(TSLA) Tesla Earnings, ECB Decision And More! What A Week Ahead Of Us!

5% for the US 10-Year Treasury Yield: A Realistic Scenario

Summary:  US equity futures traded higher overnight following last week’s roller-coaster with gains supported by a weaker dollar and stronger Asian markets after Chinese regulators and central bank offered more support with a funding crunch across the property sector and fresh covid cases posing risks to China’s economy. Commodities trade higher as a result with oil receiving a bid after President Biden, as expected, left the Middle East with no promise of extra barrels. The week will be thin on data and no FOMC comments as Fed members are in a blackout period ahead of the July 27 meeting. Focus instead on ECB and its potential first-rate hike since 2011, US corporate earnings season and Russian gas supplies to Europe.


Note: The Saxo Market Daily Podcast will return on Monday July 25

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

US equity futures trade higher amid scaled back bets on how aggressively the FOMC will hike interest rates on July 27 and after China stepped up its efforts to support its beleaguered property sector and the economy in general. The corporate earnings season will see results from a very diverse group of companies this week with focus today on IBM as well as Bank of America and Goldman Sachs.

Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)

Hang Seng Index (HSI) rallied 2.58% overnight, the most in three weeks, after Chinese regulators  asked lenders to extend loan to eligible developers in order to defuse a growing consumer boycott of mortgage payments by urging banks to increase lending to developers so they can complete unfinished housing projects. Country Garden surged 8.5% to HK$3.59 while China Overseas Land added 4.3% to HK$23.15. China Resources Land climbed 3.9% to HK$34.70. Meituan jumped 6.8% to HK$191.30, while Alibaba Group Holding added 1.7% to HK$103.90. China Merchants Bank rose 2.9% to HK$42.55. In addition the PBOC’s Govenor Yi Gang said the central bank will step up with stronger support for China’s struggling economy amid a covid crisis not yet under control. 

The dollar dips ahead of ECB and BOJ meetings

The greenback trades lower after hitting multi-decade highs against the euro and the yen last week, the change in direction being driven the market has scaling back bets on how aggressive the Federal Reserve will hike rates when they meet on July 27. In addition, with no comments from FOMC members as we enter the blackout period ahead of the meeting, the attention will instead turn to ECB and BOJ meetings on Thursday with the European central bank expected to hike rates for the first time since 2011.  The gas market will also hold a major sway on the euro with the market waiting to see whether Gazprom will resume flows on the Nord Stream 1 pipeline when maintenance ends around July 21. No flows will add further pressure on Europe and with that the euro. A break above €1.02 will as a minimum be needed to start a potential run on short euro positions. 

Crude oil (OILUKSEP22 & OILUSAUG22)

WTI and Brent crude oil futures trade higher after President Biden, as expected, left the Middle East with no promise of additional barrels to help suppress record high US gasoline prices. Instead, the Saudi ministers said that oil policy decisions will be taken based on market moves and within the framework of the OPEC+. According to the current OPEC+ agreement, the four Gulf countries and OPEC members that participated in the meeting can boost production by around 1 million barrels per day by the end of next month. Libya meanwhile has said plans to restart all its oil exports and production as a recent blockade looks set to be lifted. Gasoline prices have eased recently on a combination of lower oil prices and lower refinery margins (crack spreads). The same goes for diesel although last week saw the crack spreads move higher again, highlighting a continued tightness.

Gold, silver and copper trade higher supported by weaker dollar and China

The yellow metal has bounced back after twice finding support in the $1700-area last week, supported by profit taking on long dollar positions ahead of Thursday’s ECB meeting which is expected to yield the first-rate hike since 2011 (see below). Easing selling pressure from speculators also expected after 24k lots selling in the week to July 12 brought the net back to neutral. Increased short positions in silver and platinum also reflecting the latest onslaught with a change in the technical and or fundamental outlook potentially supporting a rebound on short covering. In addition, copper interestingly saw net buying despite falling further as recent short sellers started to scale back their exposure. HG copper found support at $3.15/lb last week, a key level representing a 61.8% retracement of the 2020 to 2022 rally. 

What is going on?

