Summary: Ukrainian success in taking back significant territory from Russia over the weekend has driven a cautious further recovery in the euro and sterling at the open of trade this week. Elsewhere, yields have jumped higher, helping drive new yen weakness and taming risk sentiment as the US 10-year treasury benchmark trades near the cycle highs since June. Focus this week is on tomorrow's US August CPI release, the most important data point ahead of next week’s FOMC meeting.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities Friday on a strong note up 1.5% and S&P 500 futures have extended their gains overnight touching the 4,100 level because before receding to around the 4,085 level in early European trading hours. The US 10-year yield continues to move higher trading at 3.34% and if it sets a new high for the recent cycle it will probably cause headwinds for US equities so watch the US bond market. Next big macro event is tomorrow’s US August CPI report which is expected to print –0.1% m/m suggesting inflation is beginning to cool.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
Hong Kong, Shanghai, and Shenzhen are closed today for the mid-autumn festival holiday. Last Friday, Hang Seng Index soared 2.7%, snapping a six-day losing streak following China’s August inflation data surprising to the downside and raising hope for more monetary easing to come from the Chinese policymakers. Chinese property names rallied on market chatters about unconfirmed stimulus measures from policymakers to boost the ailing property sector. Ahead of the mid-autumn festival, catering stocks gained. CSI 300 climbed 1.4%, led by property, dental services, infrastructure, and digital currency. Northbound inflows into A-shares reached USD2.1billion equivalent last Friday, the largest inflow in a single day since the beginning of the year.
Ukrainian success on the battlefield drives EUR and GBP strength
The surprise offensive and the re-capture of a key transport hub in the northeastern sector of the front after recent focus on operations in the south caught the market by surprise and has seen the euro and sterling rebounding versus the US dollar in early trading this week, with EURUSD trading to new local highs well clear of 1.0100 briefly overnight before edging back lower. Likewise, GBPUSD pulled north of 1.1650 before treading water back toward 1.1600. It will take some time and further developments to assess whether Ukraine can capitalize on its gains and this in turn triggers a new stance from Russia on its energy policy.
JPY crosses back higher as yields rise
The USDJPY correction on Friday inspired by somewhat stern language from Bank of Japan Governor Kuroda has mostly faded, as USDJPY bobs back above 143.00 overnight on US treasury yields challenging cycle highs. EURJPY pulled back close to the cycle high well above 144.00 overnight on hopes that the war in Ukraine is turning in the Ukrainians favour. New highs in USDJPY may bring more two-way volatility again if Japanese officialdom backs up its concern on the situation with market intervention (buying JPY).
Crude oil (CLV2 & LCOX2)
Crude oil starts the week in defensive mode with the focus staying with demand concerns amid continued lockdowns in China hurting demand from the world's top importer and a rapid succession of interest rates from major central banks negatively impacting the global economic outlook. Into the mix a US-backed plan to cap prices on Russian oil sales from December 5, a stranded Iran nuclear deal, strong demand for fuel products such as diesel at the expense of punitively high gas prices and a softer dollar. In addition, the collapse of Russian defenses in Ukraine and the response from Moscow will be watched closely. Monthly oil market reports from OPEC tomorrow and IEA on Wednesday should provide some further guidance on the supply/demand outlook. Brent’s current range: $92.75 and $87.25
US Treasuries (TLT, IEF)
The 10-year US Treasury benchmark edged higher toward the local range high north of 3.3% overnight, with only the June peak at 3.50% remaining as the focus to the upside (this was the highest yield for the cycle since early 2011 and the run higher in yields in June coincided with the major low of the equity bear market this year. Tomorrow’s US August CPI number is the next key test for sentiment and yield direction, while the US Treasury will also auction both 3-year and 10-year treasury notes today and will auction 30-year t-bonds tomorrow.
What is going on?
France’s manufacturing production contracted in July
According to the latest estimate released by the French Institute of National Statistics (INSEE), the manufacturing production decreased by a stunning 1.6 % month-over-month in July. It remains in expansion on a yearly basis (+0.2 %). Without much surprise, the drop is mostly explained by higher prices, especially higher energy prices. The INSEE does not forecast a recession in France this year. Nonetheless, growth is likely to decelerate very sharply in the coming quarters. The institute forecasts that growth will be around 0.2 % in Q3 and will be stagnant in Q4 2022.
India’s rice export ban risk aggravating global food crisis
After a ban on wheat exports earlier this year, India has now announced restrictions on rice exports, aggravating concerns of a global food crisis. Bloomberg reported India imposed a 20% duty on white and brown rice exports and banned shipments of broke rice. The new curbs apply to about 60% of India's rice exports and go into effect Friday. India’s rice output has been depressed due to the severe heatwaves, but also possibly to cap domestic price pressures. If these measures are duplicated by other key rice exporting countries like Thailand and Vietnam, there could potentially be a severe grain shortage globally, especially weighing on poor rice importing nations. We continue to see a threat of climate change to global agricultural output, which along with a prolonged energy crisis, suggested price pressure will stay in the medium-to-long term despite some cooling off from the recent highs.
European carbon price drops as EU considers sale of permits from reserves
The December ECX emissions contract (EMISSIONSDEC22) has fallen by around one-third since hitting a record high last month above €99 per tons. Given the current energy crisis, EU energy ministers are moving towards a deal to sell surplus permits from its Market Stability Reserve (MSR) in order to support a reduction in the cost of producing power and heating within the region. Power producers need to buy carbon permits to offset the polluting impact of using coal and gas over renewables.
