What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities are headed lower again erasing most of the recent gains and that is despite no big changes in the VIX Index or higher interest rates. S&P 500 futures are trading around the 3,780 level this morning in European trading hours with the next key level to watch on the downside being 3,761, and on the upside a close above the 3,800 level is critical to stop the current negative sentiment. Today’s initial jobless claims is the most important economic figures to watch as the labour market has weakened in the US over the past two months and this indicator is the best time series we have on the US economy.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) traded higher overnight
June Manufacturing PMI came at 50.2, marginally back to the expansionary territory and below expectations (Bloomberg consensus: 50.50, May: 49.6). At 54.7, non-manufacturing PMI however beat expectations nicely (Bloomberg consensus: 50.5, May: 47.8), with the service sector sub-index at 54.3 and the construction sector sub-index at 56.6, both showing notable improvements from last month. Re-opening of Shanghai and release of pent-up demand contributed significantly to the recovery in the service sector. Yesterday, President Xi reiterated that China’s zero-Covid policy being “correct” and ‘effective. Auto stocks rebounded, with Li Auto (02015) leading the charge, up almost 8%. NIO (09866) rallied 6%, recouping half-of the plunge yesterday following a negative research report. Leading AI software vendor, SenseTime (00020) plunged as much as 51% as the post-IPO lock-up expired.
USD pairs, especially EURUSD and USDJPY
The DXY index rose above 105 again overnight despite the 10-year Treasury yields dipping below 3.1% yesterday. EURUSD plunged below the tactically pivotal 1.0500 area to lows of 1.0433 as German inflation cooled but Spanish HICP touched 10% levels, coming in above expectations. The lack of an anti-fragmentation tool may limit the ECB to a 25bps rate hike in July, meaning more pressure on EUR – traders should note that the 1.0350 cycle lows is just above the 2017 low of 1.0341, the lowest since 2003. USDJPY touched the key 137 level overnight, printing a new 24-year high, though it retreated slightly into early European trading. Thursday brings announcement of BOJ's quarterly bond purchase plan for July-September, which may likely be revised higher as BOJ’s resolve on yield curve control continues to be tested. Tokyo inflation for June is also due on Friday.
EURCHF has dipped below parity and just below the spike lows from early March triggered by Russia’s invasion of Ukraine. The SNB’s recent 50-basis point rate hike at its June meeting took the market by surprise as it has front-run the ECB in initiating a rate-hike cycle, with the latter is only set to move by 25 basis points in July. The SNB’s weekly sight deposits have actually fallen in recent weeks, suggesting that the SNB is comfortable with a stronger CHF as it is not intervening. There are no real chart levels of note to the downside from here as the chaotic 2015 unwind of the EURCHF floor created only fleeting price action below parity that was erased within a couple of weeks.
Crude oil (OILUKSEP22 & OILUSAUG22)
Crude oil came under pressure again yesterday amid signs of slowing US gasoline demand, and we may be looking at the first monthly decline since November with Brent currently stuck in a wide $110 to $120 range. The weekly EIA report showed US crude stockpiles at their lowest since 2004 but the key market impact came from signs US gasoline demand is slowing with four-week average demand falling to a 2014 seasonal low. However, we still believe fears of demand destruction will be more than offset by supply constraints. OPEC+ meet today, and already trailing their own production target by 2.7 million barrels per day the group is expected to rubberstamp another small but illusive production increase, thereby completing the reversal of output cuts made at the start of the pandemic in 2020. What lies ahead for the group will be crucial, but with most producers being close to maxed out, we are unlikely to see a surprise additional supply response.
Gold (XAUUSD) rangebound and lacks oxygen
Gold and silver (XAGUSD) are both heading for a third straight monthly decline with the strong dollar and elevated yields taking their toll. In addition, silver has suffered due to its link to industrial metals, the worst performing sector this month, and as a result the XAUXAG ratio trades near a two-year high. Gold on a relative basis, however, continues to perform well compared with the sharp declines in stocks and bonds. Reasons for holding gold, such as the hedge against stagflation and geopolitical risks, have not gone away, but for now with the summer holiday and low liquidity season upon us, investors are scaling back more than gearing up.
US Treasuries (TLT, IEF)
US Treasury yields fell sharply yesterday, with the 10-year benchmark treasury yield closing near the lowest daily close for this period of consolidation near 3.10%, with the next focus lower on the 3.00% lows of last week as a possible trigger for further bond market strength, perhaps on the fears of rising recession risks. Yesterday’s significant reversal in crude oil prices likely prompted some of the strength in treasuries. Economic data will be important to watch through next Friday’s US jobs report (US PCE inflation today, ISM Manufacturing tomorrow, ISM Services next Wednesday), as well as whether the long end of the sovereign yield curve serves as a safe haven should equity markets crater. In the cycle since last year, bonds have provided no solace for mixed portfolios as both bonds and equities have suffered, but at times, the correlation turns negative between the two asset classes.
What is going on?