Weeks of heavy commodity selling showing signs of easing

Speculators of hedge funds selling slowed in the week to July 12 according to the latest Commitment of Traders update from the US CFTC. Since early June when the FOMC 75 basis point rate hike led to an increased focus on recession, heavy selling was seen across all sectors with the Bloomberg Commodity Spot index falling by 19%. The net long across 24 major commodity futures dropped to 900,000 lots, the lowest since June 2020 but the 52k lots reduction was well below the 190k average seen during the previous four weeks. Speculators turned net buyers of crude oil, copper and sugar with selling concentrated in natural gas, soybeans, corn, wheat and coffee. The gross position, ie the long and short was cut by 177k lots, reflecting a high degree of uncertainty and vacation season lowering the general level of risk appetite. 


What we are watching next?

Expect the European Central Bank to finally lift rates this Thursday

This will be the first time since 2011. Based on the minutes of the June ECB meeting and recent comments from ECB’s president Christine Lagarde, the central bank plans to hike interest rates by 25 basis points this week. This is too little and too late. The first June eurozone CPI estimate is out tomorrow. The economist consensus expects a new jump at 8.6 % year-over-year. This is painful. We believe the window of opportunity to hike interest rates is rather limited. According to the new forecasts from the European Commission, the eurozone GDP is likely to advance 1.4 % next year – down from May predictions for gains of 2.3 %. This is still optimistic. We forecast GDP growth to be lower, around 1 % in 2023. Lower growth momentum will probably be reflected in the ECB’s projections towards the end of the year. This means the ECB has roughly six months to hike rates before a potential policy pivot towards a more dovish stance (on the condition that inflation is falling by then). With political risk rising in Italy again, there will be a strong focus on the ECB’s anti-fragmentation tool too. We doubt the ECB will disclose all the details this week. There are still ongoing discussions between ECB staff and governing council members about how to define a ‘neutral’ spread (in other words, could a political crisis in Italy justify the use of the anti-fragmentation tool, for instance?). Finally, the market will also look closely at any comments regarding the sharp depreciation of the euro against the dollar. But with investors now considering a 75-basis points hike (or above) by the U.S. Federal Reserve this month, we don’t see any catalyst for upside for the euro in the short-term.

The Italian PM Mario Draghi will tell lawmakers if he will resign on Wednesday

This could open the door to early elections within 70 days. According to the latest polls, a center-right tie-up led by Giorgia Meloni’s Brothers of Italy would win if its members stick together. This would be a very bad news for the eurozone at the worst time ever (lower growth, fragmentation risk and risk of energy crisis this winter).

Australian commodity companies' quarterly results

Major Australian commodities companies Q4 results will be watched this week; for clues as to what we can expect from Australian financial year results, out next month. BHP (BHP) reports quarterly numbers are due Tuesday July 19. Given Rio Tinto’s (RIO) quarterly results last week showed costs are moving higher and output is lower, while demand is lacklustre, much of the same themes will be expected from BHP this week. Other results to watch include Lynas Corp (LYC) in rare earths and Allkem (AKE) in lithium. We think sell side analysts/investment banks may start to downgrade commodity stocks like these facing headwinds. Inversely, coal giant Whitehaven Coal’s (WHC) quarterly report will likely come with an upgrade amid tight coal supply; we think analysts will also upgrade FY forecast for coal companies. Finally, oil companies like Beach Energy (BPT), and Woodside (WDS), and Santos (STO) reporting Q4 on July 20th and 21st will be watched closely after the oil price has fallen about 20% in 5 weeks.

Earnings Watch

This coming week we will see results from a very diverse group of companies.  A preview of Q2 earnings releases can be read on the trading platform or here.

  • Monday: Big banks continue with reports today, with releases from Bank of America and Goldman Sachs with IBM also in focus.
  • Tuesday: Johnson & Johnson, Netflix and Lockheed Martin
  • Wednesday: Tesla and United Airlines
  • Thursday: AT&T, Union Pacific and Travelers
  • Friday: American Express and Verizon

Economic calendar highlights for today (times GMT)

0800 – Italy and Spain May Trade Balances
0900 – BOE's Saunders Speak
1000 – Portugal June PPI
1215 – US June Housing Starts

The week ahead from Saxo’s APAC team
Saxo Spotlight: What’s on investors and traders radars this week?

Commodity Weekly
Peak recession fears bring commodities down to earth

Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Source: Financial Markets Today: Quick Take – July 18, 2022 | Saxo Group (home.saxo)

5% for the US 10-Year Treasury Yield: A Realistic Scenario

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