 Good morning. Welcome to CMC markets on Friday the 15th of July and this quick look at the week ahead with me Michael Hueson It's looking Pretty much set up for another negative week or a negative week for equity markets this week we've seen a significant amount of volatility yet again and most of this week's Price action has been dominated by rising recession risk global slowdown against the backdrop of rising inflation and the potential for more aggressive central bank action when it comes to containing said inflation So what does that mean for equity markets going forward? well certainly this week's this week's events have been dominated by Events in China we started the week off by concerns that Q3 GDP growth in China was likely to be held back shall we say by a continued stop-start nature of COVID-induced restrictions or lockdowns we found out that the various lockdowns during Q2 Prompted the Chinese economy to contract by 2.6% on a quarterly basis Which meant that on an annualized basis the Chinese economy only grew 0.4% in the second quarter So that essentially means that it's highly unlikely that the Chinese economy will get anywhere close To its 5.5% GDP target for this year Even though we did see a modest improvement in retail sales in June That's largely as a consequence of the big decline as a bounce back From the big declines that we saw in April and May Looking forward This week has been dominated by some really big jumps in not only US CPI Which rose to 9.1% but also in Retail in producer prices US PPI prices which also jumped sharply in June largely driven by big spikes in food and energy prices What was noteworthy though, and it and this did seem to get lost. I think a little bit in the fog of Surging dollar was the fact that core prices in both cases Actually fell back in June even as the headline number pushed higher nonetheless We saw the dollar index move to its highest levels in nearly 20 years the euro dollar move below parity for the first time since 2002 with the prospect that we're likely to see further euro declines Over the course of the next few weeks as we look ahead to this week's this coming weeks European central bank rate decision. We also saw this week a monster hike from the Bank of Canada I had expected the Bank of Canada to be moved by 75 basis points this week um, I think when Officials at the Bank of Canada looked at the US CPI numbers I think there was perhaps a concern that maybe the Fed might be more aggressive when it comes to hiking rates On the 27th of July and consequently the Bank of Canada raised rates by 100 basis points Of course the CPI numbers that we saw out this week from the Federal Reserve Prompted similar concerns that we may see we may see the Federal Reserve go by 100 basis points when they meet Later this month now that expectation Even though the market started to price it in has been tempered somewhat By comments from Federal Reserve Board Governor Christopher Waller Who said that he thought the market was getting ahead of itself by pricing in 100 basis points This was the very same policymaker Who only a few weeks ago said the Fed was all in on inflation So he softened his tone a little bit But on the other hand we've got Raphael Bostic of the Atlanta Fed who said that everything is in play For July the 27th so ultimately 100 basis points is in play nonetheless St. Louis Fed President James Bullard Said that he wasn't in favor of 100 basis points move at this time Which helped pull European equity markets and US equity markets off their lows for the week So that's essentially where we are at this point in time. We're still down on the week US bank earnings season is well underway And certainly I think in terms of earnings expectations The rubber is starting to hit the road when it comes to the potential for further earnings downgrades as we look ahead to Goldman Sachs and Netflix and tesla in the coming week so As we look ahead to Next week Let's have a quick look at the various key chart points on the various indices and as we can see from here Not really any change to the range trading that we're seeing on the FTSE 100 fairly decent support In and around this 7000 level we've tested it quite a few times This month without breaking through once again, we've rebounded off it We really bounded off it back here And really I think for pretty much all of this year 7000 has been a pretty solid Solid support aside from a bit of a tick lower in the aftermath of the russian invasion of ukraine It's also been notable this week As markets increasingly price the prospect of a recession has been the big declines that we've seen In commodity prices notably copper and crude oil and What we're also got to be aware of as we look ahead to the send VEC be raising rates next week because that is what is expected albeit by a fairly modest 25 basis points is What effect an economic slowdown will have on events in europe because the weakness of the euro Is coming a real problem for the ECB There's a number of factors that play obviously the shutdown of Nord Stream 1 for maintenance for 10 days And that's due to roll off around about that's due to restart on the 21st of july And there is perhaps a concern that russia might use Any means necessary to perhaps delay the reopening of Nord Stream 1 that's certainly been No, it's certainly not been reflected In the way oil prices have behaved this week or commodity prices in general We've seen a big decline In commodity prices this week in copper this week hit a 20 month low. So Recession risks are rising at the same time As central banks are having to consider Much tighter monetary policy going forward now in Historical terms interest rates are still very very low specifically when you consider where inflation levels are right now the last