Global Market Quick Take: Europe – August 22, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Strong rebound as Nvidia rallies 8%

S&P 500 futures rebounded 0.7% on Monday after three weeks of declines with Nvidia being the big mover up 8.5% as analysts keep raising their price targets on the stocks ahead of earnings release on Wednesday. The rising price targets from analysts are at odds with reports highlighting slowing interest in AI and lower user numbers on ChatGPT. As we have stated previously, Nivida earnings will either show 1) that there is a structural demand shift on AI chips, or 2) that the outlook is dampened because it is mostly Chinese technology companies playing catch up with US technology companies.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index supported by a rebound in telecommunication and materials

The Hang Seng Index managed to take a pause after sliding lower seven days in a row. Telecommunication and materials stocks notably outperformed while the benchmark index was modestly higher from yesterday’s close. China Telecom 0728:xhkg) and China Unicom (00762:xhkg) added more than 2%. China Nonferrous Mining (01528:xhkg) and China Gold (02099:xhkg) rallied over 2%. In the A-share market, CSI300 shed 0.5%, dragged down by weaknesses in healthcare, environmental protection, and home appliances.

FX: USD lower even as US treasury yields carve out new highs.

The US dollar generally eased lower yesterday, even as US treasury yields closed sharply higher yesterday, with the 2-year treasury yield teasing 5% (it has only ever closed above that level twice, both times just before the March banking crisis), while the 10-year benchmark yield posted a new r high close since late 2007 yesterday at 4.338%. The Japanese yen was the lone major currency weaker against the greenback as higher yields weighed. USDCNH closed the day sharply lower below 7.30 after pulling above 7.33 at one point yesterday. The PBOC set a stronger than expected daily reference rate for the yuan overnight, a sign of its pushing back against yuan weakness as the USDCNH rate trades near its multi-year highs from late 2022 above 7.37.

Crude oil: lower on supply tightness concerns easing

Crude oil prices continue to consolidate with the upside risks reduced on signs supply tightness could ease. Iraq’s oil minister is reported to be planning the resumption of oil exports (500kb/d) through the Ceyhan terminal in Turkey which has been curtailed by a dispute over payments between Iraq and Turkey over the past few months. This was exacerbated by data showing exports from Iran surged to 2.2mb/d this month, levels last seen prior to the US pulling out of the 2015 Iran nuclear deal and re-imposing sanctions on its oil industry. With demand outlook also deteriorating, the downside in oil prices could become more pronounced unless OPEC+ cuts are expanded, or monetary policies turn accommodative. Focus this week remains on Powell’s comments at Jackson Hole

Gold: Surging yields offset by softer dollar, silver strength and BRICs meeting

Gold managed to close higher on Monday and trades firmer overnight despite a surge in US 10-year Treasury yields to fresh 16-year highs. With forward inflation expectations not moving higher at the same pace, real yields rose across the curve, normally a development that would be negative for gold, but the move was somewhat offset by a softer dollar and not least rising silver prices supported by copper. For now, however, the prospect of Fed funds staying higher for longer will likely weigh on prices ahead of Friday’s speech by Fed Chair Powell at Jackson Hole. In the past two COT reporting weeks to Aug 15, the gross futures short jumped 38k and based on the VWAP, the pain level is somewhere around $1935 in spot and $1965 in futures, so plenty of work to do before short covering becomes a feature. Also focus on BRICs meeting (see below).

Jackson Hole and Treasury auctions will weigh on US Treasury yields (2YYU3, 10YU3, 30YU3).

Before the anticipated Jackson Hole at the end of the week, the U.S. Treasury will sell 20-year US Treasuries on Wednesday and 30-year TIPS on Thursdays. Both maturities are usually disliked by investors, especially the 20-year notes, which have been re-introduced recently after the pandemic. The focus is going to be on both auctions’ bidding metrics and whether demand remain strong despite the recent increase in supply, coupled with QT and a retreat of Japanese investors home. US Treasury yields remain in an uptrend, and as explained here, higher yields may be in the cards with 10-year yields aiming to 4.5% and 30-year yields going to 4.65%.

What is going on?

