Global Market Quick Take: Europe – August 17, 2023 Global Market Quick Take: Europe – August 17, 2023 Global Market Quick Take: Europe – August 17, 2023

Global Market Quick Take: Europe – August 17, 2023

Macro 5 minutes to read
Saxo Strategy Team

Summary:  US stocks fell again on Wednesday with the S&P 500 index closing at a five-week low while the yield on US ten-year Notes closed at a fresh cycle high at 4.29% after FOMC members continued to see significant upside risks to inflation, which would require further tightening. The dollar trades at a two-month high, thereby souring the risk appetite further, while stocks in Asia overnight hit a nine-month low as fears over China’s sluggish economy mounted. Crude oil trades lower despite current tightness while gold is back below $1900.


What is our trading focus?

US equities (US500.I and USNAS100.I): Weakness continues

Equities continue to weaken with S&P 500 futures down 0.8% yesterday trading around the 4,426 level this morning with the 4,369 support level fast coming into play. The return spread between the cyclical and defensive sectors did not change much indicating that the selloff is less a rotation and more a broad-based selloff to reduce equity exposure as investors are preparing for a slowdown in the economy.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg) under pressure but off the day lows

As we have been repeatedly saying in the Quick Take this week, investor focus has shifted from the weakness in the broader Chinese economy and the Chinese property to the country’s shadow banking sector. Chinese banks and insurance companies continued to be among laggards due to investor concerns about their exposures to the trust industry, which issues wealth management products to raise money to lend to relatively risky borrowers, particularly property developers. The Hang Seng Index trades down 1% after gapping down at the open while in the A-share market, the CSI300 Index trades down only 0.4%, helped by a rally in robotics, defense, and heavy industrial equipment names.

FX: JPY and CNH on intervention watch

USDJPY spiked to a fresh high for the year at 146.56 in the Asian morning, overtaking the 76.4% retracement level at 146.12. There were some signs of a verbal intervention yesterday, but traders continue to test the patience of Japanese authorities in the absence of any major BOJ tweaks. GBPUSD was the G10 outperformer on double dose of hawkish data this week and touched highs of 1.2766 before reversing back lower amid structural headwinds. AUDUSD broke below 0.64 handle on disappointment from the employment data and NZD testing 0.59. Despite heavy dollar selling activity by China’s major state-owned banks, both in onshore and offshore markets, the USDCNH reached a fresh high at 7.35, just 0.3% below a multi-year high. The euro trades softer as well with focus on the July low at €1.0835.

Crude oil: loss of momentum points to further consolidation

Markets were in a risk-off mode again on Wednesday amid sustained China concerns and FOMC minutes suggesting more rate hikes may be on the cards. This prompted oil traders to shrug off concerns emanating from tightening supplies, as well as another large drawdown in inventories. Despite of this the souring risk sentiment across markets saw WTI and Brent both closed below their 21-day moving averages for the first time since early July, highlighting the risk the market has entered a period of consolidation.

Gold: breaking below $1900

Gold dropped below key $1,900/oz level as the FOMC minutes were hawkish at the margin keeping the door wide open for more rate hike. Higher yields and a two-month high in the USD dented investor demand for the precious metal. Better-than-expected economic data has also weighed on safe haven demand. After closing below, the 200-day moving average on Tuesday, spot gold is now challenging the June low at $1893 with the next level after that being $1865.

The US yield curve bear steepens amid hawkish Fed minutes and wekk JGB auction (2YYU3; 10YU3, 30YU3)

The Fed's July minutes showed that the Fed is not done with interest rate hikes. A weak 20-year JGB auction accelerated the rise in US Treasury yields pushing 10-year yields rising to test 2022 highs at 4.32%. If this level is broken, yields would rise to the highest since 2007 finding resistance next at 4.5%. Yet, higher borrowing costs, higher credit standards, and the return of student loan repayments are going to put the US economy to the test during the last quarter of the year and lead it toward stagflation. Overall, we expect the front part of the yield curve to remain anchored while long-term rates have the potential to continue to soar until the next Fed meeting. Ten-year yields have the potential to rise to 4.5% and 30-year yields to 4.75%. Once rates stabilize higher, they are likely to trade rangebound until a tail event induces the beginning of the rates-cutting cycle.