time Inflation levels were at this sort of level interest rates were well above the headline inflation, right? So when we look ahead to uk inflation later Later in this week We're expecting that to come in Around about 9.2 9.3 percent and the last time inflation was at this sort of level Interest rates were above 10 percent base rates were above 10 percent in the uk economy So there's a significant mismatch in terms of where rates are relative to where headline inflation is So still keeping a fairly decent eye on support down here on the upside Still looking to sell rallies on equity markets. The DAX is looking particularly vulnerable At this point in time we can see that here Fairly solid support at 12400 Still holding But we need to bear in mind that each subsequent rally off 12400 has become shallower Particularly the one that we saw On the 5th of july only got as far as 13 000 and then we're back there again And yes, we have bounced off there this week and we are rebounding But we really now need to have We need to have evidence that that base is in with a break above 13 000 and then move back towards The 50 day moving average to gain some form of confidence that perhaps We could start to see a modest rebound Similar story on the s&p 500 Still very much in a downtrend Pulled off the lows of the day Yesterday by those comments from christopher walla and james bullard where they Rather played down expectations of 100 basis point rate hike In july doesn't mean the fed won't do it But i think that could well be That could well be determined by how strong us retail sales are later today These are due out later this afternoon Just in the aftermath of me recording this video. So if we get a strong number of us retail sales That could give fed policy makers more confidence to be more aggressive when it comes to rate rises and personally, I think 75 basis points is still the It's I think it's still the probably the most probable outcome But certainly 100 basis points There's suddenly suddenly Suddenly started to become Less of a tail risk than it was a week ago and we do really need to be cognizant of that risk Okay, so that's the s&p 500. There's the key resistance 50 day moving average in the trend line resistance from there Similar sort of story when it comes to the nest act 100 we could probably draw a line through here But for me, I think the big level on the nest act still remains very much this peak here at around about 12 230 Which we managed to stay below When we got last week's payrolls numbers hit the tape which to all intents and purposes was a still a fairly decent number Going forward and I think those payrolls numbers the strong cpi numbers Do make the prospect of 100 basis points that much more probable than was the case a week ago But given the fact that some of the two of the most hawkish FOMC members Have played down expectations of 100 basis points and the fed goes into blackout Over the course of the next few days. I think they're going to want to avoid a situation That we saw in the lead-up to the previous meeting where everyone was pretty much comfortable with the idea with 50 We got some fairly weak We've got some fairly weak numbers going coming into that meeting and the fed suddenly started to brief We've got hot cpi report and the fed suddenly started to brief That They wanted to do 75 basis points while they're in blackout. I don't think they'll want to play that scenario out again so I think by pairing back Expectations of 100 basis points walla and bullard are basically saying look 75 is fine On top of the 75 at the previous meeting. Let's just see where the data goes As we look towards jackson hole in august and obviously the next meeting in september So looking looking at euro dollar now because the main the main topic for this coming week Is going to be not only the ecb rate decision. We're also going to be looking at uk cpi The weakness of the pound against the dollar and whether or not a strong cpi uk cpi number Will increase the probability the bank of england will do 50 basis points when they meet in early august But let's start with the ecb. We're now We've now broken below parity We hit a lot of 99 50 It keeps us very much on course now for My medium term target for euro dollar of 96 20 if we look at the weekly chart And these projections that I laid out at the end of april for further weakness in euro dollar We've now hit my next target of parity We now want to see a move extend lower towards 96 20 and A medium term target for this measured move That we projected all the way back in april or may So what could be the catalyst for an even weaker euro? Well, there's certainly plenty of factors at play. There's a political instability in italy the ability of the ecb When they raise rates this week and whether it be 25 or 50 basis points to manage bond spreads between italy and german bond yields now Either the ecb need to do something inflation is already at a record 21.9 percent in estonia is at 19.3 percent in lithuania the Baltic states are getting absolutely battered While countries like france are seeing 5.8 percent and the only reason that french inflation is so low Is because the french government has absorbed pretty much All of the fuel price increases by nationalizing edf energy and forcing edf not to price those increases on so The big the ecb's biggest problem is not so much that it's powerless to mitigate current levels of inflation it's Are they able to do it without causing further instability in eurozone bond markets? particularly between italy and german bond yields There's growing pessimism that the ecb will be able to deliver on anything on bond buying That would keep it within the boundaries of what is legal legal under the ecb capital key And there's been talk of omt outright