Global Market Quick Take: Europe – July 26, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Noting Nasdaq 100/S&P 500 divergence

The S&P500 increased by 0.3% to reach 4,567, just managing a new cycle high, while the Nasdaq100 rose by 0.7% to 15,561, still a couple of percent below its highs of last week. General Electric (GE:xnys) surged 6.2%, propelling it to a new 5-year high. This surge was fueled by their impressive Q2 results, which surpassed estimates, and an optimistic outlook for the future. 3M (MMM:xnys) also performed well, with a gain of 5.3%. The company exceeded expectations on margins and provided full-year guidance that topped analysts' forecasts. Conversely, Raytheon (RTX:xnys) faced a sharp decline of 10.2%. This decline was triggered by the company's decision to cut its free cash flow outlook, which was attributed to potential production flaws with its Pratt & Whitney jet engines.

After the market closed, Alphabet (GOOGL:xnas) surged over 6% as its Q2 revenue surpassed analyst estimates. On the other hand, Microsoft (MSFT:xnas) declined nearly 4%. Despite beating earnings expectations, the growth in the Azure cloud-services business disappointed investors.

FX: AUD lower on CPI, Euro still weak

The euro remains weak after yesterday’s soft German IFO survey, suffering in particular versus sterling and the JPY yesterday as the ECB meeting tomorrow shapes up to be a dovish affair. The AUD rose sharply yesterday from the key 0.6700 area on hopes that Chinese stimulus is on its way and as key commodity prices like copper rose sharply, but a softer than expected Q2 CPI data point overnight (more below) cut the rally short. Focus for the USD today is on whether today's FOMC meeting drives the USD to rally further after what has so far merely been a consolidation of prior weakness.

Crude Oil: easing lower in Asian session after new highs yesterday

Crude oil prices closed higher again yesterday, with sentiment still supported by China’s stimulus measure announcements. Meanwhile, supply tightness concerns also continue to support. Russia’s seaborne crude exports from Baltic and Black Sea ports fell to 1,17mb/d in the week to 23 July. This is its lowest level in seven months, as Moscow implements the recently announced production cuts. But prices dropped overnight in the Asian session as caution sets in ahead of the FOMC meeting later today and fears that another rate hike may be signalled. WTI near $79/barrel in early European trading while Brent still just above $83.

Metals: extending gains on China’s property sector boost

Copper and iron ore extended yesterday’s rally after China pledged support for its beleaguered property sector. Markets were buoyed by the fact that statement left out the slogan of “housing is for living, not for speculation”, a sign that they are considering further easing restrictions on the property sector. Copper rose to $3.90 and may be on the way to test a minor resistance at $3.95.

US Treasuries (2YYU3, 10YU3, 30YU3): yield curve to bull steepen amid today’s FOMC meeting and Friday’s PCE data

Yesterday’s 5-year US Treasury auction drew a yield of 4.170% tailing slightly from WI at 4.166%. Demand for treasuries remains elusive as resilient economic data show that the Fed can keep policy rates higher for longer. Yet, a short-lived bull steepening is likely as markets believe that the Fed is preparing to deliver the last rate hike of the cycle. The bull steepening might accelerate further on Friday if PCE data, precisely the monthly rate, shows an increase of prices between 0.1%-0.2%, which implies an annualised core PCE rate close to the Fed’s target. Two-year yields are likely to find strong resistance at 4.50%. Ten-year yields are unlikely to break below 3.70%. We, therefore, see the 2s10s spread steepening towards, but not breaking above -80bps.

EU sovereigns (D5BC:xetr, IS0L:xetr): ECB and German inflation in focus

Weak economic data continue to come out from Germany with the IFO numbers missing median estimates. At the European level, the Bank Lending Survey showed that corporate loan demand fell most on record due to high interest rates. Yet, we don’t expect the ECB to turn dovish this week as it will prioritize inflation over the economy for now. Another rate hike in the fall is in play, that means that although German yields might adjust lower in the short term, a further flattening is likely as 2-year Schatz move towards 3.5%. At the same time, Bunds yields have the potential to drop amid recession fears. If bunds break support at 2.40%, they will find support next at 2.30%.

What is going on?

Australia Q2 CPI softer than anticipated

Australia’s Q2 CPI released overnight was softer than anticipated, both for the headline and key core numbers. The headline Q/Q came in at 0.8% and Y/Y at 6.0% versus 1.0%/6.2% expected, while the “trimmed mean” figures were 0.9% Q/Q and 5.9% Y/Y vs. 1.1%/6.0% expected, respectively. The AUD traded lower in the wake of the figures as front-end Australian yields dropped.

US consumer confidence beats estimates

The Conference Board Consumer Confidence data for July rose to 117 from 110.1 in June (upwardly revised from 109.7) and beating the consensus forecast of 112. The jump was broad-based with Present Situations index rising 160 from 155.3 and reaching its highest levels since early 2020. The Expectations index also jumped materially to 88.3 from 80 (revised higher from 79.3) to reach early 2022 highs. Signs of tightness in the labour market reemerged, where the percentage of respondents who said jobs were hard to get fell back nearly to cycle lows, with the widely-followed differential (jobs plentiful minutes jobs hard to get) widening significantly in July from its post-COVID lows in June.

German IFO adds fuel to Eurozone’s economic concerns

The German IFO survey for July was out yesterday showing a worse than expected drop in the Current Assessment part of the survey, which dropped to 91.3 from 93.7 in June (and versus 93.0 expected). The Expectations component was slightly better than expected at 83.5 vs. 83.4 expected, but still falling directionally from the upward revised 83.8 (from 83.6) in June. Meanwhile, the ECB’s quarterly bank lending survey showed a record drop in corporate loan demand (to lowest since 2003 start of the survey), with demand for mortgages and consumer credit also coming in lower.

