The Monday Report – 08 July 2024

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Looks like the local market is trying to balance lower iron ore prices and another record high for US indices for, on balance, another lacklustre opening today.

World Overnight
SPI Overnight	7797.00	– 11.00	– 0.14%
S&P ASX 200	7822.30	– 9.50	– 0.12%
S&P500	5567.19	+ 30.17	0.54%
Nasdaq Comp	18352.76	+ 164.46	0.90%
DJIA	39375.87	+ 67.87	0.17%
S&P500 VIX	12.48	+ 0.22	1.79%
US 10-year yield	4.27	– 0.08	– 1.91%
USD Index	104.88	– 0.25	– 0.24%
FTSE100	8203.93	– 37.33	– 0.45%
DAX30	18475.45	+ 24.97	0.14%

By Chris Weston, Head of Research, Pepperstone

Good morning.

-The French 2nd round vote throws up a big surprise
-US growth in question US data showing a clear softening
-The USD lower for 7 days, as 2yr Treasury yields break range lows
-Gold finding form moving inversely to bond yields and the USD
-Data to navigate ahead US CPI is the marquee risk
-US earnings in play The banks get the ball rolling  

We move past a big week for markets, with the US labour market firmly under the spotlight, with the various readings cooling just enough to give market participants further confidence the Fed will start its easing cycle in September.

A big surprise for the Left-wing alliance

As we look ahead, we start the week on a rather messy note, with the French 2nd-round vote throwing up a major twist, with the left-wing coalition gaining the most seats, and Le Pen’s RN party coming in third.

The tactical moves made, with a significant number of candidates being pulled from the vote, married with high voter turnout, have worked incredibly well to block out the RN vote, and with Prime Minister Attal resigning, a coalition will attempt to be formed before 18 July, with negotiations taking place over the coming days.

Markets won’t like a far-left government having a say, and the victorious far-left NFP leader Melenchon has already stated he will not do any deals with Macron, and will implement his manifesto in full however, while we are seeing the EUR modestly weaker on open (now 1.0803 or -0.4%), the fact that centrist Macron has polled better-than-expected, as well as the number of seats the Left have obtained means passing the NFPs manifesto in full will be a real challenge.

While uncertainty is high once again, this should contain the fallout. Political gridlock beckons at a time when France really needs strong action to target its fiscal position.

French politics aside, the deteriorating trend in the US data flow, as well as the sustainability of Biden as the Democratic nominee, have been the central topics of conversation among macro heads, and the former debate has truly damaged the US exceptionalism trade.

We can see this dynamic through the Bloomberg US growth surprise index which essentially measures the outcome of the data relative to the consensus forecasts where we see this at the weakest levels since May 2020. US growth Nowcast models have also been revised lower.

The good news for risk is that we are still at levels of growth, consumption and labour readings that largely say if the Fed are to ease, it’s because of risk management purposes. That is, to massage the fed funds rate away from a restrictive setting and gradually to a more neutral setting, so as not to cause a more protracted downturn.

It’s when the market feels the Fed need to ease beyond neutral and to stimulate the economy that earnings estimates are chopped up, and equity typically goes into prolonged drawdown.

For now, bad news on US economic data is good for bonds, equity, and gold and negative for the USD. but one does question if there is a tipping point, where the move from a soft landing scenario, to one where the recession drums beat a lot louder where we morph from rate cuts are good for risky assets, to one where bad news sees traders buy volatility (e.g. the VIX index), US Treasury yield curves steepen more aggressively, and, importantly, high yield corporate credit spreads starts to show a more alarming signal for equity.

We’re not there yet, and a soft landing’ is the current market base case – so, for now, I maintain a bullish bias on risk. However, if we can identify the triggers that highlight when the market feels a greater sense of concern then we can react to changes in our market environment far more efficiently.

The by-product of last week’s US data trend was a -15bp decline in the US 2yr Treasury on the week closing the week at 4.60% and breaking below the range it held since mid-June of 4.85% to 4.65%. We can also look at US swaps pricing and see -19bp of cuts priced for the September FOMC meeting, or an 80% probability implied for a cut. Rates traders are torn between a further -25bp cut at either the November or December FOMC meeting.

The risk, for me, especially if we get a core US CPI read (Thursday) below 0.2% m/m is that the US swaps markets look to price a -25bp cut in the September, November, and December meetings.

Gold is eyeing a retest of US$2400

Gold has found real form in this dynamic with a push into US$2391, with a close above the 7 June high of US$2387.

For now, gold is the anti-USD trade, but should we see greater fragility in US high-yield credit markets (the HYG ETF is a good way to view this) then gold could easily be above US$2500 that won’t happen overnight though and could take weeks if not months.

By then funds could also be buying gold as a hedge against fiscal deficit blowout in the US, notably if we got a sense that the Republicans could take the House, which would give them the ability to extend the 2017 Tax Cut and Job Act in 2025, which along with other measures could see the US fiscal deficit increase by a further US$1.5trn-plus.