monetary transactions That was something that was laid out by mario dragui the last time this topic was discussed But this is going to be very very difficult sell because it requires Conditionality and certainly german officials are very much of the opinion that if they go down the omt route Then italy has to abide by the conditionality for omt so Lagarde's got a really difficult tightrope to navigate which he's got to do more than Talk tough about an anti fragmentation tool Because another fudge sandwich won't do the trick when it comes to Convincing markets that the ecb has an answer to increasing political risk in italy dragui's Potential resignation What sort of italian government will we get over the course of the next few days and weeks? So, you know, we're we're navigating very tricky political waters going forward So certainly i'm of the opinion that euro dollar can continue to go lower sadly I think cable will continue to suffer as well on the back of the stronger dollar Hopefully by not as much But certainly i think the uk unemployment data the uk wages data and the cpi numbers um, we'll add a little bit To the bank of england's thought processes when they meet in early august looking at cpi that came in at nine point one percent in may Given the big jump that we saw in us cpi in june You would expect to see something more Than a forecast of nine point two percent uk cpi for june There is a distinct possibility that we could overshoot on that and move ever closer to 10 Maybe to around about nine point five What we do know is that a lot of the increase in headline cpi is now starting to manifest itself not only in higher Fuel prices that's quite clear when you look at the prices of the pump, but also in food prices as well When you get a situation where Tesco's is putting security tags on lurpak butter You know, you're in the realms of significant food price Inflation and that's essentially where we are So I think if we see a very strong cpi number This week Then the bank of england needs to go and do something that it's never ever done before And that's raise interest rates in august by 50 basis points 5050 basis points or more Now the discussion is about getting inflation under control And the gdp numbers that we saw out of the uk early this week Are encouraging in that context 0.5 percent Expansion in may now obviously that is not likely to be sustained But ultimately I think it's Really a question of what's the least worst option and with the pound now even lower Then it was a month ago the bank of england needs to get a grip Of its mandate Which is to keep inflation on target at around about 2 percent Which means it needs to be more aggressive when it comes to raising rates and shake itself Out of its current groupthink narrative wages looking again at fairly Resilient numbers for the three months to may We should start to hopefully see a move higher in the numbers Excluding bonuses which are set at 4.2 Including bonuses they rose by 6.8 percent in april That's likely to those are likely to be maintained In and around current levels Given employers are under much more pressure now to pay Their staff more and obviously we've got rail strikes coming up. I had to endure rail strikes already as more and more workers look for wage increases of more than 5 percent Certainly, I think that's what we're starting to see and we're starting to see average raise average wage increases coming in between five And seven percent over the course of the next few months and that in itself Is likely to mean that the Bank of England will be forced to do more So still remain on course for 115 in cable while we're below 120 40 50 euro sterling Trended lower Started to wedge back a little bit higher now As we head towards the ECB next week could see further strength towards around about 85 30 40 But overall we're still in the range that we've been in For the past few months and I don't think that is likely to change going forward. So ECB Euro sterling still very much a range trade. We've also got final EU CPI for june And that the flash number there rose to 8.6 percent up from 8.1 in may that's likely to be maintained at 8.6 percent We've also got some so and with the ECB Meeting this week I think it'll be particularly interesting as to whether or not not only whether of course they they raise rates by 25 basis points In the coming week, but what their guidance is for september 25. Is it done deal? Well, they do 50 I would be surprised if they do But never rule it out But if they do do 50 then they've got to manage the fallout when it comes to Bond yields and that could be a slightly trickier conundrum to address One thing I did forget to mention is uk retail sales the june Thank you at the end of the week Could well see a little bit of a bank holiday bounce And then after the poor number that we saw in May a decline of 0.5 percent there could see a little bit of a platinum jubilee rebound with sales of With sales of food giving the number a little bit of a positive kick higher As we come to the end of q2 in terms of Earnings numbers there's going to be three and i'm going to pay particular attention to this week Just quickly bringing the tesla Tesla graph there we go starting with Royal mail got royal mail coming out those shares are up But they're very very low levels at the moment expectations around royal mail pretty low pretty low It's their first quarter numbers There are concerns about strike action There's already been a work to rule on the part of managers um, and that's currently starting today between the 15th and the 22nd of july And there'll be a complete strike on the 20th to 22nd Of july so this action will serve to cause further disruption To royal mail activities and you can certainly see In this chart here that there