Global Market Quick Take: Europe – May 25, 2023 Global Market Quick Take: Europe – May 25, 2023 Global Market Quick Take: Europe – May 25, 2023

Global Market Quick Take: Europe – May 25, 2023

Macro 9 minutes to read
Saxo Strategy Team

Summary:  US equities sold off again yesterday as the S&P 500 index toyed with important support before rallying slightly and then suddenly in late trading on a blowout report from Nvidia, where a massive guidance number on anticipated Ai-related demand shocked its shares higher after the close. Elsewhere, treasury yields bobbed back higher and kept the US dollar broadly bid. Oil surged on a stunning draw in US crude oil stockpiles.


What is our trading focus?

US equities (US500.I and USNAS100.I): futures bounce back on Nvidia growth bonanza

Equities were increasingly getting weaker yesterday reversing the past week’s gains over concerns that inflation is getting stickier, but Nvidia’s Q2 outlook lifted equity futures after the equity market cash close. However, S&P 500 futures are still stuck in the trading range that has been established since early April. Nvidia’s outlook will boost sentiment in technology stocks and Nasdaq 100 futures will likely extend momentum to test the 14,000 level.

Chinese equities (HK50.I & 02846:xhkg): Markets tumble, erasing 2023 Gains

The Hang Seng Index experienced a significant downward gap at the market open, swiftly plummeting through previous lows to extend its losses, ultimately declining by over 2% and wiping out all gains accumulated in 2023. Concurrently, the CSI300 index retracted by 0.5%, approaching its lowest point recorded thus far this year. This prevailing weakness permeated various sectors, notably impacting Orient Overseas (00316:xhkg), a leading container liner operator, which witnessed a substantial 7% decline. In line with the broader market sentiment, the Hang Seng Tech Index also endured a 2.5% drop, primarily driven by the slump in EV stocks and Chinese Internet names. EV manufacturer XPeng (09868:xhkg) reported its Q1 deliveries and revenue figures at the lower end of analyst estimates, along with a significant decrease in gross margins, attributed to heightened sales promotions and the expiration of government subsidies.

FX: Dollar remains firm even as risk sentiment gyrates

The US dollar firmed further yesterday, perhaps taking its lead from US treasuries, where yield remain near local highs after a few wobbles around the FOMC minutes last night. EURUSD trade at an important “capitulation” level this morning of 1.0737, which is the 61.8% retracement of the rally from the March low of 1.0517. Sterling remains offered despite the hot CPI data yesterday seeing short rates marked some 30 basis points higher – a worrying sign for the currency. EURGBP posted a bullish reversal after trying to break lower in the wake of the data release yesterday and GBPUSD threatens an even deeper retrenchment if the 1.2350-00 area fails. NZD remains weak after the shocking RBNZ shift to neutral on guidance and NZDUSD posted a new low for the year overnight, while AUDNZD eyes 1.0900 after the massive reversal to well above 1.0700 from a probe below the important 1.0600 area before the RBNZ. The JPY consolidation was extremely short lived as higher yields weighed and USDJPY rallied to new highs for the year, pressing close to 140.00.

Crude oil: pausing after strong run up

Crude oil trades a tad softer following a three-day rally that was supported by the biggest drop in US crude stocks since September 2016 and the Saudi Energi Ministers stern warning that speculators should watch out.  In addition, the EIA also reported another drop in fuel stocks with gasoline hitting the lowest seasonal level since 2014 with retailers stocking up ahead of an expected busy Memorial Day weekend. WTI is has found some resistance around $74.5, the 50-DMA with $80 still the big level to break in Brent before talking of a change in direction.

Copper and iron ore selloff accelerated on sustained China slowdown concerns

The selloff across copper and the rest of the base metals complex accelerated on fears of weaker growth in China. Copper prices at the London Metal Exchange fell below $8,000/t in the face of disappointing economic data last month, including weak construction activity. Demand in Europe has also been lacklustre, leading to inventories on the LME rising nearly 80% over the past month. Meanwhile, USD has been stronger amid a weak risk sentiment as debt ceiling talks prolong. HG copper broke below key support at $3.56, thereby fuelling additional selling from hedge funds, already short the market, and next key level of support is $3.45, the 76.4% retracement. Iron ore futures were also weaker amid signs of weakening steel demand and falling industrial production levels in China. Prices dropped below $100/ton this week and are now testing early May lows of $94.50.

Gold returns to challenge support as dollar and yield strength bite

Gold turned lower again on Wednesday as the dollar and US bond yields resumed their recent strength in response to a continued deterioration in market risk sentiment as the debt-ceiling crisis show no signs of being resolved, raising the prospect of the US government running out of cash. The dollar reached a fresh one-month high while traders increased bets on another FOMC rate hike by July followed by less than two cuts thereafter before year-end. Support remains at $1950 ahead of $1933 while a break back above $2001, the 21-DMA will be needed to improve sentiment.

