Global Market Quick Take: Europe – July 6, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Will equities prove immune to rising yields?

S&P 500 futures headed lower yesterday, and they are extending their decline this morning as the US 10-year yield took a big jump higher yesterday and are getting closer to the 4% level trading around the 3.95% level this morning. US bond yields are moving higher as FOMC Minutes showed that most of the policymakers agree that more tightening is needed this year. If the US 10-year yield breaks above 4% and marches on to challenge the previous cycle highs around the 4.25% it could change the dynamics in the US equity markets. With rising bond yields a positive Q2 earnings season becomes more important to justify the current equity valuations under rising yields.

FX: JPY surges on weak risk sentiment

The US dollar generally firmed yesterday as US treasury yields at the long end of the curve broke to new highs ahead of key US macro data today and especially tomorrow with the June jobs report. (FOMC minutes provided no spark as the Fed is in data-dependent mode). Overnight, the JPY lurched higher after risk sentiment was weak late in the US, but particularly weak in the Asian session as Japanese equities sold off steeply USDJPY traded below 144.00 and EURJPY below 156.00 after as high as 157.72 yesterday. It is quite unusual for the JPY to rise when long US treasury yields rise sharply as they did yesterday. Next focus for USDJPY perhaps the 140.93 pivot high from late May.

Crude oil: higher amid supply concerns

Crude oil prices surged on Wednesday as US markets came back from holiday and traders assessed the impact of the production cut announcements from Saudi Arabia and Russia. WTI rallied to $72/barrel as it caught up to the moves in Brent over the US holiday on Tuesday. However, at the OPEC International Seminar, UAE said it won’t be joining voluntary cuts at this time. Meanwhile, geopolitical risks were also heightened following reports of US Navy ships stopping Iranian forces from seizing two oil tankers near the Strait of Hormuz. Demand concerns also eased as API reported crude inventories declining by 4.4mn barrels last week, and focus will turn to the labor market indicators in the rest of the week.

Wheat: crop supply concerns linger

Chicago wheat futures were up over 5% on Wednesday as Monday crop conditions report from the US was assessed by traders after returning from holiday. The USDA reported that just 37% of the winter crop was harvested as of Sunday, versus 52% last year. The agency also unexpectedly cut its spring wheat rating as rains failed to improve conditions. Meanwhile, concerns on Russian supplies also lingered after recent rains suggesting market tightness could continue. The USDA rated 51% of U.S. corn in good-to-excellent condition, up a point from the prior week. Soybean conditions, however, fell by a point.

Gold weakens on yield rise

After touching above the local 1,930 resistance briefly yesterday, gold wilted back lower as US treasury yields at the long end of the yield curve rose to new highs since early March, with the price coming in around 1,920 this morning after a 1,1915-area low overnight. The recent pivot lower just below 1,900 are the critical support ahead of key US macro data through tomorrow’s US jobs report, with any further significant pressure higher in yields a headwind for gold.

The US yield curve steepened, attention turns to today’s initial jobless claims (2YYN3, 10YN3)

The bond market buys the Fed “higher for longer“ message, but not the dot plot which shows two more hikes coming. Hence the surge of long-term yields, while short-term yields remained underpinned. Ten-year yields broke above 3.90% this week for the first time since March. Two-year yields are also on the rise towards 5.07% yet did not outpace long-term yields’ rise.  Hence, the yield curve steepened. Today initial jobless claims, JOLTS numbers and tomorrow nonfarm payrolls are critical and are likely to reignite the flattening of the yield curve.

What is going on?

German Factory Orders surged in May

Data out this morning showed German Factory orders rising 6.4% MoM, versus a rise of 1.0% expected. The YoY figure still shows orders down –4.3%, but this is far better than the –9.7% expected and –9.3% from April. The largest increases in the survey were noted in vehicle production, with the category “other transport equipment” which captures military-related demand, up 137% YoY.

FOMC minutes show a split over the June pause

The tone of the FOMC minutes was somewhat different than what a unanimous pause decision may have hinted. Some members favoured an increase in interest rates at the June meeting, but went along with a pause. Almost all of the members continued to highlight the need for further rate hikes. Many also noted that, after rapidly tightening, the Committee had slowed the pace of tightening and that a further moderation in the pace of policy firming was appropriate in order to provide additional time to observe the effects of cumulative tightening and assess their implications for policy. As expected, no material change was seen to market’s expectations for the Fed from here, with July rate hike still priced in with over 80% probability and terminal rate seen at 5.4% as focus turns to JOLTs, ISM services and NFP data due into the close of the week.

