Financial Markets Today: Quick Take – August 31, 2022
Saxo Strategy Team
Summary: Whiplash in global sentiment as the US equity market ended yesterday on a sour note at new local lows, only to see the mood brighten considerably in Asia, perhaps in part due to a massive plunge in crude oil prices. Sentiment toward the euro has certainly improved this week, as the single currency posted strong gains nearly across the board yesterday on another steep drop in natural gas prices and fresh hawkish rhetoric from an ECB member ahead of next Thursday’s meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
S&P 500 futures reversed hard yesterday after pushing through above the 100-day moving average closing below the 4,000 level at 3,987. The culprit was more hawkish comments from both the Fed and ECB on top of very strong JOLTS Job Openings supporting the view that the labour market remains tight, likely leading to more wage pressures. Also, the S&P CoreLogic house index for June showed that house prices slowed down significantly on m/m basis highlighting the negative impact from higher mortgage rates. S&P 500 futures are trading back above the 4,000 level this morning with the 50-day moving average sitting around the 4,017 level is a key support level to watch today.
Hong Kong’s Hang Seng (HSIQ2) and China’s CSI300 (03188:xhkg)
In U.S. trading the night before, Hang Seng Index Futures tumbled 2.3% in a confluence of factors including Taiwanese soldiers on front-line islands firing shots at civilian drones believed flying from mainland China, a newswire report saying the U.S. regulator, PCAOB, selected Alibaba (BABA:xnys/09988:xhkg) for audit inspection commencing in September, Berkshire Hathaway reducing holdings in BYD, Covid-related lockdown concerns, and the continuous decline of the U.S. equity markets. Hang Seng Index gapped down by nearly 2% at the Asian market open but managed to crawl back all the loss and turn to a gain of 0.5% at the time of writing. The tech space led the charge higher, Hang Seng Tech Index (HSTECH.I) surged by 2.4%. In A shares, CSI 300 reversed the downtrend in the morning and bounced to 0.8% higher.
Surging euro take the single currency higher across the board
The EURUSD exchange rate was stable-to-stronger as the EU continues to build natural gas supplies ahead of the winter and as the price for gas dropped sharply yesterday again. More hawkish comments from the ECB, this time from Nagel, who argued for “front-loading” rate hikes, also helped the euro higher. The Euro was higher across the board, with EURCHF surging nearly to 0.9800 and EURUSD staying above parity despite the USD strength elsewhere. The bigger level in the latter is toward the 1.0100 local range high and former range low. Next Thursday’s ECB will be critical for the euro outlook, with the market leaning for a 75 basis point hike.
Selling pressure in GBP ramps up
Pessimism built in sterling after Goldman Sachs hinted that peak inflation in the UK could reach 22% in early 2023 and downgraded its GDP forecast. GBPUSD touched lows of 1.1622 before settling around 1.1660. EURGBP pushed higher to 0.8600, its strongest level since early July.
Crude oil prices (CLU2 & LCOV2)
Crude oil on track for a third monthly drop took a 7.5% tumble on Tuesday after recording the best day in six weeks on Monday. Both highlight a market suffering from low liquidity and lack of direction. Brent has returned to $100 with the slower growth and demand narrative once attracting sellers. In addition, a two-day plunge in EU gas prices also weighing on sentiment while new Covid infections and the worst heatwaves in decades in China added to the negative sentiment. On the supply side the Iraq turmoil is not having any impact on oil supplies while an Iran nuclear deal still lingers. Ahead of today’s EIA weekly stock report, the API last night reported a 600k barrels increase in oil stocks with big draws seen in gasoline and diesel. Further volatility can be expected in European gas prices over the coming days, and that could spill over to crude oil as well.
EU Gas traders watch Nord Stream 1 and political initiatives to suppress power prices
Dutch TTF benchmark gas which touched €350/MWh on Friday trades €270/MWh on the opening with focus on Gazprom’s announced 3-day closure of the NordStream 1 pipeline for maintenance, and whether it will reopen on September 3 or remain shut as part of Putin’s gas war against Europe. The closure coinciding with maintenance in Norway, including at the giant Troll fields. NordStream 1 currently supplies Europe with 33 mcm/day compared with its capacity of 167 mcm/day. A re-opening on September 3 could send prices tumbling further towards €200/MWh, a level still high enough to curb demand. Gas has also been losing altitude in response to rapidly filling storage sites, although daily flows will be needed throughout the winter, and signs the EU is preparing to intervene to dampen soaring power prices.
Gold remains troubled by the recent hawkish shift by the US Federal Reserve, but the downside pressure has eased a bit by a weaker dollar and geopolitical tensions. The price nevertheless trades below support-turned-resistance at $1729/oz with $1715/oz support preventing another attempt to challenge key support at $1680/oz. A host of Fed speakers were on the wires yesterday, and all of them focused on inflation, suggesting aggressive action from the Fed will continue. Meanwhile, Taiwanese soldiers fired shots to ward off civilian drones flying close to islands near China, spooking fears that tensions could escalate.
What is going on?
First shipment of wheat out of Ukraine arrives in Africa
The first export of wheat from Ukraine since the invasion of Russia in February has arrived in Djibouti, east Africa. The 23,000-ton shipment is bound for Ethiopia which is struggling with ongoing drought and conflict. A recent agreement between Russia and Ukraine, mediated by the UN and Turkey, has allowed 50 ships to resume shopping grain around the world. Wheat harvest was also seen picking up in Canada as yields improved amid better weather conditions, helping to ease supply worries in the key agricultural crop.