The UK Gilts bear flattens as data call for more tightening (IGLS:xlon, GLTS:xlon)

GPD numbers last week and jobs and CPI numbers this week showed that more tightening is needed in the UK. The focus shifts toward Friday’s retail sales, which might cause more bear flattening of the yield curve. Two-year gilts might soar to test resistance again at 5.5% and potentially breaking above it. A 50bps rate hike might be on the table for September, but it depends on August inflation and jobs data, which are going to be released one day before the monetary policy meeting. As the british economy deteriorates, we favor quality and low duration, hence short term Gilts.

What is going on?

Asian stocks lead the sell-off

Asian shares slid to nine-month lows on Thursday, while the dollar was at two-month peak as fears over China's sluggish economic recovery and concerns that the Federal Reserve may still raise interest rates rattled investors. China stocks have been in the doldrums as a series of economic data has laid bare the stuttering post-pandemic recovery, with investors so far unimpressed with moves from policymakers. Adding to the worrying landscape for the world's second biggest economy is the deepening property sector crisis. Missed payments on investment products by a leading Chinese trust firm and a fall in home prices have enhanced the gloom.

Adyen indicated down 11% on profit margin miss

One Europe’s largest payments companies Adyen reports first-half processed volume and EBITDA margin well below estimates with volume at €426bn vs est. €464bn, and EBITDA margin at 43% vs est. 49% due higher wages as there is bidding war for technical talent according to the company.

FOMC minutes suggest Fed tightening cycle is not over

Fed’s July meeting minutes were hawkish at the margin, with most officials seeing “significant” upside risks to inflation that may require more tightening. However, a number of participants warned of the risks of accidentally tightening policy too much. Meanwhile, a number also saw economic risks becoming more balanced but overall it noted that uncertainty remains elevated and future policy decisions are to be driven by the totality of data. Overall, mixed views from policymakers but suggesting more evidence of inflation softening may be needed to bring policy ease. Meanwhile, US industrial production jumped 1.0% in July (prev. -0.8%), above the expected 0.3%.

A weak 20-year JGB auction drives bond yields higher worldwide

Today’s 20-year JGB auction tailed by 6bps, the biggest tail since 1987, pricing with a yield of 1.38% as investors demand more yield while the BOJ adjust its yield curve control policy. Rising JGB yields put upward pressure on global bonds. Thus, European sovereigns open weaker on the day, with Italian BTPs underperforming peers with yields rising by 5.5bps on market opening. US 10-year Treasuries rise to test their 2022 high at 4.32%.

UK CPI comes in hotter-than-expected

After a strong wage report, yesterday’s July CPI for UK also exceeded expectations. Headline CPI came in at 6.8% YoY from 7.9% YoY previously, but higher than the 6.7% expected. Core CPI was unchanged from the June level at 6.9% YoY vs. 6.8% expected. The hot core print coupled with Tuesday's hot wages data has only emphasised hawkish expectations for the BoE with a 25bps fully baked in for September, with about 25% probability of a larger 50bps move.

China’s major state-owned banks buying yuan as foreign investors dump stocks and bonds

China's major state-owned banks were seen busy selling U.S. dollars to buy yuan in both onshore and offshore spot foreign exchange markets this week, people with direct knowledge of the matter said, in an attempt to arrest the yuan's rapid losses. State banks usually act on behalf of China's central bank in the country's foreign exchange market, but they could also trade on their own behalf or execute their clients' orders. This at a time when the FT reports foreign investors have dumped Chinese stocks and bonds after losing confidence in Beijing’s promises of more help to shore up the country’s wobbling economy. Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme show that investors have almost completely reversed Rmb54bn ($7.4bn) in net purchases of Chinese equities that followed a July 24 pledge from the politburo of top Communist party leaders to increase policy support.

