US President Cancels Up To $20,000 Student Debt (Before The Elections). It Will Cost ~$300 Bilion Over 10 Years!

EUR/USD Downtrend Continues: Factors Driving the Euro's Decline and Outlook

Summary:  A quiet session yesterday for equities, even as US treasury yields jumped higher once again ahead of a highly anticipated speech tomorrow from US Fed Chair Jerome Powell at the Fed’s annual Jackson Hole conference. In Europe, the focus remains on the dire natural gas and power prices as prices seem to ratchet perilously higher every day. That taken into consideration, EURUSD trading near parity doesn’t rate as such a weak performance from the single currency.


 

What is our trading focus?

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

Despite a shocking low PMI services figures for August, signs that financial conditions are beginning to tighten again, and surging US 10-year yield closing at 3.1%, S&P 500 futures pushed higher after initially trading to new lows in yesterday’s session. S&P 500 futures are extending their short-term momentum this morning trading around the 4,158 level which is still in the heart of the trading range of 4,100-4,170 which was established earlier this month.

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

After having been closed in the morning due to a typhoon, Hong Kong resumed trading in the afternoon and the Hang Seng Index rallied 1.5% on new incremental stimulus measures from the Chinese Government to boost the economy. A-shares fluctuated between gains and losses and edged up as much as 0.2%. Coal miners, oil and gas, and crude tankers stocks gained. China internet stocks rallied, Alibaba (09988:xhkg) +4.3%, JD.COM (09618:xhkg) +5.1%, Baidu (09888:xhkg) +5.4%, Bilibili (09626:xhkg) +4.3%.

US dollar edges back lower ahead of Jackson Hole

After a feint higher yesterday, the US dollar generally closed lower yesterday across the board despite a solid new surge higher in US treasury yields as traders eye the Jackson Hole conference speech tomorrow from Fed Chair Powell. EURUSD continues to bob back toward the obvious psychological pivot level at parity, teasing that level this morning, while China played its part in helping the USD lower overnight with a surprisingly strong fixing for USDCNY after it hit a two-year high yesterday amidst reports from Reuters (citing unnamed sources) that dealers in China were warned from official sources against aggressively selling the yuan.

JPY crosses

Global bond yields are pulling back higher, with the Japanese government bond yields from 10 years and shorter on the yield curve frozen in their tracks due to the Bank of Japan’s yield-curve-control (YCC) policy, meaning that further upside in yields may be absorbed by the yen itself. USDJPY trades sideways as the USD is a bit softer, but other JPY crosses have pulled back higher, as AUDJPY threatens the top of the range soon (high in Jul. Near 95.70 vs. 95.05 this morning) and EURJPY bounced strongly after threatening a look at local support yesterday. The reaction in the US treasury market and Friday close after Fed Chair Powell’s speech at Jackson Hole will prove critical for whether a fresh aggravated rise in yields once again challenges the BoJ commitment to its YCC policy.

Crude oil prices (CLV2 & LCOV2)

Crude oil prices extended their gains following a volatile Wednesday that initially saw prices dip after the EIA reported a smaller than expected drop in US crude stockpiles. However, the report also showed a second week of lower production together with record exports of crude oil and products to energy-starved economies looking for alternative supplies to those from Russia. Diesel exports hit a record with an increased amount of gas-to-fuel switching underpinning demand. Not least from Europe where Dutch TTF gas touched $500 per barrel of crude oil equivalent (€300/MWh), and German power $1,100 per barrel (€646/MWh). In our latest update we highlighted the increased risk of short covering from funds who in anticipation of an economic slowdown had cut their net long exposure in WTI and Brent to a 28-month low. In Brent, the next level of upside interest can be found at $102.50.

U.S. corn (CORNDEC22)

U.S. corn trades higher for a seventh day, hitting a two-month high, supported by concerns that hot and dry weather in the Midwest during the final crop development period may limit the production outcome. A poor US harvest will likely exacerbate the food inflation that’s already been gripping the world this year with dwindling global grain stockpiles being driven by war, drought and the overall impact of climate change. The US is the biggest producer and exporter of corn which is used in everything from animal feed to biofuels and sweeteners. Above $6.64/bu, the December contract may take aim at $6.88/bu next.

US Treasuries (TLT, IEF)

US treasury yields rose again yesterday as demand at the 5-year US treasury auction was at the weak end of the range. The 10-year benchmark closed above 3.10% for the first time since late June. A 7-year auction is up today ahead of Fed Chair Powell’s Jackson Hole conference speech tomorrow, the most significant event risk for the treasury market until the next CPI release in September and then the September 21 FOMC meeting.

What is going on?

Emerging countries dominate in terms of nuclear capacity under construction

According to the latest data released by the World Nuclear Association, the countries with highest nuclear capacity under construction are: China (23.3K MG), India (6.6K MG), Turkey (4.8K MG) and South Korea (4.2K MG). The United Kingdom is the first developed country in the list with 3.4K MG. France lags with only 1.6K MG, for instance. Nuclear energy is the subject of intense debate in several European countries. In our view, this is certainly one of the best options to support green transition and avoid a surge in the energy bill which will lead to lower purchasing power for longer.

