Global Market Quick Take: Europe – 7 June 2024

Key points:

• Equities: Chinese equities headed lower on weak import figures
• Currencies: Euro steady after ECB’s reluctant cut
• Commodities: Bounce back week led by softs and metals
• Fixed Income: Focus on US data to support weekly yield drop
• Economic data: US jobs report for May

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

Equities: Japanese and Chinese equities traded 0.2% and 0.7% lower in the Asian session as China’s May import figures came in lower than expected suggesting no pickup in Chinese growth. Equity futures are pointing to a flat opening in Europe. The ECB delivered its well-telegraphed rate cut yesterday with no clear signs of the next rate cut. The central bank even slightly raised its official inflation projections. This was an ECB that had talked itself into a rate cut and then by the time of the rate decision could see the European economy was rebounding. The market nevertheless is clearly not buying the rebound story in Europe expecting the ECB to cut again in October. The market is split evenly for the Fed to cut either at the September or November meeting. DocuSign shares were 7% lower in extended trading despite an earnings result beat and Q2 revenue outlook coming out higher than estimated. Today’s key event is the US Nonfarm Payrolls figures that will likely show that the US economy is humming along at levels just below trend growth.

FX: The Dollar is heading for a third albeit very small weekly gain with a post-election 5.4% loss in MXN, after Mexico’s lawmakers raised reform alarm, which could likely spook carry trades and provide a further floor on low-yielding currencies. Most other currencies except CAD trades higher on the week led by CHF, KRW and JPY. USDJPY wobbled around 156 while USDCHF took a look below 0.89 while the EURUSD was choppy on the ECB decision but stayed below 1.09 while EURGBP moved a bit higher away from key support below 0.8500.

Commodities: The Bloomberg Commodity index is heading for its first weekly gain in three with continued losses in grains, most notably wheat, and industrial metals being offset by gains across the other sectors, not least softs which has seen strong gains in sugar and coffee, as well as previous metals where gold and silver both recovered following the latest correction supported by lower bond yields and a continued appetite from buy-on-dip investors. Focus now turns to Friday’s US job report for clues on the Federal Reserve’s rate path. Crude oil trades lower on the week despite bouncing on Thursday after OPEC+ members, including Saudi Arabia, emphasized the group’s readiness to respond to market fluctuations with supply adjustments. It confirms that a “line in the sand” still exists below the market, probably around USD 75 in Brent and that the announced production increase from October will depend on market conditions at the time.

Fixed income: Market participants have ramped up wagers on interest rate reductions over the last week, encouraged by a series of U.S. economic figures falling short of expectations, the Bank of Canada's recent policy easing, and anticipation of a European Central Bank (ECB) rate cut, a move that materialized on Thursday. U.S. Treasury 10-year yields hovered around 4.29%, with swap markets increasingly factoring in a Fed rate cut beginning in November and another likely in December. Conversely, yields on 10-year German bunds climbed by four basis points as the ECB lifted its inflation projections, and policymakers largely dismissed the possibility of an additional cut in July. ECB President Christine Lagarde emphasized that despite a significantly brighter inflation outlook, the central bank intends to maintain "sufficiently restrictive" policy rates for as long as necessary. In Asia, over half of the analysts tracking the Bank of Japan expect a reduction in the central bank's government bond purchases at the upcoming meeting, with an increasing contingent also predicting a potential interest rate increase come July.

Technical Analysis Highlights: S&P500 upside potential to 5,50. Nasdaq 100 potential to 19,500. EURUSD closed above 1.0885 now likely move to 1.0980. GBPUSD above 1.28 potential to 1.29. USDJPY correction unfolding support at 155.47 and 154.09. EURJPY range bound 170.90-168.25, breakout needed for direction. AUDJPY key support at 102.80. GBPJPY support at 197.20, resist at 200.65. USDCAD key resistance at 1.3745, if broken uptrend likely to 1.39 broken resist at 0.6650 upside potential to 0.6750. USDCHF key support at 0.8880. EURCHF key support at 0.9675. Gold above resist at 2,365If above 2,385 likely bullish move to 2,420, key support at 2,314. Silver strong rebound above resist at 30, could resume uptrend. US 10-year T-yield below 4.30 key support, will it drop to 4.18?

