Financial Markets Today: Quick Take – August 24, 2022
Saxo Strategy Team
Summary: The US dollar rally was disrupted yesterday by weak US home sales data and especially another Global S&P Services PMI that suggests a US services sector that is in contraction, even after the ISM Services survey last month indicated otherwise. Still, EURUSD continues to trade below parity even as the rise in US yields was tamed yesterday. The equity market tried to celebrate the weak data, but the bounce after a sharp sell-off this week was a meager one as the market nervously eyes Fed Chair Powell’s speech at the Jackson Hole symposium on Friday.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures headed lower yesterday and are still trending lower in early European trading hours. Our view is that the index futures will go test the 100-day moving average around the 4,080 level and then likely the 4,000 if financial conditions tighten from here and Jackson Hole (central banks meeting to discuss key issues) turns out to be hawkish on inflation, or we get a bad m/m inflation print in the US. New Home sales disappointed yesterday showing that higher interest rates are cooling the housing sector. The US technology trio of Nvidia, Salesforece, and Snowflake are reporting tonight after the market close.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Hong Kong/China equities continued to trend lower on Wednesday, Hang Seng Index -1.2%, CSI 300 -1.3%. EV maker XPeng (09868:xhkg /XPEV:xnys) fell 11.5% after reporting wider Q2 losses and giving 3Q vehicle delivery guidance below market expectations. Share prices of other Chinese automakers were dragged down by 3% to 5% across the board. Chinese eCommerce mega-cap JD.com (09618:xhkg/JD:xnas) gapped higher at the open JD.com after reporting Q2 earnings beating market expectations before giving back most of it. Despite reporting better-than-expected earnings, the Chinese social e-platform, Kuaishou Technology (01024:xhkg) plunged by more than 8%. Share prices of Chinese property developers fell as the share price of Logan (03380:xhkg) plunged 48% after resuming training from suspension. In A-shares, autos, semiconductors, and electronics led the charge lower.
US dollar rally stumbles on weak US data
The US dollar rally backed off sharply yesterday in the wake of a shocking miss on the flash August S&P Global Services PMI, which suggests a considerable contraction in the US services sector, although the survey may be less trusted than the ISM Services survey (not out until Sep. 6.) as discussed below. EURUSD backed up above parity intraday after touching a cycle low near 0.9900 yesterday but traded back well below the psychologically pivotal level today. Next steps for USD direction will be on clues and the reaction to Fed Chair Powell’s speech on Friday, particularly in the US Treasury market. For the Euro and sterling, impossibly aggravated natural gas/power prices remain a critical factor. USDCNH is also a focus as the pair trades back toward the cycle highs this morning despite USD softness at times yesterday.
The Japanese yen rose sharply yesterday in the wake of weak US data, even as US treasury yields only moderated their rise slightly. The JPY could prove one of the more reactive currencies to Friday’s speech from Fed Chair Powell at Jackson, should yield volatility pick up. EURJPY is one of the heavier pairs at the moment, with the pivotal 135.00 area to the downside in focus. USDJPY needs to close below 134.00 to suggest that the recent comeback rally is failing.
Crude oil prices (CLV2 & LCOV2)
Crude oil prices continued higher on Tuesday after the Saudi Energy Minister flagged possible cuts to production amid a futures (paper) market being increasingly disconnected from underlying fundamental developments in the physical market. The market was given further support by an API report showing US crude stockpiles fell by 5.6 million barrels last week. The recovery back to $100 per barrel Brent this week has occurred despite the headwinds from recession drums banging ever louder and continued dollar strength. Focus on whether US airstrikes targeting Iranian-backed groups in Eastern Syria could impact current nuclear negotiations.
U.S. corn (CORNDEC22) and soybean (SOYBEANNOV22) rally on rising crop concerns
The Bloomberg Grains index trades near a two-month high as it continues to recover from the May to July 27% correction. Despite the stronger dollar creating some headwinds to prices, the recovery led by corn and soybeans, has been driven by continued worries about US crop conditions ahead of the harvest. This after months of troubled weather developments was topped up with an early August heatwave. The strength of these two key crops spilled over to wheat which is on track for a fourth day of gains. Corn, up nearly 9% this past week has led the charge with the current Pro Farmer crop tour pointing to a lower-than-expected yield and production.
Gold jumped 23 dollars on Tuesday in response to weak US data, and its ability to put up a fight against the current headwinds from a rising dollar and US 10-year yields above 3% points to reduced short selling conviction. The overall sentiment, however, remains relatively poor with the market focusing on Friday’s Jackson Hole speech from Fed chair Powell. At this point a further recovery in prices probably needs to be accompanied by a weaker dollar, especially against the euro, a development that is difficult to achieve with the current growth killing high gas prices in Europe. Key support at $1729 with resistance in the $1768/70 area.
US Treasuries (TLT, IEF)
US treasury yields rose again yesterday, with the 10-year benchmark trading well clear of 3.00% before weak US data tamed (see below) the rise. All eyes on how the market trades after the Fed Chair Powell speech as the market waits for whether there is increased emphasis on the interest rate mechanism or balance sheet management (possibly more bearish for longer treasuries) in Fed guidance. The attention on the treasury market will become super-charged once more if long yields re-approach the cycle highs from June (near 3.50% for the 10-year benchmark.)
What is going on?