.Looking ahead to the trading week:

US CPI is the marquee risk event

Last week’s news and price moves set traders up for an interesting week ahead. For equity and US index traders, the momentum is firmly to the upside, and I am skewed to higher levels in the NAS100 and US500.

I obviously have no idea if this bull trend will reverse lower this week, and flow works in mysterious and often unpredictable ways, but from a data and known event risk point of view, Thursday’s US CPI inflation print is really the only data point which could really rock the boat.

The consensus is for US core CPI to come in at 0.2%m/m (3.4% y/y), so a core US CPI print that rounds to 0.4% m/m (i.e. above 0.35%) would have traders questioning the degree of cuts priced, US 2yr Treasury yields would spike higher; subsequently, US equity indices would find sellers.

An inline US CPI print may be good enough to justify the current rates pricing and keep equity markets headed higher. Alternatively, an outcome that comes in below 0.2% would really cement market expectations of a rate cut in September, and put further downside in the USD, and upside in equity and gold.

We also start to get the US banks and big money centre reporting on Friday and starting the ball rolling on Q2 earnings season, with Wells Fargo, JP Morgan and Citigroup all reporting pre-market open. 

Fed chair Powell testifies to the Senate Banking Committee on Tuesday (00:00 AEST Wednesday) a highlight, but it would have been more insightful for markets if Powell spoke after the CPI print but his comments on developments in the US labour market could move markets.

Outside of the US, we see the RBNZ meet on Wednesday, where they will hold rates unchanged, but the move in the NZD comes from the tone of the statement relative to the -62bp of cuts priced in by February 2025. 

In Australia, we see home loan data, as well as the Westpac consumer confidence, NAB business confidence and CBA household spending all important metrics, but unlikely to trouble the AUD.

In China, we get PPI/CPI and trade data again, it is unlikely to move the dial too much in either Chinese or global markets, with traders looking ahead at the Third Plenum on 15 July.

On the calendar today:

Looking Ahead:

-In Australia , the ABS releases Home Lending for May
-Collins Foods ((CKF)) shares trade ex dividend 15.5c (100% franked)

Corporate news in Australia:

-Newspaper journalists at Nine Entertainment ((NEC)) are reportedly preparing a strike

-Looks like Allegro Funds might buy Fletcher Building’s ((FBU)) Tradelink unit after US-based Pacific Avenue Capital Partners withdrew from the sale process

-Australia’s Takeovers Panel has stopped Crescent Capital Partners’ takeover of Pacific Smiles ((PSQ)) due to disclosure issues

-Newmont Corp ((NEM)) maintains its 8.6% stake in Antipa Minerals ((AZY)) by participating in a $5.75m equity raise, alongside Lion Selection Group and others

-Having rejected BHP Group’s ((BHP)) proposed take-over, Anglo American is set to start the sale process for its coal assets in Australia

Spot Metals,Minerals & Energy Futures
Gold (oz)	2399.85	+ 34.55	1.46%
Silver (oz)	31.52	+ 0.84	2.74%
Copper (lb)	4.67	+ 0.10	2.24%
Aluminium (lb)	1.14	+ 0.01	0.44%
Nickel (lb)	7.91	+ 0.14	1.75%
Zinc (lb)	1.35	+ 0.00	0.23%
West Texas Crude	83.44	– 0.62	– 0.74%
Brent Crude	86.80	– 0.76	– 0.87%
Iron Ore (t)	111.31	– 1.75	– 1.55%

The Australian share market over the past thirty days

Index	05 Jul 2024	Week To Date	Month To Date (Jul)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7822.30	0.71%	0.71%	0.71%	3.05%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
ALD	Ampol	Buy	Ord Minnett
ANN	Ansell	Hold	Ord Minnett
ARF	Arena REIT	Downgrade to Neutral from Buy	UBS
BEN	Bendigo & Adelaide Bank	Lighten	Ord Minnett
BWP	BWP Trust	Downgrade to Neutral from Buy	UBS
CNI	Centuria Capital	Downgrade to Sell from Neutral	UBS
CSL	CSL	Upgrade to Buy from Neutral	Citi
DRR	Deterra Royalties	Upgrade to Buy from Neutral	UBS
EBO	Ebos Group	Upgrade to Neutral from Sell	Citi
GEM	G8 Education	Upgrade to Outperform from Neutral	Macquarie
GMG	Goodman Group	Downgrade to Sell from Neutral	UBS
LLC	Lendlease Group	Upgrade to Neutral from Sell	UBS
LTR	Liontown Resources	Upgrade to Neutral from Sell	Citi
MGR	Mirvac Group	Upgrade to Buy from Neutral	UBS
MND	Monadelphous Group	Downgrade to Hold from Buy	Bell Potter
SCG	Scentre Group	Downgrade to Sell from Neutral	UBS
STX	Strike Energy	Upgrade to Neutral from Underperform	Macquarie
VCX	Vicinity Centres	Upgrade to Neutral from Sell	UBS

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

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