Global Market Quick Take: Europe – June 21, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Pockets of exuberance

US equities headed lower yesterday extending the risk-off sentiment that started in China over a smaller policy rate cut than expected. Below the surface of declines there was a pocket of strong gains consisting of Tesla (+5.3%), PayPal (+3.7%), Nvidia (+2.6%), and Salesforce (+2.5%) highlighting the speculative fever is still intact in selected technology stocks. The stronger than expected US May housing starts and building permits also helped homebuilders such as PulteGroup, DR Horton and Lennar to advance. While US equities have seen a smaller setback the VIX Index and the forward curve on VIX futures are still suggesting a robust underlying market.

FX: Dovish RBA minutes and underwhelming China stimulus weighs on AUD

The US dollar was marginally bid after the long weekend as housing starts jumped higher. But with yields facing technical resistance, dollar gains remained capped. AUD was the weakest currency on the G10 board, with AUDUSD slipping below 0.68, weighed down by a double whammy of RBA minutes failing to confirm a hike for July 4 meeting and China loan prime rate cuts coming in below expectations. SEK dipped to a new all-time low versus the euro, though Swedish housing starts data from May ticked up for the first time since August 2021. USDJPY reversed from strong 142.25 resistance to 141.20 as Treasury yields slid. GBP pairs in focus today as UK CPI out this morning. Two days of Fed Chair Powell testimony kick off today.

Crude oil: China concerns bring losses

Crude oil prices declined on Tuesday amid the disappointment over the pace and magnitude of China stimulus measures. A general risk-off tone across markets also weighed and brings the focus on Fed Chair Powell’s testimony over the next two days. WTI prices touched lows of sub-$70/barrel before recovering to $71, while Brent was down to $74.50 before being back above $75/barrel.

Gold heavy on support

Despite a strong day for US treasuries that saw the 10-year benchmark trading a few basis points lower and some 10 basis points off yesterday’s highs, gold trades heavy into the last bits of the range support, trading below 1,940 this morning, with only the intraday low of 1,925 as the last support ahead of perhaps 1,900, with 1,903 the last major Fibonacci support level for the rally off the March lows. Fed Chair Powell is set for two days of testimony starting today.

Powell’s testimony and the 20-year US Treasury auction will be the bond market’s focus today (2YYM3, 10YM3, 30YM3)

US Treasuries tumbled as UK CPI numbers came out stronger than expected, renewing fears of more tightening coming. Today the focus will be on Powell testimony before the House Financial Services Panel and the 20-year US Treasury auction. 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%.

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

Two-year Schatz are testing resistance at 3.13% as the market prepares for more ECB hikes. We expect Schatz yields to continue to soar towards 3.35% as the July ECB meeting approaches. Ten-year yields remain rangebound but are looking to break resistance at 2.5%. Today Germany sells 30-year Bunds.

UK core CPI numbers show inflation is accelerating, Gilts yields will need to catch up with rate hike expectations (GB00BK5CVX03 , IGLS:xlon)

Amid a complacent market, the market pared back on BOE rate hikes expectations yesterday driving yields sensibly lower, with 2-year yields rejecting resistance at 5%. However, today the market is waking up to accelerating CPI numbers in the UK which call for aggressive monetary policies. We expect two-year Gilts to underperform other maturities, with yields breaking and consolidating above 5% ahead of the BOE. The 2-year swap spread spiked this morning on CPI numbers indicating that the front part of the yield curve has plenty of room to move higher.

What is going on?   

UK May CPI sees new cycle high in core inflation

The UK May CPI suggests inflation remain far from coming under control as the headline CPI printed at 8.7% versus 8.4% expected and 8.7% in April. The core inflation measure spiked once again to a new multi-decade high of 7.1% vs. 6.8% expected and 6.8% in April. This ratchets the pressure higher on the Bank of England at its meeting tomorrow.

Tesla shares roar. China to extend EV tax breaks

Tesla shares rose over 5% yesterday despite a generally downbeat session, perhaps in part on Rivian announcing it will also join Tesla’s supercharging network. Overnight, China announced an extension of tax breaks for purchase of EV’s until 2027, which boosted shares in key EV stocks. Tesla CEO Elon Musk also announced an interest in investing in India.

Pronounced strength in US May housing starts

Housing starts spiked 21.7% M/M to 1.63mn from 1.34mn in April (which was downwardly revised from the initial 1.40mn print), marking the largest M/M relative increase since October 2016, smashing the consensus estimate of 1.40mn. Activity in the housing sector was more muted for the several months prior to yesterday’s release and one month of data is not enough to confirm a trend, but some suggest that new housing construction has reasonably stable prospects. That is ironically due to very high mortgage rates indirectly as existing home supply is low due to homeowners’ reluctance to move and service a new mortgage at current rates after having refinanced at the cheap levels during the pandemic. So those who must move have an easier time finding a new home.

FedEx FY24 guidance is soft

FedEx disappointed on FY23 Q4 (ending 31 May) revenue and the FY24 EPS guidance at $16.50-18.50 was on the low end compared to the $18.31 estimate reflecting that the goods economy is running at a slower pace compared to during the pandemic years.

What are we watching next?

Fed Chair Powell heads to Capitol Hill after a pause in the rate hike cycle last week

Fed Chairman Jerome Powell will be appearing before a House panel today and a Senate panel tomorrow to provide his semi-annual monetary policy report. After the hawkish hold last week, there appears to be minimal new information for Powell to add any significant new direction on monetary policy. He may continue to signal more rate hikes, but Republicans would get the stage to express their concerns around the sticky core inflation while Democrats advocate for a more dovish policy given the rising risks to economy. Markets looking to understand what the next key catalyst for a move may be will perhaps be disappointed and continue to find a reason to rise further.

Technical update

• Nasdaq 100. Rejected at resistance at 15,265. Overbought. Correction likely down to around 14,500-14.300 before uptrend resumes. RSI supports higher Nasdaq
• S&P 500. No strong resistance until 4,546. Correction likely down to 4,315
• DAX Struggling for momentum. Possibly target 16,600
• FTSE 100 could resume downtrend
• Tesla extremely overbought but uptrend intact. No strong resistance until 313
• EURUSD back above 1.09. Potential to 1.1180
• GBPUSD Upside potential to 1.2940-1.3050. Expect short-term correction to test 1.2667
• GBPJPY above resistance at 180. Extremely stretched. Overbought. Expect a correction. Medium-term potential to resistance at around 188 -189
• USDJPY testing strong resistance at 142.25. A correction should be expected before next upwards move
• Gold testing key support at around 1,934

Earnings to watch

Our next earnings focus is Darden Restaurants reporting FY23 Q4 (ending 31 May) tomorrow before the market opens. Analysts expect revenue growth of 6.6% y/y and EBITDA of $474mn up from $435mn a year ago as the US consumer continues to keep up spending on discretionary items such as restaurant visits. Darden Restaurants has been aggressive on hiking prices to offset the reduced spending from low-income consumers. 

• Thursday: Accenture, Darden Restaurants, FactSet
• Friday: Oracle Japan, CarMax

Economic calendar highlights for today (times GMT)

• 1000 – UK Jun. CBI Trends in Total Orders/Selling Prices
• 1230 – Czech National Bank Rate Announcement
• 1230 – Canada Apr. Retail Sales
• 1400 – US Fed Chair Powell testifies before House Panel
• 1700 – US Treasury auctions 20-year bonds
• 1730 – Bank of Canada meeting minutes
• 2130 – Brazil Selic Rate Announcement
• 0130 – Bank of Japan’s Noguchi to speak