Fed Chair Powell reaffirms inflation fight
Powell said the job for policymakers is to find price stability even during the new forces of inflation and that a reversal of globalisation could mean lower growth in place, while he added the US economy is in strong shape and can withstand monetary policy moves. Powell added the aim is to have growth moderate and there is a risk that the Fed could go too far but it is not the largest risk as the biggest risk would be a failure to restore price stability. Meanwhile in a separate speech in another event, Cleveland Fed President Mester (FOMC voting member) said she supports a 75bps hike in July if econ conditions stay unchanged.
Bank of Japan’s resolve keeps getting tested
Japan’s bond traders are still testing the BOJ’s resolve on the yield curve control, even as US Treasury yields turned lower. Super long yields (30-year) are still running higher, and the yield curve is the steepest since 2016. The BOJ’s bond buying schedule for Q3 will be closely watched today, but greater risks are seen from US data coming out on the stronger side and ruling out the scenario of a deep recession, which would mean US Treasury yields will go higher again and make things ugly for the BOJ yet again. But more than the bond markets, focus of Gov Kuroda will be on the stickiness of Japan’s inflation and that could be a trigger point for BOJ to capitulate. Certainly, one of the things we are watching going into Q3.
General Mills deliver a big earnings surprise
Shares were up 6% as the company’s organic sales forecast of 4-5% is above consensus of 3.7% and EPS was $1.12 vs est. $1.01 suggesting General Mills have had success in passing on costs to retailers and consumers. The company also said that it expects supply chain disruptions to slowly moderate during the fiscal year 2023 (ending 31 May 2023).
What are we watching next?
Sweden’s Riksbank set to hike 50 basis points today
Sweden’s central bank is nearly universally expected to hike rates 50 basis point today to take the policy rate to +0.75%, and yet it is difficult to detect any enthusiasm for the SEK in the key EURSEK pair, which trades near 10.70 and in an elevated range off the April and 2022 lows of 10.22. SEK tends to trade as a function of the economic outlook for the Eurozone and is one of the most sensitive . Still, the Riksbank has gone a long way to clawing back some credibility on inflation fighting with a huge shift in guidance and a now more rapid pace of tightening. Watching the guidance for the policy rate and any comments on concerns for the domestic housing market, which has been bubbly for years and will be heavily impacted by the new tightening regime.
Grains trade lower ahead of two major US reports Thursday
Worries about a global food crisis extending into the autumn and winter months have calmed down a bit this month with most agriculture futures trading lower, led by the grains sector where the Bloomberg Grains Index shows a 9% loss for the month, led by wheat and edible oils, the two sectors that surged the most after supply chains from Ukraine got cut following Russia’s attack. With promising crop forecasts from Australia and Russia and a general worry about an economic slowdown being the main drivers, the market nevertheless needs a strong production year in North America as well. Today, the USDA will release its updated acreage report with traders anticipating a cut to soybean and wheat and an increase in corn planting. The quarterly stock report is expected to show steep year-on-year declines in wheat with gains in soybeans. Link to survey.
Quarter-end today and portfolio rebalancing flowsSo far, the script for this quarter-end has proven rather similar to the one for Q1, as a steep rally in equity markets in March peaked late in the month ahead of quarterly roll, but rolled over badly already a couple of days prior to the start of Q2. Is that what we will see this time around as well? Certainly an important test of the narrative in coming days as we get the last key June macro-economic data through next Friday’s US employment report and as we move to the other side of a massive option held by JP Morgan (it expires today) that was believed to help hold the S&P 500 above 3,620 this month.
Earnings WatchToday’s important earnings to watch are Micron Technology and Walgreens Boots Alliance. Analysts expect Micron Technology to deliver 16% y/y revenue growth and EPS of $2.44 up 33% y/y, but the outlook could surprise to the downside due to weaker than estimated consumer confidence hitting demand for consumer electronics. Walgreens Boots is expected to see negative revenue growth of 6% y/y and EPS of $0.94 down 51% y/y suggesting retailers such as Walgreens Boots are having difficulties maintaining their operating margin during this inflationary environment.
- Today: Constellation Brands, Micron Technology, Walgreens Boots Alliance, Shaw Communications
- Friday: Nitori
Economic calendar highlights for today (times GMT)
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- 0730 – Sweden Riksbank Announcement
- 1230 – US May Personal Income and Spending
- 1230 – US May PCE Inflation
- 1230 – Canada Apr. GDP
- 1230 – US Weekly Initial Jobless Claims
- 1345 – US Jun. Chicago PMI
- 1430 – EIA's Weekly Natural Gas Storage Change
- 1600 – USDA's Acreage and Quarterly Stocks update
- During the PM session: OPEC+ Meeting
- 2200 – New Zealand Jun. ANZ Consumer Confidence
- 2330 – Japan Tokyo Jun. CPI
- 2350 – Japan Q2 Tankan Survey
- 0145 – China Jun. Ciaxin Manufacturing PMI