Volatility: US Volatility, as measured by the VIX, changed little on Thursday, ending at $12.58 (-0.05 | -0.40%). US markets reflected a similar calm, with minimal movement following the impressive rally the day before. However, shorter-term VIX indicators tell a different story, suggesting impending volatility. The VIX1D, which measures expected volatility over the next day, surged to $13.34 (+3.87 | +40.87%). This spike in immediate expected volatility is largely attributed to the anticipated release of the Non-Farm Payrolls data later today, a key metric for upcoming interest rate cut decisions. With only a few earnings reports left for next week and none today, market volatility will likely focus entirely on the economic figures. VIX futures moved sideways during the overnight session and are currently at 13.220 (-0.035 | -0.27%). Meanwhile, S&P 500 and Nasdaq 100 futures trended slightly higher overnight, at 5369.50 (+5.50 | +0.10%) and 19091.25 (+31.00 | +0.16%) respectively. Thursday's top 10 most traded stock options, in order: Nvidia, Tesla, GameStop, Bank of America, AMC Entertainment, Advanced Micro Devices, Palantir Technologies, Apple, Amazon, and Robinhood.

Macro: The ECB, as expected cut rates by 25bps bringing the deposit rate down to 3.75%. While the move was well-telegraphed, it came with higher growth and inflation forecasts continuing to raise the question whether this may be a policy error. The ECB however signalled a data-dependent approach from here, not pre-committing to further rate cuts for now. US jobless claims rose to 229k from the upwardly revised 220k for the prior week, coming in above expectations again. The rise in the weekly claims is consistent with the softness of the labour market seen recently, although it is not yet something to be overly concerned about but many do expect the claims numbers to tick up throughout the Summer. NFP preview: Next key focus today will be the non-farm payrolls. April print showed a gradual cooling in labour market conditions, and several labor market indicators have showed modest softening last month which could get reflected in the May NFP print. Consensus expects headline payrolls to have risen by 180k in May, just a notch above April 175k with unemployment rate steady at 3.9%, the highest level since early 2022. Market reaction to the jobs data may be measured, especially if the print is hot given that it may not be enough to turn the Fed hawkish. If headline jobs growth comes in softer than expected, markets may try to bring forward Fed rate cut expectations, and that can fuel risk-on sending stocks higher and the US dollar lower as long as growth concerns do not over-rule the rate cut narrative. China’s exports climbed more than expected in May, highlighting the country’s reliance on exports to offset weak consumer spending at home. Exports rose 7.6% in dollar terms from a year earlier, while imports increased 1.8%, resulting in a trade surplus of almost $83 billion for the month. Economists had forecast that exports would expand by 5.7% and imports by 4.3%.

In the news: Lagarde’s Reluctant Cut Leaves Markets Guessing on Next ECB Move  (Bloomberg), Japan consumer spending rises in April for first time in 14 months (Investing), Possible ‘some fluff’ is keeping Nvidia high, says Damped Spring’s Andy Constan (CNBC), European equities beginning to outpace U.S., says Fairlead Strategies’ Katie Stockton (CNBC), GameStop surges almost 50% as 'Roaring Kitty' teases livestream (Yahoo), Oil Extends Recovery as OPEC Taper Worries Ease (Barron’s), China's exports rise solidly, but slower imports temper outlook (Reuters), Weight loss drugs Wegovy and Mounjaro could spawn a host of new piggyback product lines (CNBC),

Macro events (times in GMT):  German Industrial production (April) exp 0.2% vs –0.4% MoM prior (0600), Mexico CPI (May) exp 4.82% vs 4.65% prior (1200), US nonfarm payrolls (May) exp. 180k vs 175k prior (1230). Central bank speakers: ECB’s Nagel and Simkus (0800), Holzman and Schnabel (0800) and Lagarde (1415), Fed’s Cook (1600). Weekly COT reports from the CFTC and ICE Europe Exchange (2000)

Earnings events: No important earnings releases today.

For all macro, earnings, and dividend events check Saxo’s calendar