China’s State Council rolled out 19 new supportive measures to boost the economy

The crux of the new stimulus package consists of an incremental RMB300 billion financing from policy banks to provide equity-like capital for infrastructure projects and urges issued to local governments to utilize unused quota balances carried over from previous years to issue RMB500 billion special bonds by the end of October this year.  The package includes a plan to facilitate state-owned electricity generating companies to issue RMB200 billion bonds. 

Nvidia provides a weak outlook

Investors already knew that Q2 would be a weak quarter given the profit warning earlier this month, but underlying demand continues below estimates with Q3 revenue guidance of $5.9bn +/- 2% is well below estimates of $6.9bn, but on a positive note the chipmaker is guiding gross margin of 65% which means that it expects profitability to remain in line with recent history. On the conference call management says that China has been the disappointment in terms of demand. Shares fell 4% in extended trading.

US President Biden cancels up to $20,000 student debt

... with $10k in forgiveness for any borrower making less than $125k/year and $20k for holders of Federal Pell grants. The move affects tens of millions of Americans (and possible voters in the mid-term elections) and will cost an estimated $300 billion over 10 years.

Salesforce growth is slowing down

Q2 operating income was better than expected while revenue of $7.7bn up 22% y/y was in line with estimates. The FY revenue outlook of $30.9-31bn was below estimates of $31.7-31.8bn suggesting IT spending is slowing down amid uncertainty over the economy with July seeing a particular shift in customer attitude. Shares were down 4% in extended trading.

Snowflake post strong guidance

Q2 revenue was $497mn vs est. $468mn and updated its fiscal year operating margin guidance to 2% from previously 1% suggesting the company is able to maintain high growth while lowering its spending growth. The revenue beat was driven by an inflow of new customers. Shares were up 17% in extended trading.

Coffee prices surge on Brazil and Vietnam supply worries

Both Arabica (KCZ2) and Robusta (RCX2) coffee futures extended their three-day surge on signs of a deteriorating supply outlook. Stockpiles in Vietnam, the world’s top supplier of the Robusta variety, are expected to halve by the end of September from a year earlier while stocks of the Arabica bean monitored by the ICE exchange has slumped to a 23-year low. Freak weather in South America during the past year has decimated the production outlook for Brazil, Colombia and Central America, while recent dryness has already started to raise concerns about next year’s crop. The June high at $2.42 in Arabica being the only level standing in the way for a push towards the 11-year high at $2.605 reached in February.

Natural gas has become the biggest component in the Bloomberg Commodity Index (BCOM)

The index tracks the performance of 23 major commodity futures targeting a one-third exposure in energy, metals and agriculture. The target weights are set once a year every January and if prices shift significantly during the year, a reweighting will occur the following January. The 160% year-to-date surge in US natural gas futures has more than doubled its weight to 17% from 8%, and in the process made it the biggest component in the BCOM index, more than double that of WTI and Brent combined. What it means? The index has become more volatile and if maintained throughout the year a major rebalancing (selling of natural gas) will occur this January.

What are we watching next?

The Kansas City Fed hosts its annual symposium in Jackson Hole

This year’s theme is “Reassessing Constraints on the Economy and Policy”. The symposium will last until 27 August. Fed Chair Jerome Powell will speak tomorrow. Given the loosening of financial conditions since the June FOMC meeting, the market has been concerned that Powell will echo the pushback against the notion that the Fed knows that it is set to materially slow its pace of policy tightening after the September 21 FOMC rate decision (majority looking for another 75 basis points). Data dependency will likely be underlined in his speech, but any guidance on the Fed’s approach to QT could also garner considerable attention as longer treasury yields pull back higher toward the cycle highs from June.

Japan’s Tokyo CPI for August to show more price pressures

Japan's Tokyo CPI for August is due on Friday morning, and it is likely to suggest further price pressures above the Bank of Japan's 2% target. Consensus expectations point toward another higher print of 2.7% y/y for the headline measure and 2.5% y/y on the core measure, signalling inflationary pressures will continue to question the Bank of Japan's resolve on the ultra-easy policy stance.

Earnings to watch

Today’s earnings focus is Fortum, Delivery Hero, and NIO. Europe’s energy crisis is putting immense pressure on utility companies and consumers. Fortum is not normally a company we find interesting but given the current crisis management’s assessment of the outlook is important to read. Delivery Hero sits inside the consumer economy and especially on the discretionary spending side with delivery of take-away orders; 1H revenue growth is expected at 76% y/y. NIO is in focus following the weaker than expected result from XPeng.

  • Today: South32, Toronto-Dominion Bank, Fortum, Delivery Hero, AIA Group, China Life Insurance, CNOOC, CRH, Dollar General, Vmware, Marvell Technology, Workday, Dollar Tree, Dell Technologies, NIO
  • Friday: Meituan, China Shenhua Energy, China Petroleum & Chemical

Economic calendar highlights for today (times GMT)

  • 0800 – Germany Aug. IFO Business Climate Survey
  • 1130 – ECB Meeting Minutes
  • 1230 – US Weekly Initial Jobless Claims
  • 1230 – US Q2 GDP Revision
  • 1430 – EIA Natural Gas Storage Change
  • 1500 – US Aug. Kansas City Fed Manufacturing survey
  • 2200 – New Zealand Aug. ANZ Consumer Confidence
  • 2230 – New Zealand RBNZ Governor Orr to speak
  • 2330 – Japan Aug. Tokyo CPI

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Source: Financial Markets Today: Quick Take – August 25, 2022