Occidental Petroleum shares rise on Berkshire accumulation
In a filing on Friday, Berkshire Hathaway announced that it has lifted its stake to 26.8% in Occidental Petroleum. The move comes after the investment firm got regulatory approval for increasing the stake to over 50%. Berkshire’s move in Occidental Petroleum shares is seen as a move of confidence in the oil and gas industry as a much-needed industry for bridging the gap during the green transformation.
Semiconductors are in focus as the US is expected to announce more curbs on exports
The US Commerce Department is expected to publish new regulations curbing exports of semiconductors to China with companies such as KLA, Lam Research, and Applied Materials likely being impacted by the upcoming regulation. The move by the US further confirms the deglobalisation under the rule of self-reliance applied by increasingly more countries.
China’s medium to long-term corporate loans picked up in growth
Over the past months, Chinese policymakers instructed policy banks and gave window guidance to commercial banks to extend credits to support infrastructure construction and key industries of the economy. Some results showed up in the August loan data which recorded a growth of 16% m/m annualized in the outstanding medium to long-term loans to the corporate sector. The amount of new medium to long-term loans to corporate was RMB 735bn in August versus RMB 346bn in July and RMB 522bn in August 2021. Loans to households remained sluggish.
PBoC issues a list of 19 systemically important banks
The People’s Bank of China and the China Banking and Insurance Regulatory Commission issued a list of 19 systematically important banks. These 19 banks will face between 0.25% and 1% higher minimum capital requirements and additional leverage requirements. They are also asked to prepare contingency plans for major risk events. These 19 banks are Industrial and Commercial Bank of China, Bank of China, China Construction Bank, Agricultural Bank of China, China Minsheng Bank, China Everbright Bank, Ping An Bank, Hua Xia Bank, Ningbo Bank, China Guangfa Bank, Jiangsu Bank, Bank of Shanghai, Bank of Beijing; China CITIC Bank, China Postal Savings Bank, Shanghai Pudong Development Bank, Bank of Communications, China Merchants Bank, and Industrial Bank.
The CPC is set to amend the party constitution at its upcoming national congress
The Political Bureau of CPC Central Committee said in a readout last Friday that the Communist Party of China (CPC) is set to “work out an amendment to the Party Constitution that facilitates the innovative development of Party theories and practices and meets the need of advancing the great new project of Party building in the new era” at the CCP’s national congress to convene starting on October 16. It further elaborates that “the latest adaption of Marxism to China's context and new circumstances will be fully epitomized and so will the new ideas, new thinking and new strategies of governance developed by the CPC Central Committee since the Party's 19th National Congress in 2017.
What are we watching next?
The Bank of England (BoE) will need to go big on 22 September
The meeting initially scheduled for this week is postponed following the Queen Elizabeth II. Last week, both the Bank of Canada and the European Central Bank hiked their benchmark interest rate by 75 basis points. All eyes are turning to the BoE now. Pressure is mounting for the BoE to go big this week – meaning a 75-basis points hike. In August, the central bank hiked rates by 50 basis points to 1.75 %. Despite prime minister Liz Truss’s new anti-inflation plan (which will likely lower the peak in inflation), we think the BoE will need to show its commitment to fight inflation. The Bank forecasts that UK CPI will increase to 13.3 % year-over-year in Q4 2022. But the peak in inflation is only expected in 2023. This means that the cost of living will continue increasing in the short term, anyhow.
Fed speakers stay hawkish before the blackout period begins and ahead of US CPI release tomorrow
Fed rate hike expectations have picked up strongly since Jackson Hole, and we have heard an extremely unanimous voice from the Fed speakers since then. Some of them have clearly made the case for a 75bps rate hike in September, with Bullard on Friday even saying that Tuesday’s CPI report is unlikely to alter the incoming 75bps rate hike in September. Governor Waller leaned hawkish as well, but did not specify the size for September’s decision, but a “significant” hike still points to that. Esther George stayed away from guiding for individual meetings but made the case for sustained rate hikes.
The second-largest cryptocurrency, Ethereum, is scheduled to undergo a major upgrade this week (estimated on Thursday) which, if successful, will fundamentally change the way the cryptocurrency is working. It will go from the computationally intensive proof-of-work consensus to the more energy-friendly proof-of-stake, as well as introducing a mechanism to limit the inflation in Ethereum. The crypto community is looking very much forward to this upgrade, although some are concerned about the security in the new framework.
Earnings to watch
Today’s key earnings release is Oracle which a better-than-expected earnings result on 13 June surprising the market on EPS by 12% as the legacy database and software maker is gaining momentum in its cloud offering. Analysts expect FY23 Q3 (ending 31 August) revenue growth to accelerate to 18% y/y, which includes its recent acquisition of Cerner in the health care sector, which is impressive for the previously low growth company despite some of the growth being driven by acquisitions. If the outlook remains strong a longer-term repricing of the company’s valuation could be in the making.
- Today: Oracle
- Tuesday: DiDi Global
- Wednesday: Inditex
- Thursday: Polestar Automotive, Adobe
Economic calendar highlights for today (times GMT)
- 0730 – ECB's Guindos to speak
- 0800 – Switzerland Weekly SNB Sight Deposits
- 1200 – ECB’s Schnabel to speak
- 1530 – US 3-year Treasury auction
- 1700 – US 10-year Treasury auction
- 2100 – New Zealand Aug. REINZ House Sales
- 0030 – Australia Sep. Westpac Consumer Confidence
- 0130 – Australia Aug. NAB Business Conditions/Confidence
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