European luxury brand LVMH reports US sales weakness

The European luxury brand company LVMH, reported Q2 2023 earnings with revenues of 21.21 billion Euros, surpassing the expected 20.6 billion Euros. However, sales in the U.S. fell by 1% in Q2 after +8% growth in the first quarter. The sentiment on US luxury consumer pulling back was also reported by other brands such as Richemont and Burberry. The company stated that it doesn't anticipate further price increases in the near term. Despite the drop in U.S. sales, LVMH expressed satisfaction with its Q2 performance in China. LVMH closed down 4% in NY.

Battery-maker CATL reports 63% higher profits

Electric vehicles have been gaining traction lately on increasing penetration supported by government subsidies and more affordable prices. Chinese battery maker CATL reported Q2 earnings with net income rising 63% on revenue increase of 56% to 100 billion yuan, both beating estimates. Tesla is CATL’s top customer, while Ford, Volkswagen, Hyundai and Nio are also on the list. ETFs like Global X Lithium and Battery Tech (LIT) offer a diversified exposure to EV battery makers.

Alphabet beat on better results from Google Search and YouTube

Alphabet reported Q2 revenue of USD74.6 billion, surpassing the consensus estimate of USD60.3 billion and rising 7% from the last year quarter. Revenue from the Google Search segment increased 5% Y/Y to USD42.6 billion. The revenue from Google Cloud surged 28% Y/Y to USD8.0 billion while revenue from YouTube increased 4% Y/Y to USD7.7 billion. The Network segment, however, saw a 5% Y/Y decline in revenue to USD7.9 billion. Both the Google Search and YouTube segments exceeded expectations, while the Cloud segment growth was in line and consistent with the momentum seen in Q1. Q2 GAAP EPS came in at USD1.44, 9% above the consensus of USD1.32.

Microsoft Q2 beat but growth in Azure cloud-services business slows

Microsoft reported Q2 revenue of USD56.19 billion and GAAP EPS of USD2.69, beating the consensus estimates of USD55.5 billion and USD2.56 respectively. While the 27% Y/Y growth in its Azure cloud-services business was in line with previous management guidance, it decelerated from the 31% Y/Y growth in Q1 and disappointed investors. 

What are we watching next?

FOMC to hike and may guide hawkish, but market thinks Fed is done

Few surprises are likely in store for today’s FOMC meeting, with the market universally expecting a 25-basis point hike that takes the Fed Funds rate to 5.25-5.50%, with language in the guidance that likely indicates a bias for another rate hike after the June staff projections of Fed Funds rate, the so-called “dot plot”, saw the median projection of two more rate hikes this year. The market is quite convinced that this will prove the last rate hike for the cycle and may not be swayed. With no new staff projections on the economy or Fed policy until the September meeting, the Chair Powell press conference will be worth watching after the statement release for clues on the Fed’s thinking from here, and whether balance sheet reduction is emphasized, as well as how comfortable the Fed is with the trajectory of inflation and the economy.

Technical Analysis

• S&P 500. New high but not higher close. Top & reversal pattern still intact. If closing above 4,579 it will be cancelled. Support at 4,455
• Nasdaq 100. Correction down to 15K-14687 likely
• DAX closed above 16,210 i.e., uptrend but not confirmed by indicators
• AEX25 Range bound between 781 and 748
• CAC40 Broken above resist at 7,403 but indicators not supporting bullish break. However, no resist until 7,581 
• EURUSD Short-term correction to 1.10 likely before uptrend resumes. Medium-term room to 1.1485
• GBPUSD correction likely to be over at 1.28 support. Bounce and uptrend to resume
• USDJPY Rebound facing resistance at 142. Expect setback before break of 158
• EURJPY rejected at key resist at 158. Minor setback before next attempt higher. Key support 153.28
• EURGBP Double bottom pattern cancelled. Downtrend resumed. Could test key 0.85
• Gold uptrend but short-term correction to 1,940-1,930 likely
• Copper likely building uptrend.  Minor resistance at around 395  
• Brent above resistance at 83. Next resistance at 87.25
• WTI above resistance at 79.20. Next resistance at 83.35
• Wheat testing June peak at 784. Likely higher prices next few weeks
• US 10-year Treasury yield resuming uptrend. Likely to get back to 4%

Earnings to watch – heavy day of earnings ahead

The big name reporting today is Meta, after that stock has risen from the ashes, more than tripling from its lows of last November after CEO Mark Zuckerberg eased away from his intense commitment to investing in the Metaverse and announced a large expansion of its stock buyback program in February. Besides the usual critical ad revenue growth trajectory, the focus of late for Meta has been on the potential of its Llama 2 AI large language model, an open-source competitor to OpenAI’s GPT and on its Threads app that is thought to rival Twitter. The stock has been in for a sharp correction here in the last few sessions ahead of its earnings report after the close today.

Earnings this week:

• Wednesday: Rio Tinto (0615 GMT), Coca-Cola (pre-market), Thermo Fisher Scientific (pre-market), Union Pacific (1145 GMT), Boeing (pre-market), QuantumScape (after close), ServiceNow (after close), Meta (after close)
• Thursday: Samsung, Amazon, MasterCard, Nestle, Roche, L’Oreal, AbbVie, McDonalds
• Friday: ExxonMobil, Procter & Gamble, Chevron, Hermes, AstraZeneca, Sanofi, Keyence, ITC

Economic calendar highlights for today (times GMT)

• 1400 – US Jun. New Home Sales
• 1430 – US DoE Weekly Crude Oil and Product Inventories
• 1730 – Bank of Canada to release latest meeting minutes
• 1800 – US FOMC Rate Decision