Global Market Quick Take: Europe – June 19, 2023 Global Market Quick Take: Europe – June 19, 2023 Global Market Quick Take: Europe – June 19, 2023

Global Market Quick Take: Europe – June 19, 2023

Macro 9 minutes to read
Saxo Strategy Team

Summary:  US equities ran into resistance and closed lower on Friday ahead of a three-day weekend, as today is a national holiday. Asian markets mostly faced rough sledding overnight, as Japan’s recently high-flying shares traded sharply lower. The week ahead brings testimony from Fed Chair Powell before Congress and plenty of further central bank drama, as the Bank of England, Norges Bank, Swiss National Bank and Turkish Central Bank all meet on Thursday.

What is our trading focus?

US equities (US500.I and USNAS100.I): overextended equities are retreating

S&P 500 futures delivered a weak Friday session indicating that the US equity market fuelled by the AI hype may finally be entering a period of profit-taking and weaker dynamics ahead. The Chinese government is still in “thinking mode” on stimulus, which is adding to the negative sentiment in equities, but if we look at Chinese equity markets measured against other Asian equity markets send the market is beginning to turn around on its view on China expecting the outlook to improve. On the other hand, the VIX Index closed at its lowest close for the cycle at 13.54 suggesting little risk priced in equity options.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): slow action on stimulus weigh on equities

Mulling over stimulus measures is not good enough and investors voted with their money to sell Hong Kong and Chinese stocks, seeing the Hang Seng Index plunging 1.5% and the CSI300 shedding 1%. The readout from the State Council executive meeting chaired by Premier Li Qiang last Friday suggests that the Chinese Government was still contemplating on policies and measures and made no indication of the launch of a comprehensive package as investors have been hoping to hear. China’s property and internet stocks led the decline. Adding to the cooling of sentiment, a couple of major investment banks joined others in cutting China’s GDP forecasts for 2023.

FX: Yen steadies after ugly sell-off. GBP firm ahead of CPI, BoE

USDJPY and other JPY crosses printed marginal new highs for the cycle in early Asian hours before the JPY firmed slightly. This after Friday saw another aggravated extension of the JPY sell-off as the Bank of Japan doubled down on its dovishness, offering no hints that it is ready to budge on policy (although July will bring a new set of BoJ forecasts). Elsewhere, sterling finished last week on a strong note, with GBPUSD trading north of 1.28 as the market shifted Bank of England rate hike expectations sharply higher on the hot UK labor data last week. A big week ahead for sterling on the UK May CPI release Wednesday and Bank of England meeting Thursday (more below). USDCAD traded down below 1.3200 at times Friday and overnight, a new low since last September, after the recent BoC rate hike and firmer crude oil.

Crude oil trades lower amid disappointment with China stimulus plans

Crude oil reversed some of the last weeks strong gains overnight after a key State Council meeting in Beijing on Friday failed to deliver additional strong measures to support the economy, and after a couple of banks cut China’s growth forecast. In Brent a return to $75.50, the averaged since early May and the 21-day SMA highlights a market that struggles for direction. OPEC’s focus on supply management will likely enforce the view of a soft floor under the market, currently around $72 in Brent, while an upside break seems equally unlikely as long the focus remains on a weakening economic outlook. Funds cut bullish bets on WTI and Brent in week to June 13, but overall, the net long at 278.5k contracts was in line with the average seen the past seven weeks, highlighting the mentioned rangebound behaviour and lack of direction.

Gold: looking for direction after eventful week

Gold ended an eventful week near unchanged, having bounced from a three-month low at $1925 after the FOMC left rates unchanged while forecasting another two hikes before yearend. However, the combination of a softer dollar and the market questioning the viability of two additional hikes helped send prices higher before once again running out of steam around the 21-day moving average, currently at $1956, some distance from key resistance at $1984, a recent high. Surging stock markets currently weighing on investment appetite leading to a 14-day non-stop reduction in ETF holdings while hedge funds in the week to June 13 cut their net-long positions to a three-month low.