UK Gilts tumble amid inflationary fears (FLGM3, FLGU3)

Gilt yields rose sharply yesterday following higher-than-expected CPI numbers. The front part of the yield curve felt most of the pressure, with 2-year yields rising almost 30bps and the yield curve inverting the most since February as markets positioned for more rate hikes. Although 10-year yields can test and break resistance at 4.59% and 2-year yields might test resistance at 4.68%, its unlikely rates will soar to break 5%. We believe that as resistance is broken, the financial sector will begin to suffer as it happened during Truss’ mini-budget. The BOE will need to step into rescue, limiting rates’ upside.

US rates continue their rise (2YYK3, 10YK3, 30YK3)

The yield curve becomes more inverted as markets prepare for another rate hike and price out rate cuts for this year. The Fed’s minutes showed that members are ready to hike if needed but reluctant to cut despite forecasting a mild recession. That contributed to yields soaring across the yield curve. Ten-year yields are testing resistance at 3.75% but have failed to break it. 2-year and 30-year yields continue their rally towards resistance at 4.49% and 3.75%, respectively. If the debt ceiling impasse is resolved, a June rate hike will be in play.

The debt ceiling saga continues to rattle money markets (BIL:arcx)

As Yellen highlights the beginning of June as the X-date, volatility in the money market increases. Yields on the 1st of June T-bills broke above 7%, yesterday the same yield offered by some junk bonds. The cost of insuring against a US default is still one of the highest in history. Finally, Fitch announced yesterday that the US is on a negative outlook, meaning it could lose its AAA rating. Just as a reminder, when S&P downgraded the US long-term rating in 2011, the company was investigated by the FOJ and SEC and shortly after the CEO was asked to step down.

Nvidia rips 25% higher in extended trading on AI-related guidance bonanza

Nvidia reported Q1 revenue at $7.2bn vs est. $6.5bn and adjusted EPS of $1.09 vs est. $0.92, but the chipmaker’s Q2 guidance knocked the ball of the ballpark. Q2 revenue guidance is $11bn plus or minus 2% vs est. $7.2bn driven by insane demand increase for data center products which are likely caused by the huge interest in developing AI-related systems following the commercial success of the current generation of chatbots such as ChatGPT and Bard. The CEO says that this is the beginning of a 10-year cycle

Snowflake plunges on weak sales versus estimates

Snowflake reported Q1 revenue of $624 vs est. $610mn and Q2 product revenue of $620-625mn vs est. $646mn suggesting Snowflake is now also being hit hard by the technology spending slowdown. Shares were down 12% in extended trading.

FOMC May meeting minutes continued to highlight the Fed split

The May FOMC minutes from the Federal Reserve showed that officials are somewhat split on support for more rate hikes. Where several said if the economy evolved along the lines of their outlooks, further policy firming might not be needed, but some said with inflation expected to take a while to return to 2%, additional firming would likely be appropriate. There was also high uncertainty on the banking sector outlook but almost all officials saw upside risks to inflation. The only consensus appeared to be on a data-dependent approach, and forecast for a mild recession in 2023 was maintained. Overall, there is a leaning for a pause in June but it does not signal the end of the tightening cycle yet. Fed Governor Waller, a notable hawk, also took a data dependent approach for the June meeting, although he made it clear that he Is not in favor of a pause. 

What are we watching next?

Debt ceiling: Fitch places US AAA rating on negative watch

Talks resumed yesterday, but no progress was reported, with Democratic minority leader Jeffries sounding pessimistic on the status, while Republican House speaker McCarthy kept an optimistic tone and cited progress. Talks are thought likely to be suspended for the upcoming US Memorial Day weekend, which may mean no more news on the issue until next Tuesday. The bonds ratings agency Fitch placed US Treasury debt on negative watch. S&P is the only major agency to downgrade US debt and still maintains a rating one step below triple-A, though Moody’s briefly also had US debt on negative watch in 2011 until the debt ceiling issue cleared at the time.

Earnings to watch

Today’s US earnings focus is Costco which will likely follow the rest of US retailers highlighting increased cost pressures from wages and less spending from consumers. Analysts expect FY23 Q3 revenue growth of 4% y/y and EBITDA of $2.4bn up from $2.3bn a year ago.

  • Thursday: Royal Bank of Canada, Toronto-Dominion Bank, Meituan, Generali, Costco, Medtronic, NetEase, Workday, Autodesk, Marvell Technology

  • Friday: PDD, Booz Allen Hamilton

Economic calendar highlights for today (times GMT)

  • 0940 – Sweden Riksbank Governor Thedeen to speak
  • 1100 – Turkey Rate Announcement
  • South Africa SARB Rate Announcement
  • 1230 – US Apr. Chicago Fed National Activity Index
  • 1230 – US Weekly Initial Jobless Claims and Continuing Claims
  • 1230 – US Q1 GDP Revision
  • 1430 – US Weekly Natural Gas Storage Change
  • 1500 – US May Kansas City Fed Manufacturing survey
  • 1700 – US 7-year treasury auction
  • 2330 – Japan May Tokyo CPI
  • 0130 – Australia Apr. Retail Sales
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