Summary: The US equity markets posted a strong session yesterday, with speculative names outperforming. The rally was well under way upon the release of a far stronger than expected July US ISM Services survey reading and despite yields rising sharply in the wake of that surprise, although treasuries found support later in the day, taking the action back close to a sideways performance on the day. Today, the Bank of England is seen raising the policy rate another 50 basis points and announcing its plan for balance sheet reduction.
S&P 500 futures confirmed their momentum yesterday taking out the price levels from the previous three trading sessions closing at 4,156 and above the 100-day moving average. The move was driven by a much stronger than expected ISM Services print which highlighted that despite galloping inflation the broad services sector is still seeing strong demand. The 4,200 level in S&P 500 futures is a natural psychological level and proved to be the ultimate resistance level back during the rally in late May this year, so price action from will be critical. Next big event to impact markets is tomorrow’s US jobs report.
Ahead of reporting results after market close today, Alibaba surged nearly 4%. Chinese tech stocks traded in Hong Kong outperformed, up 1% to 4% across the board. Hang Seng Tech Index (HSTECH.I) rose as much as 3.3% in early trading but pared gains and was up 1.7% as of writing. Apple suppliers gained, Cowell +9%, Sunny Optical +5%, Q Technology +3%. In A-shares, CSI300 Index was flat. Shares of the defense, auto and coal mining industries retreated. The tension over the Taiwan Strait ceases to be the focus in today’s trading.
The US dollar pulled sharply higher in the wake of the strong surprise in the ISM Services survey for July, but the move was tempered by treasury yields retreating back to unchanged after an initial burst higher, and as strong risk sentiment restrained USD buying. Still the prior day’s sharp rise in yields has set to the tone for the greenback, which awaits today’s weekly claims data and tomorrow’s July jobs report for signs of a whether signs of a decelerating jobs market are multiplying, despite the strong Services survey (which is in direct conflict with another survey of the US services sector, the S&P Global one, which indicates recessionary conditions). In addition to the direction of treasury yields, traders should keep an eye on financial conditions, many of which (credit spreads and volatility) have continued to ease despite the jump in treasury yields off recent lows. The 1.0100 area is a key trigger zone for EURUSD as it is the low of the very tight range of the last more than two weeks. AUDUSD is pivotal around the 0.7000 area.
The sharp comeback in global yields was tempered yesterday, but JPY crosses generally continued to trade higher after getting jolted off new local lows by the surge in yields on Tuesday. But the prior slide in many JPY crosses has been so deep that the rally will still need to extend considerably to get the weak JPY trend back on track. USDJPY, for example, would need to trade back well above 135.00, EURJPY above 137.00-137.50, while AUDJPY has already reversed the downside momentum with the sharp rally back into the range above 91.50 even after the RBA proved less hawkish than expected this week. Australia reminded the world of its commodity powerhouse status in reporting a record trade surplus for the month of June overnight.
Oil prices are weak in the wake of the OPEC+ meeting, which may have less bearing on the price action than the outlook for the global economy as a possible coming recession impacts the demand outlook. US weekly inventories came in far stronger than expected yesterday.
US yields trade sideways after a burst higher in the wake of the much stronger than expected US ISM Services survey for July. The yield curve inverted the most for the cycle yesterday below –35 bps for the 2-10.
Stronger than expected trade data out today showing Australia's surplus surged to $17.7 billion (vs $14b surplus expected for June). In May trade also hit a record of $15.95 billion. What's driving this, is that exports keep surging to brand new records with Australia exporting more and more coal and coal derivatives. Coal exports hit a new record in June of $14.5 billion. There was also a significant jump in gold exports, 64% month on month, and a 27% month on month jump in metal exports.
The former German chancellor, who is a friend of Russian leader Putin, in an interview with German magazine Stern claimed that Russia is ready for a negotiated settlement over Ukraine, with specifics including allowing an armed but neutral Ukraine and admission of Russian possession of Crimea, as well as a “Swiss canton model” for the Donbas region. His comments were brushed aside in dismissive comments by Ukrainian President Zelensky, among others.
Yesterday, France’s historical state-controlled utility EDF indicated that three of its nuclear reactors on the Rhône and Garonne rivers will be shut down temporarily due to low water levels. The water is used for cooling. One of them will be shut down from today onwards and the two others from 6 August onwards. This should reduce nuclear electricity production of about 3.8GW approximately. Based on the latest figures, nuclear electricity production in France and in Germany combined is down 20GW (which is a very high figure). This is mostly due to issues in nuclear reactors (related to corrosion) and low water levels. In France, nuclear energy represents about 69 % of electricity generation (this is a larger share than any other country). About 17 % of nuclear electricity is produced thanks to recycled materials. In the meantime, France’s 1-year forward baseload electricity contracts continue to jump to a new record high of €520 per MWh. This is only the beginning. France’s nuclear underperformance might last over the winter. Most experts consider that EDF’s reactor corrosion issues will not be solved anytime soon. In a recent statement, the French regulator ASN mentioned it could take several years.
