What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equity markets attempted to rally at the start of the trading session, but energy in the market faded quickly with the session ending flat. Palantir and Nvidia earnings added negatively to sentiment in Nasdaq 100 futures. In S&P 500 futures the trading range has become very narrow with resistance at 4,156 and support around 4,100. As a side show the meme stocks frenzy has started again with Bed Bath & Beyond rallying 127% in six trading sessions highlighting that the speculative excesses are still significant despite tighter financial conditions. The Fed observing this behaviour has one more argument for tightening even more; excess speculative behaviour on this scale is non-productive for the economy.
Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Local Hong Kong property developer names rallied after reports that Hong Kong is considering to remove the punitive double stamp duty imposed on residential property buyers from the mainland. Sun Hung Kai Properties (00016:xhkg) +2.8%, CK Assets (01113:xhkg) +1.5%, Henderson Land (00012:xhkg) +1.6%. Shares of coal miners surged 2% to 5% across the board. Hang Seng Index gained 0.3%. In A-shares, CSI300 was flat, with coal mining, auto parts, and wind and solar power storage outperformed.
USD decision time
The USD can’t seem to figure out what it wants to do. It has been on the defensive at times recently and is will off its highs as the market has adjusted Fed tightening expectations significantly lower since the June extremes and liquidity and risk sentiment have improved in turn with the drop in US yields and as the market prices an economic “landing” of some sort and a disinflation, despite strong data last week and a Fed that clearly disapprove of the market pricing the Fed to begin cutting rates before mid-year next year. If the market’s conviction in its forward view on the Fed is shaken as incoming data challenges the complacent outlook on the economy and inflation, the USD may yet pick up again. Technical signs of a broad USD recovery that it is doing so would include USDJPY pulling above 136.00, EURUSD dropping down through 1.0100 and AUDUSD back down below 0.6900. Tomorrow’s July US CPI could prove a catalyst for a directional move in the greenback.
Silver (XAGUSD) and Copper (COPPERUSSEP22) both traded higher on Monday
... with silver outgunning gold and in the process managing to mount a challenge above its 50-day moving average, now support at $20.33 with focus on resistance at $20.85. HG Copper meanwhile had a brief peak above $3.60 before drifting lower overnight after stocks stalled and bonds rose. While speculators have been scaling back copper short positions in recent weeks, the price action has yet to challenge those looking for another recession-focused sell-off. For that to change, the price as a minimum need to break above $3.69/lb, the 38.2% retracement of the June to July 31% correction. The gold-silver ratio, currently at 86.4 and down from 94 two weeks ago may target 83, thereby signaling another +4% outperformance against gold.
Crude oil (OILUKOCT22 & OILUSSEP22) looks to outside markets for guidance... and for now it has found a market concerned about the economic growth outlook as the battle to combat runaway inflation continues. Also, in focus Iran nuclear talks with no deal to revive the 2015 deal yet to emerge. Bears who in recent weeks sold crude oil as a hedge against recession could be challenged into the autumn months as US scale down releases from its strategic reserves as well as the EU embargo on Russian oil impacting the availability of supply. US gasoline demand is now lower than 2021 and the question remains whether the recent price drop to a five-month low will stimulate demand. In focus today, EIA’s Short-term Energy Outlook (OPEC and IEA on Thursday). Brent resistance at $98.50, the 200-day moving average and recent consolidation lows.
US Treasuries (IEF, TLT)
- The yield curve inversion extended further yesterday with an intraday low for the 2-10 spread of -46 basis points as the longer end of the US yield curve remains anchored, with the 10-year yield benchmark yesterday retracing much of the 15 basis point rise that came on the back of the strong July jobs report on Friday. That benchmark is in a pivotal area, either needing to rise toward and above the 3.00% level to renew the threat of higher yields or to take out the 2.50% area consolidation lows posted at the start of last week. Today sees an auction of 3-year US Treasury Notes, with a 10-year auction tomorrow and 30-year T-bond auction Thursday.
What is going on?
Nvidia Corp (NVDA) ripped for sharp loss on lower revenue guidance
The company adjusted quarterly revenue expectations lower by well over $1 billion (projecting $6.7bn versus earlier guidance of $8.1bn) in a shock statement yesterday, citing lower consumer demand for gaming and a rather cryptic “we took actions with our gaming partners to adjust channel prices and inventory” leading to a $1.3bn inventory write-down as GPU prices have collapsed as crypto mining companies have gone out of business. The company has never been happy that its products are heavily associated with crypto-currency mining activities, which it has never broken out in its reporting, and circumstantial evidence suggests the steep drop in crypto prices this year has played a significant role in the company’s poor performance.