US/China relations

The US lifted restrictions on 27 Chinese companies and organizations, a sign Washington is extending an apparent olive branch ahead of Commerce Secretary Gina Raimondo’s planned trip to Beijing this month. The US Department of Commerce on Monday removed the Chinese entities — such as chemical firm and lithium battery material maker Guangdong Guanghua Sci-Tech Co., and sensor maker NanJing GOVA Technology Co. — from its “unverified list,” which restricts a company’s ability to buy American technology (BBG)

Chip-designer Arm Holdings set to be largest US IPO since 2021

Chip-designer Arm is set for an IPO in coming weeks after owner SoftBank Group filed to take the company public yesterday. It is expected to be the largest US IPO since 2021. The move comes after an attempt by Nvidia to buy the company in 2020 was cancelled due to negative attention from regulators. The company is expected to look for a $60-70 billion valuation, with owner SoftBank obviously hoping for more, given its touting of the AI-potential in Arm’s portfolio of products.

Are European gas prices above €40 sustainable?

European natural gas prices closed at a two-month high on Monday above €40/MWh on continued concerns strike action at key export plants in Australia could impact 10% of global LNG flows. Labor unions warned over the weekend that industrial action could start as soon as September 2 and the worry is that any disruption could trigger a bidding war between buyers in Asia and Europe. However, with EU stocks storage facilities already 91.3% and demand some 15% below the seasonal average, the risk of tank-tops within weeks may send prices lower as demand for LNG drops ahead of the winter high demand season which is not expected to kick off before early November.

BHP earnings: Profits plunge on cost pressures and China slowdown

Mining giant BHP Group reported full year earnings this morning, missing revenue and profit expectations. Full-year revenue came in at $53.82 billion, down 17% YoY primarily from falling iron ore, metallurgical coal and copper prices. FY underlying profit of $13.42b, -37% YoY and cost pressures were highlighted amid inflation and labor issues. Final dividend was $0.80/share taking the full-year payout to $1.70/share, down 48% from last year’s $3.25. The miner reported caution on China’s growth trajectory but was optimistic of India’s buoyant construction activity underpinning an expansion in steelmaking capacity.

Ukraine finalising a deal to insure grain ships, but US wheat crop conditions worsen

Ukraine is finalising a scheme with global insurers to cover grain ships travelling to and from its Black Sea ports. The deal could be in place as early as next month for about 30 ships. This could bring hopes of a revival in commercial shipping activity and lower the risks of food security issues. Meanwhile, the USDA’s weekly crop progress and conditions report said wheat crop conditions worsened in the week to August 20, adding to concerns about production shortfalls in key growing areas such as Canada and the European Union. Corn ratings also declined while soybean ratings held steady.

What are we watching next?

BRICS summit kicks off today

The leaders of BRICS – Brazil, Russia, India, China and South Africa – are scheduled to hold talks this week Tuesday to Thursday. The agenda is expected to center around the group’s expansion, with some 40 other nations lining up to join including Indonesia, Saudi Arabia, Argentina and Egypt. This could mean internal conflict as South Africa seems open to the idea, but Brazil is worried about its influence getting diluted. Meanwhile, Russia is attempting to ward off currency pressures at home and Xi is trying to find the most appropriate response to pressures on China’s property sector and economy at large. But a larger group could mean more opposition to the West and a larger pursuit against the dominance of the dollar. This could, however, be positive for gold which acts as an alternate store of value and central banks continue to ramp up gold purchases in order to hedge against the dollar. The Russian invasion of Ukraine and food security issues could also be discussed.

Focus shifting to Jackson Hole this week

The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming, is scheduled for August 24-26. This year’s theme is "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak on August 25 at 10am ET. Other central bank heads will also be likely on the agenda. From recent commentaries, it appears that central bankers will keep the flexibility to hike rates further, while clearly avoiding committing to cut rates soon. Still, thoughts on economic momentum could be key and rising credit risks may warrant some dovishness

Earnings to watch

Today’s US earnings focus is Medtronic which reports FY24 Q1 earnings (ending 31 July) before the market open with analysts expecting revenue growth of only 3% y/y and EBITDA of $2bn unchanged from a year ago.

• Today: Woodside Energy, Kuaishou Technology, ANTA Sports, Lowe’s, Medtronic, Baidu
• Wednesday: Nvidia, Analog Devices, Snowflake, Autodesk, Splunk
• Thursday: Royal Bank of Canada, Toronto-Dominion Bank, Meituan, CRH, Intuit, NetEase, Workday, Marvell Technology

Economic calendar highlights for today (times GMT)

0600 – Norway GDP
1000 – UK CBI Industrial Trends
1230 – US Philadelphia Fed Non-manufacturing Activity survey
1400 – US Richmond Fed Manufacturing Index
1830 – Chicago Fed’s Austan Goolsbee (voting member) speech
2000 – API's Weekly Crude and Fuel Stock Report
2300 – Flash Aug. Australia PMI’s
0030 – Flash Aug. Japan PMI’s