, the US based data analytics software maker, reported slightly better than expected revenue for Q3 at $553-557mn vs est. $554mn and increased its shares buyback to $1bn. Investors liked the earnings report from Palantir sending its shares up 3% in extended trading. Glencore is reporting 1H EBITDA this morning down 50% from a year ago due to falling commodity prices while adding a new buyback program worth $1.2bn.

Moody’s downgrades 10 US regional banks and puts Bank of NY Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade

Moody’s announced to downgrade 10 US regional banks, including M&T, Amarillo National Bank, Old National Bancorp, Commerce Bank, Associated Banc-Corp, BOK Financial Corporation, Webster Bank, Prosperity Bank, Fulton Bank, and Pinnacle Financial Partners. Additionally, Moody’s put Bank of New York Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade. Moody’s said the rationale for the actions is to reflect the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses. For some of these banks, Moody’s also cited rising risks associated with commercial real estate exposures as an additional reason for the actions.

US used car prices slumped in July

US used vehicle prices decreased by 1.6% MoM in July to the lowest levels since April 2021, and registered a decline of 11.6% YoY. With a weight of 2.7% in CPI, the sustained decline in used car prices continues to push downward pressure on inflation due this week. However, it is worth noting that price declines are slowing month after month and suggests that the pace of slowdown in inflation may moderate as well.

Slowing monthly earnings and spending in Japan

Japan’s wage growth slowed in June with nominal wages rising 2.3% YoY from 2.9% YoY in May while real wage growth saw a sharper contraction of 1.6% YoY from -0.9% YoY previously. Household spending, meanwhile, slumped by 4.2% YoY in June from -4.0% YoY in the previous month. The deeper decline in real earnings may weigh on consumption and puts more weight on the BOJ’s case that inflation is supply driven. This continues to make a case for the Bank of Japan to continue with its easy monetary policy.

Mixed Monday in the grain market

CBOT soybean futures dropped 2.3% on Monday as rainy weather across much of the key U.S. crop belt and forecasts for good growing conditions for August pushed prices to their lowest in more than five weeks. Wheat futures gained 3.9% as global supply concerns intensified, spurred by fears of an escalation of attacks on Black Sea shipping after a Ukrainian strike on a Russian tanker. The good crop weather, resulting in a 2% weekly improvement in crop conditions, also pressured the corn market, which notched its ninth losing session out of the last 10, but losses were kept in check by the gains in wheat.

What are we watching next?

Fed speakers in focus as market looks for direction

Fed officials continue to emerge from their silence this week after hiking rates another 25 basis points at their last meeting. Investors betting the Fed has reached the end of rate increases will have another chance to gauge their theory when Philadelphia Fed President Harker and Richmond Fed President Barkin speak on Tuesday. Their remarks will be top of investor watchlists after mixed messages about the future rate path from New York Fed President John Williams and Fed Governor Michelle Bowman on Monday. Bowman's comments suggesting more rate hikes gave markets a jolt.

Technical Analysis

• S&P 500. Top & reversal pattern. Correction very likely. Support at 4,455
• Nasdaq 100. Correction down to 15K-14687 likely
• DAX correction. Below 16K but uptrend intact
• AEX25 Uptrend intact after closing above 768
• BEL20 uptrend but likely minor correction
• CAC40 uptrend intact closing above 7,251
• EURUSD Finding support at 0.786 retracement. Likely bounce and uptrend to resume
• Dollar Index rejected at 0.786 retracement at 102.41
• GBPUSD bounced just above key support at 1.2590. RSI bullish
• USDJPY testing once again 0.786 retracement at 143.40
• EURJPY close to be testing strong resist at 158
• Gold finding support at 0.618 retracement at 1,929. 
• Silver testing 24.10 support
• Copper rising channel. Bouncing from lower trendline and 382
• Brent resistance at 87.25. Likely range bound between 87.25 and 82
• WTI reaching resistance at 83.50. Likely range bound between 83.50 and 79

Earnings to watch

Today’s US earnings focus is on EV makers Li Auto and Rivian. Eli Lilly will also be tightly watched by the market given the pharmaceutical company is playing catchup with Novo Nordisk in the huge market for the new generation of obesity drugs. UPS is naturally also interesting given its large footprint in global logistics and with Maersk’s subdued expectations in last week’s earnings report the market should be prepared for potentially bad news.

• Tuesday: Barrick Gold, Bayer, SoftBank, Daikin Industries, Glencore, Eli Lilly, UPS, Zoetis, Duke Energy, Li Auto, Coupang, Global Foundries, Rivian Automotive
• Wednesday: Commonwealth Bank of Australia, Vestas Winds Systems, Novozymes, Sampo, E.ON, Generali, Sony, NTT, Honda Motor, Flutter Entertainment, Delhaize, Walt Disney, Trade Desk, Illumina, Roblox
• Thursday: KBC Group, Brookfield, Novo Nordisk, Orsted, Siemens, Deutsche Telekom, Allianz, Munich Re, Hapag-Lloyd, RWE, Antofagasta, Zurich Insurance, Alibaba
• Friday: Constellation Software, Wilmar International

Economic calendar highlights for today (times GMT)

• 0700 – EU and Germany July CPI
• 1215 – Fed's Harker (voting member) Speaks on Economic Outlook
• 1230 – Fed's Barkin (non-voting) Speaks on the Economy
• 1330 – US June Trade Balance
• 1600 – EIA's Short-term Energy Outlook (STEO)
• 2000 – API's Weekly Crude and Fuel Stock Report