Europe’s energy outlook darkens as Norway moves to curb electricity exports
The electricity situation across Europe has is already dire due to the reduction of Russian natural gas imports and France forced to shut down significant nuclear generation capacity. Now, Norway has moved to limit the export of electricity from its hydroelectric capacity, choosing to prioritize refilling of its water reservoirs amidst soaring domestic electricity costs as the reservoirs are below their normal seasonal levels
Little improvement in the eurozone Sentix Investor Confidence index
... which came out at minus 25.2 in August from a lowest point at minus 26.4 in May. The current situation saw a small improvement to minus 16.3 in August from minus 16.5 in July, the lowest point since March 2021. The expectations index was up a bit too (at minus 33.8). But it remains close to its levels of December 2008 (in the midst of the global financial crisis). This is clear that the economic situation in the eurozone remains challenging. We fear that several member countries could face a tough situation on the energy front this winter (e.g. blackout). A recession is more likely in the eurozone in the short-term than in the United States, in our view.
US New York Fed survey of inflation expectations show sharp decline
Median 1-year ahead and 3-year ahead inflation expectations declined sharply in July, from 6.8%/3.6% in June to 6.2%/3.2% in July. Lower income households showed the greatest shift lower in expectations, possibly linked to the sharp drop in petrol prices (the peak in June in one national measure was over $5.00/gallon, a level that fell to below $4.25/gallon by the end of July.
US FBI raids former president Donald Trump’s residence
The grounds for the search of his property was on his handling of classified documents that may have been taken there. Legal experts have pointed out that it is nominally a federal crime to remove classified documents without following strict procedures. The other angle of attack from the US justice department on Trump is his role in the January 6 riots on Capitol Hill.
The grain market is finding support
... and following the 30% May to July correction the Bloomberg Grains index has now been trading sideways for the past few weeks. The opening of the grains export corridor from Ukraine, upbeat production reports from Russia, the stronger dollar and worries about an economic slowdown have led to an exodus of speculative longs. Since April when speculators held a near record above 800k contracts across six major crop futures, the net long has since slumped below 300k contracts, a level from where fresh buying emerged last week. In the US the market now focuses on the August weather, a crucial driver of production, which is currently hot and dry, hence the move higher this week. This Friday the USDA will release its important World Agriculture Supply & Demand Report (WASDE).
Softbank ‘s Vision Funds suffered record losses
Softbank reported a net loss of 3.16 trillion yen and its Vision Funds business segment reported pretax losses of JPY2.33 trillion. The pre-exit unrealized losses in the Vision Funds 1 & 2 were USD10.9 billion for listed stocks and USD8.9 billion for unlisted stocks. The company announced a smaller additional share buyback authorization of 400 billion yen and said that the company may not use all of it in the coming 12 months.
What are we watching next?
The U.S. July CPI report is out on Wednesday
This could be a low energy report (due to the recent decrease in energy prices), but any strong upside surprise could generate a considerable reaction, given the market’s seeming confidence in pricing the Fed to end its rate hike cycle at the December meeting. The economist consensus looks for headline and core CPI to increase by 0.1 % month-over-month and 0.6 %, respectively. The first estimate of the U.S July PPI report is out on Thursday.
Several U.S. primary elections are held today
(Connecticut, Minnesota, Vermont, Wisconsin). In Minnesota, the primary election is held after the death of the Republican Representative Jim Hagedorn (pro-Trump). Four candidates are running belonging to four parties (Republican Party, Democratic-Farmer-Labor Party, Legal Marijuana Now Party and Grassroots Legalize Cannabis Party). Projections and polls suggest that, while President Biden’s approval ratings are very low, the Democrats are set to retain control of the Senate while losing control of the House of Representatives. Without control of all three of the presidency and the two houses of Congress, it is almost impossible for the US to pass any new legislation.
Earnings to watch
Today’s earnings focus is Globalfoundries and Coinbase Global with the former sitting in the semiconductor industry and thus being part of the new US policy trajectory on semiconductors with the US CHIPS Act. Globalfoundries is expected to deliver Q2 revenue of $1.97bn and EBITDA of $708mn. Coinbase Global is worth watching given the fallout in cryptocurrency trading and the recent partnership with BlackRock to ease access for institutional investors. Coinbase is expected to deliver revenue of $855mn and net income loss of $485mn.
- Today: Alcon, Globalfoundries, Roblox, Trade Desk, Coinbase Global, Akamai Technologies, Plug Power, Unity
- Wednesday: Commonwealth Bank of Australia, Vestas Wind Systems, Genmab, E.ON, Honda Motor, Prudential, Aviva, Walt Disney, Coupang, Illumina
- Thursday: KBC Group, Brookfield Asset Management, Orsted, Novozymes, Siemens, Hapag-Lloyd, RWE, China Mobile, Antofagasta, Zurich Insurance Group, NIO, Rivian Automotive
- Friday: Flutter Entertainment, Baidu
Economic calendar highlights for today (times GMT)
- 1000 – US Jul. NFIB Small Business Optimism
- 1100 – Mexico Jul. CPI
- 1230 – US Q2 Unit Labor Costs / Nonfarm Productivity
- 1600 – EIA's Short-term Energy Outlook
- 1700 – US 3-year T-note auction
- 2030 – API's Weekly Oil Inventory Report
- 2350 – Japan Jul. PPI
- 0130 – China Jul. PPI / CPI
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