The US yield curve continues to invert as front-end treasuries underperform amid FOMC rate hikes expectations (2YYM3, 10YM3, 30YM3)

The spread between ten- and two-year yields fell to hit -97bps on Friday as Fed members Waller and Barkin said that additional rate hikes might be needed. The University of Michigan 1-year inflation expectations fell from 4.1% to 3.3%, but the 5 to 10-year inflation expectations remained at 3%, showing markets forecast stickier inflation. Treasuries yields remain in an uptrend, and we expect them to continue to soar until July’s FOMC meeting, with 2-year yields heading towards 5%. This week’s focus is on the T-Bills and 20-year US Treasury auctions, Fed member speakers, and Jerome Powell’s testimony.

The German yield curve continues to invert as the ECB prepares for more hikes (IS0L:xetr, D5BC:xetr)

German 2-year Schatz remain above 3% as the market prepares for more ECB hikes. We expect Schatz yields to continue to soar to 3.25% as the July ECB meeting approaches. Ten-year yields remain rangebound but are looking to break resistance at 2.5%. This week’s focus is on tomorrow’s 2-year Schatz and 30-year Bunds auctions on Wednesday.

What is going on?

Federal Reserve data contradicts liquidity concerns as Treasury replenishes TGA

The recent Federal Reserve H.4.1 report reveals that the Treasury General Account (TGA) saw a substantial $86 billion increase, rising from $48.5 billion on May 31, 2023, to $136 billion on June 14, 2023. However, this rise was more than offset by a $145.75 billion decrease in the overnight Reverse Repo balance at the Fed during the same period, dropping from $2,255 billion to $2,109 billion. Contrary to fears of a liquidity drain, US banks' reserves in the Federal Reserve system grew by $101 billion to $3,306 billion between May 31 and June 14.

Money market funds, driven by the Fed's decision to skip a rate hike in June and expectations of only one more hike before the cycle concludes in July, appear inclined to shift funds from overnight Reverse Repos to capitalize on higher yields offered by Treasury bills. With the Fed currently paying an overnight interest rate of 5.05% to money market funds, the investment rates (higher than quoted discount rates) on Treasury bills, ranging from 5.113% to 5.511% in recent auctions, make them an attractive alternative. This shift in investment preferences reduces exposure to reverse repos and mitigates potential liquidity concerns.

Grains: weather worries in focus

As we noted in Friday’s Commodity weekly, agriculture crops have been on a tear with gains of ~10% across wheat, corn and soybean over the last week. Supported by concerns over El Nino which will be felt in the coming months and current poor weather across the US and Europe together with strong buying from a fund community that was woefully unprepared for higher prices. In addition, a a US government report hinted that global appetite for vegetable oil and biofuel feedstocks remains high while stockpiles are running low. This is fuelling fresh concerns of food inflation. Focus today on the weekly US crop conditions report which may show a further deterioration in the percentage of corn and soybean crops being rated good/excellent.

Fed speakers lean hawkish, eyes turn to Powell’s testimony this week

While the Fed paused last week, officials continued to ramp up the hawkish rhetoric and continued to guide for more rate hikes to come. Fed Governor Christopher Waller downplayed the banking sector concerns and said Friday that the US economy is still "ripping along", adding anticipated global spillovers from coordinated central bank tightening have not really materialised. His concerns on inflation were noteworthy, as he said that core inflation is not coming down "like I thought it would'' and will probably require some more tightening. Thomas Barkin (non-voter) was somewhat more data-dependent saying Friday that he is comfortable doing more on rates if incoming data does not confirm a story that slowing demand is returning inflation to 2%. This week’s focus will be on Chair Powell who testifies in the House on Wednesday and Senate on Thursday.

