Global Market Quick Take: Europe – August 15, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Cyclical stocks rebound

Cyclical sectors rebounded 1% percentage points against defensive sector yesterday driven by a strong comeback in technology stocks such as Nvidia rallying 7% off key support levels just above the 400 level. S&P 500 futures were up 0.6% yesterday and the momentum has extended this morning. Key US earnings focus today is Home Depot reporting before the market opens.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): markets sold off despite surprise rate cuts in China

While investors are still digesting the renewed fears of credit event risks from the property sector and the shadow banking system signified in trust companies and wealth management products, China’s activity data came in weaker than the already downbeat expectations. The surprise cuts on the policy Medium-term Lending Facility (MLF) rate to 2.50% from 2.65% and the 7-day reverse repo (OMO) rate to 1.8% from 1.9% failed to generate any fanfare. The Hang Seng Index dropped by 1% and the CSI300 shed 0.8%.

FX: JPY unchanged on blowout Japan GDP

USDJPY saw a mild and temporary downside to 145.40 on Japan’s flash Q2 GDP numbers reporting a solid growth on the headline, although details were less convincing. Still no sign of verbal intervention from authorities as pair reaches highs of 145.58 and more gains remain in sight. EURUSD plunged below 1.09 overnight but recovered above later and GBPUSD still sticking close to the 1.27 handle as labor market data will be in focus today. USDCNH surged to a 9-month high above 7.30 after China’s central bank unexpectedly cut a key interest rate by the most since 2020 amid an ongoing slump in economic activity.

Crude oil: Tight conditions offsets China growth concerns

Crude oil prices trade near unchanged after falling one percent on Monday despite another dose of disappointing economic data from China raising some concerns about demand in the coming months. Prices instead continue to be supported by tight market conditions amid record demand, as seen through the physical crude differentials and elevated refinery margins. The market is likely to remain in this state as long the Saudi’s maintain their 1m b/d voluntary cut, or cracks begin to show up in the demand outlook. Having found resistance above $87.50 last week, Brent is currently consolidating with the positive momentum not being challenged unless it closes below the 21-day moving average, last at $84.20.

Gold: testing of key $1900 support has begun

Higher Treasury yields and a stronger dollar continue to weigh on the short-term outlook for gold, the result being a current challenge of support with the first level being the 200-day moving average at $1903 followed by the June low at $1893. Sentiment remains weak with ETF holdings continuing to decline, down 4.3 tons on Monday to a fresh 3 and a bit year low.  The timing of the first, and the depth of subsequent rate cuts remain a current focus with traders currently scaling back their expectations.

Higher for longer pushes rates higher (2YYU3; 10YU3, 30YU3)

The issuance of $132 billion in 3- and 6-month bills went smoothly yesterday as bidding metrics remain solid. However, the focus in bond markets is on the rise in nominal and real yields as bond future markets pushed away chances of interest rate cuts, as the market resonates with the Fed’s higher for longer message. That caused the yield curve to bear flatten, a move which is likely to return between September and October as markets see a rebound in inflationary pressures. Overall, we expect the front part of the yield curve to remain anchored while long-term rates can continue to soar, with 10-year yields going towards 4.5% and 30-year yields to 4.75%.

Unemployment and inflation in focus for UK Gilts (IGLS:xlon, GLTS:xlon)

Jobs numbers released today show that the Bank of England has more job to do hiking rates. Wages continue to put upward pressure on inflation, while data last week show that the economy is resilient. That strengthens the picture for a 6% peak rate, implying that 2-year gilts might soar to test resistance again at 5.5%, and potentially breaking above it.

What is going on?

PBOC cuts rates as economic data disappoints

China's production, consumption and investment slowed more than expected in July despite efforts to boost domestic demand, data released by the National Bureau of Statistics on Tuesday showed. Coming on top of whole host of weaker than expected data recently, the People’s Bank of China responded by unexpectedly cutting two key policy rates for a second time in three months. The central bank cut the one-year medium-term lending facility by 15bp to 2.5% while also lowering the rate on the 7-day reverse repo rate by 10bp to 1.8%, while injecting a net of CNY198 billion via the instrument.

Country Garden seeks to extend a Panda bond due September by three years

Ailing Chinese developer Country Garden reportedly is talking to bondholders of RMB bonds issued by the Cayman Islands domiciled Country Garden Holdings in the mainland domestic market due this September and seeking to reach an agreement to extend the maturity of the debt by three years. According to the proposal, Country Garden will redeem 2% each in Oct, Nov, and Dec 2023, 10% in Sep 2024, 15% in Sep 2025, 25% in Mar 2026, and the remaining 44% in Sep 2026. This proposal might be a pilot plan paving the way for other Country Garden bonds that mature later to follow.

US NY Fed Survey of Consumer Expectations sees lower inflation expectations

The NY Fed Survey of Consumer Expectations saw median 1yr ahead inflation expectations fall to 3.5% from 4.1%, the lowest since April 2021, while the 3yr and 5yr ahead both dipped to 2.9% from 3.0%. Labor market expectations strengthened, and households’ perceptions about their current financial situations and expectations for the future improved. Meanwhile, WSJ’s Timiraos tweeted that the Cleveland Fed measure of one-year inflation expectations fell to 4.3% in July from 5% in April. This is the lowest level in 2 years.