Chinese equities lower in Asia session

The Hang Seng Index dropped 2.8% in today’s session as there was fresh news that the country’s real estate sector continues to be weak impacting banks and investors also reacted negatively to news that Chinese banks have stopped buying bonds issued in the Shanghai free trade zone after more regulatory scrutiny.

Janet Yellen in China as US-China tensions continue to rise

China’s restrictions on exporting gallium and germanium metals crucial for semiconductors and electric vehicles have further raised concerns about potential curbs on rare earth exports, that could disrupt global supply chains. Chinese officials will meet with major producers of the metals on Thursday to discuss the export restrictions, Reuters reported. Meanwhile, Janet Yellen visits Beijing from Thursday with the goal of finding areas of common economic ground and opening communication channels amid increasingly turbulent US-China relations.

Strong quarterly US sales numbers from automakers Toyota and GM

General Motors Co. and Toyota Motor Corp. both posted strong sales gains in the second quarter, signs of consumer health in the auto market as semiconductor supply improves. Toyota's unit sales in the US rose 7.1% in the second quarter, with 29% jump in June deliveries of EVs. Meanwhile GM's unit sales surged 19% in Q2. Ford’s unit sales numbers are due out on Thursday.

Inflation trumps demand for UK Gilts (IGLS:xlon, GLTS:xlon)

Yesterday the DMO sold 2-year Gilts at 5.663%, the highest yield since 2007. However, demand was 2.77 times higher than the amount issued. That means that investors are happy to hold onto UK government bonds as long as they are compensates adequately.  JPM sent out a note saying that the BOE base rate might reach 7%. We believe that this estimate might be too aggressive as already now, rates are putting strain on financial stability. We remain defensive, looking to liming duration while prioritising quality.

What are we watching next?

Are long US treasury yields breaking higher?

An important test for equity markets here as the market sits atop significant gains this year (S&P 500 up 15.8% this year and Nasdaq 100 up 30.1% YTD through yesterday’s close) and as long US treasury yields rose to new highs since early March yesterday and into this morning, with the US 10-year treasury benchmark yield eyeing 4.00%. Key incoming data lies ahead: today’s batch of data includes the June ISM Services survey after the May report suggested that the US services sector is teetering on the brink of contraction (a 50.3 reading – the June reading expected to show slight improvement). We also get the weekly initial jobless claims that has driven sharp market reactions in recent weeks, especially after last week’s drop back to 239k, the first reading sub-250k after several weeks well above that level. Tomorrow sees an. Even if the US data points to a resilient economy, equity traders and risk sentiment generally might wobble on a further determined rise in longer US yields, for example a significant surge above 4.00% at the long end of the US yield curve.

Technical update

• S&P500.  Likely to move higher to resistance at 4,546
• Nasdaq 100 Close to testing strong resistance at 15,265. Close above potential to 15,653-15,882
• DAX uptrend but struggling for momentum. Key support at 15,625
• AEX25 in uptrend but struggling for momentum. Room to 800 resistance 
• CAC40 Range bound between key resistance at 7,403 and support at 7.080.
• Hang Seng Index in downtrend. Support at 18K
• Nikkei/JP225 support at 32,240
• EURUSD Range bound short-term between 1.08 and 1.10 but uptrend intact. Resistance at 1.11
• USDJPY Uptrend to 146.60. Uptrend stretched. Correction to 142.25 could be seen
• EURJPY correction unfolding. Support at 154.40
• EURNOK rejected at rising trendline. Shoulder-Head-Shoulder reversal pattern could unfold
• Gold bottom and reversal pattern indicating downtrend is over. Short-term bounce to 1,964 likely
• US 10-year Treasury yields higher towards 4%

Earnings to watch

The Q2 earnings season starts next week with US banks such as Wells Fargo, JPMorgan Chase, and Citigroup are kicking off the earnings season on Friday. Read our earnings preview from yesterday here.

Next week’s earnings releases:

• Thursday: Fastenal, Delta Air Lines, Progressive, PepsiCo, Cintas, Conagra Brands
• Friday: Wells Fargo, JPMorgan Chase, BlackRock, UnitedHealth, State Street, Citigroup

Economic calendar highlights for today (times GMT)

• 0830 – UK Jun. Construction PMI
• 0900 – Eurozone May Retail Sales
• 1130 – US Jun. Challenger Job Cuts
• 1215 – US Jun. ADP Private Payrolls Change
• 1230 – Canada May International Merchandise Trade
• 1230 – US May Trade Balance
• 1230 – US Weekly Initial Jobless Claims & Continuous Claims
• 1245 – US Fed’s Logan (Voter 2023) to speak
• 1400 – US May JOLTS Job Openings
• 1400 – US Jun. ISM Services
• 1500 – US Weekly DoE Crude Oil & Product Inventory