Strong US University of Michigan survey

The preliminary University of Michigan survey for June reported strong gains with headline up to 63.9 (exp. 60.0, prev. 59.2) and a sizeable jump in both conditions, 68 from 64.9 (exp. 65.5) and expectations, 61.3 from 55.4 (exp. 56.5). The optimism may have been driven by the easing of banking sector concerns and resolution of the banking crisis even as the sentiment still remains low by historical standards as income expectations have softened. The inflation expectations saw the more volatile, energy-exposed 1yr-ahead gauge slashed lower to 3.3% from 4.2%, the lowest since March 2021, following the recent drop in gasoline prices. Meanwhile, the long run 5-10yr expectations, which the Fed pay more attention to (in order to gauge how anchored inflation expectations are), saw a slight move lower in June to 3.0% from 3.1%, however, the report notes that is still elevated relative to the 2.2-2.6% range seen in the two years before COVID.

Micron sees larger impact from China ban, but investment continues

On Friday, Micron warned of a bigger hit to revenue from a Chinese ban on sale of its chips to key domestic industries, saying it expects an impact on about half of its revenue from China-headquartered firms, which equates to a low-double-digit percentage of its total revenue compared to an earlier estimate of low-to-high single digits percentage impact. Still, the company announced that it would invest 4.3 billion yuan ($603.8 million) over the next few years in its chip packaging facility in the Chinese city of Xian, a move that CEO Sanjay Mehrotra said demonstrated the company's "unwavering commitment to its China business and team." Meanwhile, diversification in supply chains also remains a key focus, with Micron investing $1bn in a semiconductor packaging factory in India.

What are we watching next?

UK May CPI Wednesday ahead of Thursday Bank of England meeting

Wednesday sees the release of the May UK CPI data after the April data showed a shocking acceleration in core inflation to 6.8% year-on-year, a new cycle high, versus the 6.2% that was expected and 6.2% in March. That saw BoE rate hike expectations for coming meetings notched higher, with last week’s strong revisions to April payrolls and jobless claims data and far hotter than expected wage growth data (up 7.2% year-on-year) adding further fuel to expectations that the Bank of England will have to deliver far more tightening. This Thursday’s Bank of England meeting will have to see the bank doing some soul-searching on its assumptions that the hiking it has done thus far will provide the necessary traction to begin slowing inflation and delivering a far more hawkish message to meet the market’s forward expectations. The BoE is priced to hike 30 basis points a this meeting and almost 90 basis points through the next three meeting, suggesting that some believe the bank will deliver larger hikes again. In all, the Bank is priced to hike 140 basis points through next Thursday for a “terminal rate” of 5.84% up some 100 basis points since May.

Technical update

  • Nasdaq 100. Rejected at resistance at 15,265. Overbought. Correction likely RSI supports higher Nasdaq
  • S&P 500. No strong resistance until 4,546
  • DAX New all-time high. Possibly target 16,600
  • AEX25 above 770 resistance. Next resistance at 802
  • CAC40 closed above 7,379 resistance. Potential uptrend to all-time high at 7,581
  • US 10-year Treasury yield. Uptrend intact. Could reach 4%
  • AUDUSD likely to test resistance at 0.6920
  • EURUSD back above 1.09. Potential to 1.1180
  • GBPUSD Upside potential to 1.2940-1.3050
  • GBPJPY above resistance at 180. Overbought. Expect a correction
  • USDJPY likely to test strong resistance at 142.25. Close above potential to 146.60
  • Wheat above falling trendline. Short-term upside potential to 750-800

Earnings to watch

Our next earnings focus is FedEx reporting tomorrow after the US market close with analysts expecting revenue at $22.7bn down 7% y/y and EBITDA at $2.8bn down from $3.3bn a year ago as pricing in global logistics is coming down from elevated levels during the pandemic as global supply chains are coming back to operating smoothly again.

Earnings releases this week:

  • Monday: Vantage Towers
  • Tuesday: FedEx
  • Thursday: Accenture, Darden Restaurants, FactSet
  • Friday: Oracle Japan, CarMax

Economic calendar highlights for today (times GMT)

  • US markets closed today to mark Juneteenth holiday
  • 1100 – ECB’s Lane to speak
  • 1140 – ECB's Schnabel to speak
  • 1400 – US Jun. NAHB Housing Market Index
  • 2000 – USDA Weekly Crop Condition and Planting Progress
  • 0115 – China Rate Announcement
  • 0130 – Australia RBA Meeting Minutes

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