US ISM services showed an unexpected surge in July to 56.7 from 55.3 previously amid strong order growth and some relief on price pressures and supply constraints. The composition was strong with business activity rising to 59.9 from 56.1 and new orders rising to 59.9 from 55.6. This was also a positive surprise especially after a dismal print of 47.3 on the services PMI reported by S&P, and it eases concerns about the pace of economic slowdown in the US. New orders were up to 59.9 in July. We see this as adding more weight to our thinking that markets are under-pricing Fed’s tightening path.
OPEC+ decided to add only 100k barrels per day of output for September, significantly lower than the output increases in July and August. This raises further concerns around energy supply and inflation, despite pressure from the White House to bump up production to cool prices. Next OPEC+ meeting is scheduled for September 5. Some have regarded OPEC supply announcements as largely symbolic anyway as the cartel has been under-producing relative to its quotas.
After the much stronger than expected print on ISM Services, U.S. treasury yields jumped sharpy. The move was further fuelled by hawkish comments from Fed officials. St. Louis Fed President James Bullard said he supports “front-loading” rate hikes. San Francisco Fed President Mary Daly said the market is ahead of itself on pricing in Fed rate cuts. Minneapolis Fed President Neel Kashkari commented that rate cuts in 2023 seem unlikely. Bids returned to treasuries later in the day as dealers taking note of the cut in auction sizes across the curve in the Treasury Department’s refunding announcement. The 2-year yield, after rising to as high as 3.2%, retraced to close at 3.09%, up only 3bps for the day. The curve flattened. The 10-year yield, once going as high as 2.85% after the ISM Services data, fell 4bps to close at 2.71%.
The Russian aluminium giant, Rusal (00486:xhkg) issued the first RMB bond in Russia. Rusal issued two 5-year RMB denominated bonds with a total size of RMB4 billion. The bonds were more than two-time oversubscribed. The issuance suggests that there is quite a pool of renminbi cumulated in Russia and looking for renminbi-based assets for investment. Under the U.S. sanction, Russian exporters are willing to receive currencies other than the US dollar for payment.
Cyber security stocks have rallied post Pelosi’s visit to Taiwan as several cyber security attacks were carried out on Taiwanese Internet infrastructure during the visit. Fortinet, one of the biggest cyber security companies in the world, reported Q2 earnings yesterday showing strong results in Q2 while lifting guidance on margins and earnings for the full fiscal year.
This comes after rallying up 11% in the US session on Tuesday. What fuelled the rally was the fact that Elliot Investment Management bought a $2bn stake in its rival, PayPal which lifted sentiment in the payment sector. Secondly, investors are expecting good things from Blocks’ Q2 earnings report tomorrow in the US. Block’s results will be watched closely for clues as to how consumer spending has changed and if cash app transactions have been impacted by higher interest rates and inflation. The market consensus is that Block's revenue will hit $4.34 billion in Q2. Earnings (EBITDA) of $146.1 million is expected for Q2 and the market thinks earnings will head higher in Q3 to $179.1 million, with revenue of $4.6 billion.
Today sees the release of the latest weekly initial claims, which have been on a rising trend from record low levels (adjusted for the US population) at the beginning of this year. Expectations there are for a number around 260k versus a 4-week moving average of 249k. We will also see the July Challenger Job cuts report for July after a number of companies, especially those that over-expanded during the pandemic (for example Amazon) have announced reductions in headcount. June’s number was up 59% year-on-year. As for the main event on Friday, the July US unemployment rate is expected to come in unchanged at 3.6% and the Nonfarm Payrolls Change at +250k versus a 3-month average around +375k, while the Average Hourly Earnings are expected at +0.3% MoM and +4.9% year-on-year vs +5.1% YoY in June.
The Bank is widely expected to hike the policy rate by 50 basis points to 1.75% (possibly with dissenters), and had announced months ago that this meeting would see the outline for the bank’s approach on reducing its balance sheet (expected at a pace of £50-100 billion annually after a possible vote next month on whether to begin sales). UK inflation touched 9.4% y/y in June and is seen rising to 12% in the winter months suggests room for a stronger action. Job market remains tight, even though there are some nascent signs of easing. After a seeming downshift in guidance from the FOMC meeting last week, or at least a clear nod toward data dependency in its guidance, one that was mimicked by the RBA. Will the BoE follow suit? As well, what is the tone/guidance from Governor Bailey after prior press conferences gave the impression that the BoE is only reluctantly hiking due to necessity, very afraid of the coming recession and the current cost of living crisis in the UK? The market is leaning for two more fifty basis point hikes after today’s meeting for the September and November meetings.
Today’s focus in Europe is earnings from Adidas and Glencore which both have reported in early European trading hours with Adidas confirming its recent outlook cut seeing its operating income declining 28% y/y while meeting expectations for revenue; Glencore beats on 1H EBITDA and is declaring a $3bn buyback programme on top of a $0.11 per share special dividend. In the US focus will be on Alibaba, Amgen, Block, and DoorDash, with Alibaba naturally important for sentiment in Chinese technology stocks and Block being key for sentiment in payment stocks.
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