Japan Q2 GDP blows past expectations

A strong beat was seen on Japan’s Q2 GDP data this morning. Annualized GDP for Q2 came in at 6.0% QoQ, more than double of the consensus expectation at 2.9% with Q1 also revised higher to 3.7% QoQ from 2.7% previously. But details still lack conviction with contribution from net exports seen higher at 1.8% from -0.3% in Q1. Private consumption growth turned negative in the quarter to come at -0.5% QoQ from 0.6% in the first quarter and business spending was flat from growth of 1.8% last quarter. Notably, GDP deflator, a measure of inflation jumped higher to 3.4% YoY from 2.0% in Q1 and may make a case for some more tweaks from Bank of Japan.

US crop conditions for corn and soy jumps

The weekly US crop condition report from the USDA supported another upgrade to this year's production outlook, and together with increased competition from South America prices of both crops continue to suffer. The good/excellent rating for corn rose 2% to 59% while soybeans jumped an unprecedented 5%, both reaching 59% and now higher than now higher than in the same week a year ago. The improve production outlook together with increased competition from South America continue to weigh on prices. Wheat conditions meanwhile continues to linger, up 1% last to 42% but prices can't get a break with Black Sea exports continuing amid hostilities ahead of the harvest season.

What are we watching next?

US retail sales on tap today

While the markets continue to embrace the soft-landing narrative, Fed’s data-dependent mode has made it extremely sensitive to any incoming data releases. Last week’s data suggested it may be too early to put inflation concerns on a backburner, and this week’s focus will primarily be on growth data as July US retail sales is reported on Tuesday. Bloomberg consensus expects July retail sales to see an uptick and come in at 0.4% MoM from 0.2% previously, while the control measure that feeds into the GDP is seen at 0.5% MoM from 0.6% in June. Headline may be boosted by one-time items such as Amazon Prime Day or July 4 holiday spending as well as higher gasoline prices boosting the value of gasoline station sales. However, retail sales could likely fall towards the end of the year as excess savings of the lower- and middle-income groups are getting depleted and rising credit risks suggest household financial stress could elevate. Sustained weakness in same store sales growth from Johnson Redbook for July also suggest headwinds to retail sales could be building.

UK labor market data could continue to complicate the inflation outlook

UK’s Q2 GDP surprised to the upside last week, but the markets are still more worried about wage and inflation dynamics to see the end of the tightening cycle draw closer. Labor market data will be out on Tuesday and will likely show some signs of cooling in the labor market, but wage pressures, particularly in the private sector, are unlikely to ease enough to support the case for a pause at the September meeting. Bloomberg consensus expects monthly payrolled employees to decline by 12k in July from -9k in June, while the 3-month weekly earnings could surge to 7.4% YoY for June from 6.9% previously.

Technical Analysis

• S&P 500. Downtrend. Bouncing from support at 4,455. Expect minor correction before down resumes. Likely to drop below 4,400. Next support at 4,340
• Nasdaq 100. Expect correction to 15,420 before downtrend is likely to resume. Support at 14,750 likely
• Hang Seng bearish. Support at 18,052
• DAX Bearish. Rejected at 16K.  Likely to drop to 15,482 support area
• AEX25 Key support at 763. Close below next 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 forming bottom and reversal pattern
• Gold XAUUSD Could test June low at 1,892. RSI bearish 
• Silver XAGUSD likely to drop to support at around 22.15
• Copper testing support at 370.  Next support at 360-356 but a bounce seems likely  
• Brent rejected at resistance at 88.20. Expect correction down to around 83
• US 10-year uptrend resumed after correction. Resistance at 4.22 could move to 2022 peak at 4.32

Earnings to watch

Today’s US earnings focus is on Home Depot which is expected to FY24 Q2 (ending 31 July) revenue growth of –3.8% y/y and EBITDA of $7.1bn down from $8bn a year ago highlighting the pressure on consumer discretionary spending in the US. NU Holdings, parent company of South American online bank Nubank, is also going to be in focus as a gauge on consumer credit conditions in South America. Analysts expect Nubank to see net revenue growth of 120% y/y in Q2. Sea Ltd operates the largest e-commerce business in Southeast Asia and thus another interesting earnings release to watch in terms of impact on consumer discretionary spending.

• Today: Suncor Energy, Alcon, Home Depot, Agilent Technologies, NU Holdings, Sea Ltd
• Wednesday: Carlsberg, Tencent, JD Health, JD Logistics, Cisco, TJX, JD.com, Target
• Thursday: 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)

• 0430 – Japan Jun Industrial Production
• 0600 – UK Jul Job Report
• 0900 – Ger Aug ZEW Survey
• 1230 – US Jul Retail Sales
• 1230 – Can Jul CPI
• 1230 – US Aug Empire Manufacturing
• 2030 – API's Weekly Crude and Fuel Stock Report