US flash Aug. PMIs and New Home Sales disappoint
The US S&P Global flash PMIs for August came in below expectations, with the Aug. Flash Services PMI at an ugly 44.1 vs. 49.8 expected. This after the prior July S&P Global Services PMI (47) was at extreme odds with the July ISM Services survey (56.7). Which survey is a better measure of activity? The flash Aug. S&P Global Manufacturing PMI survey fell to 51.3 in August (vs. 51.9 expected) from 52.2 in July. The Composite PMI at 45 was the weakest reading since early in the pandemic, but some relief came from softening of input and output prices. Meanwhile, new home sales continued to show some concerns on the housing sector, with a fall of 12.6% in July to a 511k pace being the weakest data point since January 2016, including pandemic lows. New home supply rose to 10.9 months (prev. 9.2mnths), an eighth consecutive month of increases.
Manufacturing PMIs from Europe and UK in contraction
A further retreat in Europe’s composite PMI to 49.2 in August from 49.9 previously suggested that the growth momentum continues to retreat. Europe is reeling under the threat of energy crisis, and the manufacturing sector has been hit hard due to the surge in power and utility prices. Eurozone manufacturing PMI slid further to 49.7 from 49.8 previously while the services sector was also slower at 50.2 in August from 51.2 previously despite some tailwinds from resumption of travel and tourism. UK manufacturing PMI was a big disappointment at 46 from 52.1 in July, coming in at the slowest pace in over two years. H
Twitter saga is growing daily
The fight between Twitter and Elon Musk is intensifying and a former executive and head of security, Peter Zatko, has now filed a whistleblower lawsuit against Twitter arguing that he had warned management about gross deficiencies (old software and hardware, and too many employees had access to the core code behind the platform) to protect users on the platform, but the warnings were ignored. In addition, the court in Delaware has ordered Twitter and a former head of products to hand over key documents and communication regarding Twitter’s handling and fighting of spam bots, which is at the center of why Elon Musk allegedly pulled out of the deal.
JD.COM, Kuaishou Technology, and Ping An Insurance reported
JD Logistics delivered RMB 36mn operating profits instead of a loss, and a 0.8 percentage point y/y improvement in its operating margin at JD Retail. JD.com (09818:xhkg/JD:xnas) reported Q2 earnings beating market expectations. Q2 revenue growth of 5% y/y was in line with forecasts. Net income grew 40% y/y in Q2 to RMB 6.5bn, 42% above the consensus forecast of RMB 4.6bn. The company had 580.8mn annual active customers in Q2, which was 9.2% higher than a year ago. Kuaishou Technology (01024:xhkg) reported Q2 revenue growing at 13% y/y to RMB 21.7bn, above market expectations. Q2 Net loss narrowed to RMB 1.3bn from the loss of RMB 5bn in Q2 last year and beat the consensus forecast of an RMB 2.3bn loss. Operating margin improved to -5.5% from -25.9% last year on cutting spending on marketing and revenue growth. Ping An Insurance Group (02318:xhkg) reported a 3.9% rise in net income to RMB 60.3bn in H1, beating analyst estimates. The better performance was attributed to lower claims and better-than-expected policy persistence at Ping An Life.
Hungary offers “last ditch” package to avoid EU cutting off funds
Hungary has offered the EU a package of measures meant to address EU charges against the country on its violation of rule-of-law principles that threaten EU budget distributions. As of last month, the EU still found that Hungary’s efforts to change its practices were insufficient. The EU commission will respond in a month, according to a commission spokesperson. The total funds at risk include some EUR 5.8 billion for pandemic recovery and another EUR 21.7 billion for Hungary’s portion of the current 7-year budget through 2027. EURHUF has traded as high as 414 yesterday, close to cycle highs and far above the range high around 370 that prevailed until the EU threatened to halt the distribution of funds earlier this year.
What are we watching next?
USD and US Treasury yields as Jackson Hole Fed conference is the macro event risk of the week Friday
The rise of the US dollar and US treasury yields was tempered yesterday by softer data as discussed above, but these developments have likely done nothing to alter Fed Chair Powell’s Friday speech at the Fed’s annual Jackson Hole conference, set to kick off tomorrow. The title of the Jackson Hole conference this year is “Reassessing Constraints on the Economy and Policy”. Reading between the lines, will the Fed try, as the Bank of England has done, to emphasize how little its tools are able to address the supply side factors that drove some of the rise in inflation? This would fit with the Fed’s declaration that it would like to remain data dependent, leaving the market with few new takeaways, although it will watch closely for hints on how the Fed weighs the importance of balance sheet management (QT) now that the market has priced the Fed to begin slowing the pace of rate hikes after the September meeting. The pace of QT is meant to pick up in coming weeks to a pace of $95B/month. So far, the QT has been slow out of the gates, with the balance sheet currently only some $115B smaller than at its mid-April peak.
Earnings to watch
Today’s earnings focus is the US technology trio Nvidia, Salesforce, and Snowflake. We wrote an earnings preview yesterday on these three companies where we go through the expectations and what to look for in each of the earnings releases.
- Today: LONGi Green Energy, Royal Bank of Canada, PetroChina, Ping An Insurance Group, Nongfu Spring, Mowi, Nvidia, Salesforce, Pinduoduo, Snowflake, Autodesk
- Thursday: South32, Toronto-Dominion Bank, Fortum, Delivery Hero, AIA Group, China Life Insurance, CNOOC, CRH, Dollar General, Vmware, Marvell Technology, Workday, Dollar Tree, Dell Technologies, NIO
- Friday: Meituan, China Shenhua Energy, China Petroleum & Chemical
Economic calendar highlights for today (times GMT)
- 1230 – US Jul. Flash Durable Goods Orders
- 1400 – US Jul. Pending Home Sales
- 1430 – US DoE Weekly Crude Oil and Product Inventories
- 2245 – New Zealand Q2 Retail Sales
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