Global Market Quick Take: Europe – August 25, 2023

What is our trading focus?

US equities (US500.I and USNAS100.I): Focus on Jackson Hole

S&P 500 futures delivered an ugly session yesterday despite the better-than-expected Nvidia Q2 earnings lifting equity sentiment in the early trading hours. Nvidia shares started above $500 but closed at the intraday low 6.1% lower from the open print. The session also saw defensive sectors outperforming the cyclical sectors. With Nvidia earnings out of the way focus is naturally shifting today to Jackson Hole with focus on Powell’s and Lagarde’s speeches. The outstanding question is whether peak rates have been reached or the two central banks think they must hike more to get inflation under control.

Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Tech stocks retreat

A technology-led pullback weighed on the benchmark indices. The Hang Seng Index slid by 1.3% while the Hang Seng Tech Index plunged by 2.2%. Meituan (03690:xhg) dropped by 5.2%. The Chinese e-commerce and food delivery platform beat estimates in revenue and earnings in Q2 but provided slower growth guidance for its food delivery business for Q3. NetEase (09999:xhkg) fell over 5% after reporting an earnings beat on improved margins but a softer-than-expected revenue growth. In the A-share market, the CSI300 shed 0.5%, dragged down by computing and AI stocks.

FX: USD jumps back higher after risk sentiment swoons

The US dollar is resurgent after a wildly positive open in US equities yesterday was crushed back to earth and another strong US weekly claims print reminds traders that the highest frequency data suggests a very strong US labour market indeed. EURUSD was pounded below 1.0800 and posted a new local low. GBPUSD was even weaker after the very weak UK PMI’s yesterday deflated short UK yields, and the pair fell below 1.2600 for the first time since June. The greenback failed to post new local cycle highs versus Asian currencies, perhaps as China continues to support the renminbi, as USDCNH still trades within the range after a bounce yesterday. Today’s Jackson Hole comments from Fed Chair Powell (more below) are critical for next steps across all markets and of course, for the US dollar.

Crude oil: range bound as fresh catalysts awaited

Crude oil prices are headed for a second, albeit small weekly drop as the supply outlook improves, while demand could be challenged in the coming months as the focus switch from peak summer demand to growth worries in key consuming countries. Like most other markets the focus is turning to Powell’s comments at Jackson Hole later today. Any signs of concern for the economy can prompt the market to bring forward rate cut expectations, helping offset some of the demand concerns. Key support in Brent between $81.75 and $81.25.

Gold and silver: a key day awaits

It has been a good week for precious metals, leading the commodity sector to its first weekly gain in four, led by silvers near 6% surge while gold trades 1.3% higher. The mood in the market has ebbed and flowed with movements in the dollar and not least yields which hit a fresh multi-year high earlier in the week before softening, only to rise again on Thursday ahead of Powell’s key speech today at Jackson Hole where he is expected to offer clues on the interest-rate outlook. Recent softness in economic data has led the market to speculate about a potential peak in rates. Not a make-or-break day for metals, but one that may dictate the short-term direction.  

Record demand at 30-year TIPS auction doesn’t stop yield from rising ahead of Jackson Hole (2YYU3, 10YU3, 30YU3)

Investors saw an opportunity to lock in the highest real yield since 2011 yesterday, taking down 96% of the 30-year TIPS auction. Despite high demand, the auction tailed by 2bps, and yields continued to soar afterward, showing that investors doubt the Federal Reserve is done with fighting inflation. Today’s attention will be on Powell and anything to points to the end of the hiking cycle. If it sounds the Fed is done with hiking rates, a bull steepening is likely to ensue. In case the opposite, a bear flattening is likely.

What is going on?

US jobless claims again surprise on the downside

Initial Jobless Claims came in at 230k in the week ending 19th August, missing the estimate for an unchanged print at 240k. Meanwhile, the continued claims came in at 1.702mln (prev. 1.711mln, exp. 1.708mln). Data may be some relief for Fed Chair Powell as he takes the stage today at the Jackson Hole Symposium after weak PMIs and a downward revision in NFP. However, near-term Fed trajectory has many more variables to consider as CPI, PCE and NFP come out before the September meeting.