Tencent reports strong advertising, offset by weaker gaming revenue

Tencent (00700:xhkg) reported in-line results for Q2. Revenue increased by 11% Y/Y to RMB149 billion, 1.8% below the consensus estimate of USD151.96 billion. Online adverting revenue surprised positively, giving a 34% Y/Y growth, much better than the 23% anticipated. Online gaming revenue, however, came in slower with a 5% Y/Y revenue growth, below the 8% projected by the consensus estimates. Adjusted EPS increased 34%, beating consensus.

Cisco beats in revenue and EPS

Cisco reported quarterly revenue of USD15.2 billion, an increase of 16% Y/Y, and 1% above the consensus of USD15.05 billion. Better-than-expected performance in Secure, Agile Networks revenue countered a revenue miss in the Internet for the Future. Adjusted EPS grew 37% Y/Y to USD1.14, beating consensus USD1.06 by over 7%. The company provided guidance for the current quarter revenue of USD14.5-14.7 billion, in line with expectations. The adjusted EPS guidance of USD1.02-1.04, however, was better than the consensus of USD1.00 due to improvements in gross as well as EBIT margins.

What are we watching next?

Atlantic hurricane season may be getting underway

The peak of Atlantic hurricane season begins in mid-August but so far this year has been light with just four named storms. Peak of the season is around September 15, and it is expected that the remainder of the 2023 Atlantic hurricane season will to be busier than originally anticipated, partly due to warming ocean waters, according to the National Hurricane Center. The NOAA outlook calls for a 70% chance of 14 to 21 named storms, with six to 11 reaching hurricane strength and two to five major hurricanes. This could potentially tighten the US gasoline market and disrupt oil production and trade flows. 

Cyclical vs defensive sectors

Cyclical equity sectors peaked out against defensive sectors back in July and is currently in an ongoing downward trend as investors are positioning themselves for slowdown in the economy. Further rotation among investors could accelerate the downside move in equity indices.

Technical Analysis

S&P 500. Downtrend. Broken below key support at 4,455. Likely to drop to support at 4,340
Nasdaq 100. Down trend . Support at 14,750 and 14,254
Hang Seng bearish. Closed above support at 18,052. . Further downside likely towards 17K
DAX Bearish. Rejected at 16K.  Likely to drop to 15,482 support area
AEX25 Bearish. Support at 748
CAC40 Key support at 7,251. If broken downtrend to 7,100 
EURUSD Likely to be range bound between 1.0833 and 1.1065. Key support at 1.0833. Close below Short- and medium-term trend down. 
Dollar Index rejected at key resistance at 103.28. Close above uptrend on medium-term.
GBPUSD is struggling for upside momentum. Key support at 1.2590. a close below likely sell off to 1.23 area. RSI still bullish 
USDJPY broken resistance at 145. Next is 148 
EURJPY above strong resist at 158. Likely to move to 160.60
AUDUSD free fall. Currently below support at 0.64. Likely to drop further. Support at 0.6185. But expect corrections
Gold XAUUSD testing June lows at 1,892. RSI bearish. 200 MA giving some support but could drop to 1,870
Silver XAGUSD testing June lows at  at around 22.15
Copper below 370.  Next support at 360-356
Brent correction finding support at 83. Could dip to 81.75 before bouncing
Dutch Gas uptrend. Strong resistnace at 50.30
US 10-year uptrend. Could above 2022 peak at 4.35

Earnings to watch

Today’s US earnings focus is Walmart which is expected to FY24 Q2 (ending 31 July) revenue growth of 4.5% y/y and EBITDA of $9.9bn up from $9.6bn a year ago. Given the better-than-expected revenue figures from Home Depot and the strong retail sales report Walmart is tilted to surprise to the upside in today’s earnings release. Walmart release their earnings before the market opens.

  • Today: Telstra, Coloplast, CNOOC, Adyen, Nibe Industrier, Geberit, Walmart, Applied Materials, Ross Stores
  • Friday: Kingspan, Deere, Palo Alto Networks, Estee Lauder, XPeng

Economic calendar highlights for today (times GMT)

1230 – US Initial Jobless Claims
1230 – Philadelphia Fed Business Outlook
1430 – EIA's Weekly Natural Gas Storage Change

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