US consumer confidence and JOLTS data came in better-than-expected
US consumer confidence rose to its highest level in three months to come in at 103.2 in August from 95.7 previously. Both the expectation index and present situation index saw improvements, rising to 75.1 (prev. 65.6) and 145.4 (prev.139.7), respectively. This could be partly driven by lower pump prices, but also signals that a healthy job market report may be coming this week. The 1-year ahead inflation expectation fell to 7.0% (prev. 7.4%), which was a seven-month low. Meanwhile, US JOLTS rose to 11.239mln in July, above the expected 10.45mln and previous 10.698mln, hinting that the labor market remains tight.
German CPI’s upside surprise, ECB still leaning towards front-loading
Germany CPI came in higher than expected at 7.9% YoY (vs. 7.5% prev and 7.8% expected) while the MoM print was slightly softer at 0.3% (vs. 0.9% prev and 0.4% expected). Food and energy price gains underpinned, but fuel rebate helped to take some pressure off. Meanwhile, ECB speakers continued to push for more front-loaded rate hikes, in contrast to ECB’s Lane calling for more step-by-step increases on Monday and signaling recession concerns yesterday. THe ECB’s Nagel argued for front-loading rate tightening and Knot clearly said he’s leaning towards a 75bp hike in September, but he is open to a discussion, as did Muller. Wunsch also vouched for rates in restrictive territory, and Vasle (non-voter) said the September rate hike should exceed 50bps. Pricing for the ECB meeting next Thursday closed yesterday around +65 basis points.
Taiwan shot at drones flying close to its offshore islands
Taiwan’s authorities said in a statement Taiwanese soldiers fired shots in three incidents on Tuesday to ward off drones flying close to small offshore islands controlled by Taiwan. The statement did not identify where these civilian drones were from but said that the drones flew away in direction of Xiamen, a coastal city in mainland China. Taiwan’s President Tsai Ing-wen previously urged Taiwan’s military force to take “appropriate by necessary” actions to drive away civilian drones having been buzzing Taiwan’s military installations on its front-line islands.
Crowdstrike reports better than expected results
Shares were higher in US extended trading, following a 0.7% rise in the regular session after reporting second-quarter results that topped expectations, while it also raised its forecasts for the year. The cyber security giant reported revenue rose to $535mn, up from $337.7mn last year. Annual recurring revenue grew 59% to $2.14bn compared to the same time last year. This is a somewhat of a testament that cyber security is a defensive industry, as it is able to somewhat thrive regardless of economic conditions weakening.
Chinese lithium miners are seeing explosive growth
Tiangqi and Ganfeng, two of the world’s largest lithium miners, both reported very strong results seeing net income increasing multiples times from last year as lithium carbonate prices have risen 80% this year in China driven by supply shortages of lithium and extremely rapidly growing demand for electric vehicles.
What are we watching next?
The EU will hold an emerging energy meeting on 9 September
This happens while the EU is set to meet its gas storage filling goal (80 %) two months ahead of target. Germany, which is one of the largest European economies most dependent on Russian gas, is also on track to meet its national storage goal before the deadline expires. In recent weeks, the EU has scaled up efforts in order to avoid energy rationing this winter. On this emergency meeting, Spain is expected to propose that the entire EU apply the ‘Iberian exception’ to set electricity prices. In mid-April 2022, the European Commission agreed that Spain and Portugal create a temporary mechanism to decouple the price of gas from that of electricity for a period of 12 months. Concretely, the price of gas was capped to an average of €50 per megawatt-hour. This resulted in electricity bills being halved for about 40 % of Spanish and Portuguese consumers with regulated rates. This could be applied at the EU scale.
The Chinese Communist Party national congress commences on Oct. 16
The politburo decided to propose to schedule the next once-every-five-year National Congress of the Chinese Communist Party (the “CCP”) for Oct 16, 2022. The 2,300-odd delegates attending the National Congress will elect the CCP’s Central Committee which consists of 205 full (voting) members and 170 alternate (non-voting) members. The full members of the Central Committee will elect among themselves the 25 members of the Politburo and the members of the Politburo will then choose among themselves the seven members of the Politburo Standing Committee, who are the highest leaders of the CCP. The National Congress will review the CCP’s work over the past five years and formulate policy directions and action plans for the next five years.
Today is the first report of US ADP Payrolls Change using new methodology
The ADP Research Institute and Stanford Digital Economy Lab have revised the methodology for the ADP’s monthly employment report, arguing that the new report will offer a better view on the labor market, with breakdowns of weekly data for the prior month and more data on changes in pay. Only time will tell whether the market will begin to trust this data more than the official nonfarm payrolls “establishment” survey.
Earnings to watch
Today’s US earnings focus is MongoDB expected to report 42% y/y revenue growth in FY23 Q2 (ending 31 July) with operating profit getting very close to break-even. The database company has been running positive cash flow from operations over the past two quarters, but investors would like to see operating income (includes share-based compensation) break-even as well.
- Today: MongoDB, Brown-Forman, Veeva Systems
- Thursday: Pernod Ricard, Broadcom, Lululemon Athletica, Hormel Foods
- Friday: BNP Paribas Fortis
Economic calendar highlights for today (times GMT)
- 0755 – Germany Aug. Unemployment Change/Rate
- 0800 – Poland Flash Aug. CPI
- 0900 – Eurozone Flash Aug. CPI
- 1200 – US Fed’s Mester (voter) to speak
- 1215 – US Aug. ADP Private Payroll change
- 1230 – Canada Jun. GDP
- 1345 – US Aug. Chicago PMI
- 1430 – EIA's Weekly Crude and Fuel Stock Report
- 2300 – South Korea Q2 GDP
- 0145 – China Aug. Caixin Manufacturing PMI
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