Global Market Quick Take: Europe – July 4, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Cash markets are closed due to Independence Day holiday

S&P 500 futures managed to extend their recent gains yesterday getting closer to the 4,500 level again underscoring the strong sentiment in equities betting on no recession and inflation will eventually come closer to the policy target. The VIX Index remain below 14 and the US 10-year yield remains bid but still below 3.9%.

FX: Dollar range-bound in thin markets

The US dollar chopped around without convictions, bottoming out yesterday after the release of a weak ISM Manufacturing survey (more below). Still, the weak ISM print wasn’t enough to change expectations for Fed hike in July (85% chance), which keeps the focus on labor market data from JOLTs and June Nonfarm Payrolls this week. USDJPY stayed above 144 with threat of a coordinated intervention. The RBA this morning decided to keep rate unchanged, but kept the door open for further tightening (more below). Taking the AUDUSD back toward 0.6650 after it teased higher before the meeting.

Crude oil: reverses the post Saudi-cut gains on ISM disappointment

Saudi Arabia and Russia’s attempt to boost prices fell flat on Monday with time spreads not pointing to any tightness at this time. Instead, the market continues to focus on macro-economic developments, especially the continued inversion of the US yield, reaching a two-decade high, pointing to an incoming recession. Crude oil initially popped only to fall back after US ISM manufacturing dropped further into contraction. Saudi Arabia said, not surprisingly, that it would extend its unilateral 1mb/d production into August, while Russia said it would reduce oil exports and production by 500kb/d in August. Crude oil remains stuck, with Brent trading around $75, near the average price seen since May. Speculators hold a decade low exposure across the energy complex but for them to turn buyers, production cuts need to be supported by an improved economic outlook, especially in the US and China.

Gold: supported by weak manufacturing data

Gold briefly traded above $1930 on Monday, and near trendline resistance at $1931, after weak manufacturing data brought some inflation relief (see below). The US 2–10-year yield curve spread meanwhile reached a two-decade high further strengthening the view, the US economy is heading in the wrong direction, potentially curbing the FOMC’s ability and willingness to hike rates to lower inflation further. A quiet day ahead is expected with the US markets closed. Gold remains in a downtrend but with support below $1900 looking solid an upside attempt to challenge resistance in the $1931-36 area could be seen.

FOMC minutes, JOLTS and non-farm payrolls are likely to push the yield curve to further inversion (2YYM3, 10YM3, 30YM3)

Yesterday the spread between 10-year and 2-year yields dropped as much as -110.9, as the yield curve inverted the most since 1981. To soften the flattening trend, the ISM manufacturing index declined to a 3-year low. Yet, yields closed the day sensibly higher with 2-year yields closing at 4.93% and 10-year yields at 3.85%.  We expect the yield curve to continue to flatten throughout summer. If inflation eases slowly and the economy remains resilient long-term yields will continue to rise with front-term yields soaring at a faster space, contributing to a further inversion of the yield curve. However, weaker than expected data on growth might provoke drops on the longer part of the yield curve providing an even faster flattening. Today is a bank holiday in the US, the bond market’s focus shift to tomorrow’s FOMC minutes, JOLTS numbers on Thursday and non-farm payrolls on Friday.

What is going on?

US ISM manufacturing weakest in three years

The headline US ISM index came in below expectations and a 3-year low at 46.0, weakening from May’s 46.9 further and recording an eighth straight month of contraction. The prices paid component brought good news on inflation as it dipped to YTD lows of 41.8 from 44.8 in May. New orders index picked up slightly to 45.6 from 42.6 in May while the production index dipped into contraction as it came in at 46.7 in June from 51.1 previously. The Employment index was also in contraction at 48.1 in June from May’s 51.4. While these numbers continue to suggest that manufacturing part of the US economy is weakening, it doesn’t spell immediate trouble and the markets continue to price in a July rate hike from the Fed with 85% probability

Rivian adds to positive EV sentiment

US electric vehicle start-up Rivian Automotive revealed stronger-than-expected production numbers a day after larger rivals Tesla and BYD reported robust deliveries. Rivian said that it built 13,992 trucks and vans in the second quarter, well above Wall Street expectations of about 11,000, and the company reaffirmed guidance for manufacturing 50,000 vehicles this year. The company delivered 12,640 vehicles to customers during Q2, compared with 4,401 in the same quarter of 2022. Rivian will release its Q2 earnings on August 8.

Reserve Bank of Australia leaves rate unchanged

The RBA left the policy rate unchanged at 4.10%, which agreed with market pricing of less than 20% odds for the RBA to deliver another hike, but some half of polled analysts were looking for a hike at today’s meeting. The discussion and focus in the statement was largely the same as the prior statement and the key guidance was left unchanged: “Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.” AUD traded weaker and Australia’s short-end yields were largely unchanged after whipping back and forth.

China announces limits on exports of chipmaking metal

China imposed restrictions on exporting two metals crucial to the semiconductor, telecom and EV industries, escalating its tech trade war with the US and Europe. Gallium and germanium will be subject to controls starting 1 August. Exporters will need to apply for commerce ministry licenses and will be required to report details of the overseas buyers and their applications.

What are we watching next?

Important rest of the week ahead for US data

The rest of the week continues to deliver a string of key macro data, with FOMC minutes tomorrow not particularly in focus as the Fed is seen as reactive to incoming data. After the US holiday today to mark Independence Day, the US reports the June ISM Services survey on Thursday after May’s print was the worst for the cycle at 50.3. Another survey, the S&P Global Services PMI, on the other hand, registered its strongest reading in over a year in April at 55.0 and the initial June reading only dipped slightly to 54.1. Thursday also sees the June ADP private payrolls data after a strong +278k reading in May. Finally, Friday brings the official June US labor market data, especially the Nonfarm Payrolls Change number after a strong surge in payrolls of +339k reported in May, while the Unemployment Rate is expected to dip back lower to 3.6% after an odd surge to 3.7% in May. Average Weekly Earnings/Hours are also in focus as these have both been on a declining trend since early 2022.

Technical update

• S&P500.Likely to move higher to resistance at 4,546
• Nasdaq 100 Close to testing strong resistance at 15,265. A daily close above potential to 15,653-15,882
• DAX resuming uptrend. Could to test all-time high
• AEX25 failed to close above key resistance at 777. Could see a setback but uptrend intact
• CAC40 testing key resistance at 7,403. If closing above likely move to all-time highs at 7,581
• EURUSD rejected at 1.10. Range bound short-term between 1.08 and 1.10 but uptrend intact. Resistance at 1.11
• GBPUSD below support at 1.2667. Could correct to 0.618 at 1.2515. Uptrend intact
• USDJPY Uptrend to 146.60. Uptrend stretched. Resistance at 145.30
• Gold testing 1,900. Downtrend could lead to support at 1,870
• Copper bouncing from 0.618 retracement around 370

Earnings to watch

There are no important earnings releases this week. The Q2 earnings season starts in less than two weeks from now with US banks kicking off the earnings season.

Economic calendar highlights for today (times GMT)

US Market closed for Independence Day

• 1600 – ECB's Nagel to speak
• 0145 – China Jun. Caixin Services PMI