Head of FX Strategy
Summary: Stocks ended July in mixed fashion, with the major US indices still perched near the highs for the cycle, while Europe is struggling into the close of the month, held down in part by the very strong euro in July. As the often-volatile month of August gets underway, earnings season is still a focus, if less so, while US employment data and the course of COVID-19 virus resurgence are in focus this week.
What is our trading focus?
US500.I (S&P 500 Index) and USNAS100.I (NASDAQ 100 Index) – the US session on Friday saw interesting divergences in how the four mega-cap companies Apple, Alphabet, Facebook and Amazon reacted to their respective earnings reports, but the overall session ended relatively flat and near the top of the range, with the focus for Nasdaq 100 on the 11,000 level that has yet to be taken, while the S&P 500 index closed Friday within a percent of its post-virus panic high of 3,284.
DAX.I (German DAX Index) - we continue to note the large divergence in the major European indices from US counterparts, as the DAX trades not far above the 200-day moving average (currently 12,207) and closed Friday some 1,000 points below the mid-July highs. One source of headwinds for European equities has been the recently strong euro, which surged some 4.8% in the month of July.
AAPL:xnas (Apple) - of the technology megacaps reporting earnings last week, Apple saw the most positive reaction to its very strong earnings report, with the stock leaping over 10% on the session to a new all-time high that added over $150 billion in market cap. The company is the world’s largest and is now worth over $1.8 trillion.
HSBA:xlon (HSBC) - shares are down 4% this morning in Hong Kong trading to fresh lows not seen since 2009. The culprit is Q2 pre-tax profit missing estimates and stark warnings on loan losses that could increase to $13bn. The bank is cutting cuts and is singling out UK as the weakest economy among the large economies while Asia is holding up. The biggest catalyst and future risk to loan losses is from their commercial customers.
XAUUSD (Spot Gold) and XAGUSD (Spot Silver) - gold was solidly bid into the close of the week and month on Friday, managing to ignore the stumble in the US dollar. In early Monday trading, spot gold made a stab higher to marginal new record highs that failed to hold in early European trading, with the psychological focus clearly on whether the $2,000/oz. level can be taken out here. Silver, meanwhile, continues to churn around in the $23-25/oz. range, held back in part by copper prices, which closed Friday at their lowest level in over three weeks.
AUDUSD – the USD rally on Friday was rather forceful and looked potentially decisive in the case of USDJPY. The Aussie was also pushed back lower versus the greenback, taking the pair back closer to the critical pivot zone on the way up in the 0.7000-0.7050 area. The supportive factors for the Aussie are somewhat mixed here, as iron ore prices (iron ore is Australia’s largest export) in China continue to charge higher while Australia is dealing with a massive resurgence in virus concern, with the city of Melbourne declaring a strict curfew at the weekend. The Australia RBA meets tonight.
USDJPY – a hard reversal back higher on Friday unfolded after the USDJPY pair took a look below the pivotal 104.50 area – there was not identifiable trigger for the move save for the general, across-the-board USD rally, with end-of-month flows a possible driver in addition to a squeeze on shorts after the pivotal technical development showed signs of failure. Overnight, the pair spiked further above 106.00 briefly before settling back lower. The rally from Friday’s lows presents a tough obstacle for USD bears.
What is going on?
The China Caixin July Manufacturing PMI out at 52.8. - this marks a further acceleration in growth from the June reading of 51.2 and beat the 51.1 expected.
Microsoft is continuing talks to acquire TikTok’s US operations after Trump banned TikTok in the US in yet another sign that the world is dividing into two “systems” on the Internet. TikTok’s parent company ByteDance is also considering a spin-off, but this would still leave operational ties to the Chinese operation and thus a direct sale to Microsoft is the most likely scenario at this point. In our view it’s a big opportunity for Microsoft to create a stronghold in social media and their brand recognition in the developed world to massively increase TikTok’s presence.
Siemens Healthineers (SHL:xetr) announces $16.4bn deal to acquire Varian in move to enter cancer treatment one of the areas of health care the biggest long-term market potential. The CEO is also saying that part of the deal is equity financing issuing additional shares and thus increasing the free float (the parent company Siemens’ stake will fall to around 72% from 85%) to a point where the company could be included in the DAX Index following the empty seat left by the Wirecard accounting scandal.
What we are watching next?
Where’s the next round of US stimulus? This is the most important question hanging over US markets this week, as many benefits of the initial round of US stimulus expired on Friday, most importantly the $600/week federal unemployment benefit. There were mixed signs on progress over the weekend, but the sides declared themselves still far apart on reaching agreement, with talks set to resume today.
Russian assets and the ruble – the ruble has been divergently weak relative to most other major EM currencies over the last six trading days, likely in part due to concerns linked to the Belarussian situation, where an election is to be held this upcoming weekend, and where protests have marked the domestic situation in Belarus, while the country’s current leader Lukashenko, has accused Russia of attempting to meddle in the country’s affairs after he has resisted Russia’s moves to closer union of the two countries. The ruble in euro terms closed at its weakest level Friday since March and is down over 10% versus the Euro since late June.
Economic Calendar Highlights for today (times GMT)
0715-0800 – Euro Zone Final Jul. Manufacturing PMI
0830 – UKS Jul. Manufacturing PMI
1400 – US Jul. ISM Manufacturing
0430 – Australia RBA Cash Target
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