Japan’s core-core Tokyo CPI stays at 4% in August

The leading indicator for Japan’s nationwide CPI, Tokyo CPI, was released this morning. Headline CPI cooled from 3.2% YoY in July to 2.9% YoY in August and core measure (ex-fresh food) softened from 3.0% to 2.8%. The core-core measure (ex-fresh food and energy) however remained firm at 4.0% YoY in the month, keeping the message mixed on price pressures and the scope for a BOJ tweak alive into 2024.

BRICS adds more members

The Brics emerging market bloc has launched the biggest expansion in its history as Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates were invited to join. The marks a turning point as the expanded group can mean more global influence as a counterweight to the US and the G7. The bloc will also control most of the oil output in the world and a significant amount of natural resources which could give some room to develop an alternative currency and enhance the de-dollarization trend in the years to come.

US natural gas: another below average stock build

US natural gas futures rose on Thursday, thereby reducing the weekly loss to around 2.6%, after the EIA reported a smaller-than-expected 18 bcf stock increase compared with a 5-yr avg. of 49 bcf. Recent heatwaves have resulted in strong demand which may now slow as the weather turns cooler, potentially limiting the upside risk to prices. The summer stock building exercise ahead of winter has nevertheless slowed with the current total of 3,083 bcf being just 9.5% above the 5-year average

What are we watching next?

Jackson Hole speeches from Fed Chair Powell and ECB’s Lagarde today

The Federal Reserve’s Economic Policy Symposium in Jackson Hole, Wyoming kicked off yesterday and runs through tomorrow. This year’s theme is "Structural Shifts in the Global Economy" and Fed Chair Jerome Powell is expected to speak today at 1405 GMT. Other central bank heads will also likely be on the agenda. There is considerable attention on this speech and whether the Fed is set to deliver major long term policy hints, far more than any anticipation around whether Powell is set to offer strong hints on the near-term course of policy. As noted in a recent FX Update from John Hardy, Powell’s speech could touch on rising fiscal dominance (massive treasury issuance projections and the pressure this will bring to inflation risks and higher long rates) and whether this will require that the Fed consider appropriate policy options. In addition, “Fed whisperer” Nick Timiraos recently penned a piece suggesting that the Fed could be set to raise its projections of the appropriate Fed policy rate for the longer run, where the median in the Fed‘s quarterly “dot plot” projections has been pinned at 2.5%. A hint that the Fed is set to raise its longer-term policy projections at the September FOMC meeting could spark significant volatility.

Australia LNG strike threat remains

Workers voted in favor of industrial action at two of Chevron Corp.’s liquefied natural gas facilities in Australia if talks don’t resolve a pay dispute. Unions could strike at Chevron’s Gorgon and Wheatstone Downstream plants should the company fail to provide an appropriate offer during negotiations, the Offshore Alliance said in an emailed statement. That would put at risk 24.5 million tons of annual supply, or about 5% of global liquefaction capacity (BBG)

Earnings to watch

The number of important earnings releases is dropping fast. Next week, the most important earnings releases to watch are from Salesforce, NIO, UBS, and Lululemon Athletica.

Next week’s earnings releases

• Monday: Fortescue Metals, HEICO
• Tuesday: PDD Holdings, HP, Hewlett-Packard Enterprise, NIO
• Wednesday: Prudential, Salesforce, Crowdstrike, Pure Storage
• Thursday: UBS, Broadcom, VMware, Lululemon Athletica, Dell Technologies, Dollar General, MongoDB

Economic calendar highlights for today (times GMT)

• 0800 – Germany Aug IFO
• 1400 – US Final University of Michigan Sentiment
• 1405 – Fed's Powell Speaks at Jackson Hole
• 1900 – ECB's Lagarde Speaks at Jackson Hole

Saturday

• 16:25 – BoE's Ben Broadbent Speaks at Jackson Hole