is potential for further declines. Nonetheless Royal mail management still feel fairly confident that they can Generate a combined operating profit of 623 million for the new fiscal year So I think it'll be interesting to see whether or not they maintain that guidance Given the current backdrop Obviously higher costs when it comes to energy prices, but also higher costs when it comes to potential salaries And potential redundancies. We've also got our goldman sacks continuing the uk bank earnings theme Big big level. I think the goldman sacks here around about 273 coincides with these these these lows here And those previous peaks there. So that's a bit of a level there for goldman sacks jp morgan this week Um disappointed as did morgan stanley. We've got city group later today They're likely to potentially Pay into similar picture. What was notable was that jp morgan actually stopped their buyback program as a result of concerns about increasing Loan loss present loan loss provisions against a backdrop of rising inflation. So Goldman sacks doesn't have a big retail operation But certainly I think some of the m&a revenues investment bank revenues that we saw big declines There on the back of investment banks that could also be a theme for goldman sacks when they release their numbers on monday Netflix Netflix I don't think it's too fine a point to say Netflix is in big trouble when it comes to What's going to be expected for this week's numbers Certainly, if you look look back at where it was in november The implosion in the share price has been quite something and you can really see where the various profit warnings The earnings numbers came out. So the big question here, I think is What would constitute an upside surprise? Have we hit peak netflix? obviously, I think the emergence of companies like disney plus or disney with with their disney plus offering amazon Paramount plus now Is come to the fore is making things an awful lot more difficult And I think when you look at the amount of money that's being spent amazon spending On a new lord of the ring series called ring of power paramount plus um, it's it's also got a strong catalogue with A new star trek series strange new worlds as well as a new season of star trek new season of star trek discovery Which used to be on netflix and now season four Is no longer on netflix neither of seasons one to three the now on paramount plus so Even though netflix brought forward The latest season of stranger things I think a big win for netflix would be if They didn't lose subscribers in q2. They're certainly expecting to they lost 200 000 customers In q1 against an expectation. They were gained two and a half million And netflix has said it expects to lose another two million subscribers in q2 um Downgrading that from an expectation of plus 2.4 million so hopefully It's load the bar low enough that they Are actual they are actually able to beat expectations The revenues netflix has said it expects to grow its revenues by about 10 percent year over year And can have an operating margin of 19 to 20 percent given current Trends when it comes to inflation This does appear optimistic And the stronger dollar isn't helping the dollar is in now even stronger than it was When we had a profit warning here and we had a profit warning here now Now Netflix is producing Films and tv in more than 50 countries three hours six most popular tv seasons Using non-english language titles. Yeah, it refuses to hedge its us expo us You know, it's fx exposure Why would you not do that when you could potentially make a billion dollars more in revenue by doing such a thing? It makes no sense. Let's talk about A lower cost advertising model. It's teamed up with microsoft To deliver that the big risk with that it risks cannibalizing its higher value subscription model so Netflix big test As we look ahead to the upcoming week can it start to Mitigate some of the losses unpropped and prompt to rebound back above 200 dollars We'll soon find out on the 19th of july tesla Okay, let's get shot of that That appears to have found a base just above 600 dollars The biggest concern that I have about tesla is is elon musk's mind In the game when it comes to tesla Because most of the narrative around elon musk over the past quarter has been over the twitter acquisition, which now looks like it's not going to happen so Tesla's been trading sideways pretty much for the past four or five weeks The disruption in china Is certainly impacted and will have impacted the number of cars that it has been able to deliver Over the past quarter If we look at maintenance shutdowns, we've also seen in berlin As well as obviously shanghai Those those maintenance shutdown shutdowns have also coincided with covid shutdowns so Having delivered a total of nine hundred and thirty six thousand vehicles in 2021 There were high hopes that tesla would be able to get above the million deliveries level in this current fiscal year Now both q1 and q2 deliveries have been disrupted due to supply chain disruptions Which means that it could struggle to hit that target in q1 tesca tesca tesla In q1 tesla Was able to deliver around about three hundred and ten thousand new vehicles In q2 that's fallen back to two hundred and fifty four thousand and obviously in china april Output was one thousand five hundred and twelve with zero exports and in june Tesla managed to deliver seventy eight thousand nine hundred and six so in april Production virtually ground to a halt in china So that will obviously affected its q2 numbers So i think in terms of how it's looking the q3 and q4 If they were able to get production back up to over three hundred thousand A quarter then Obviously one million remains very much in the ballpark Expectations are for profits to come in at a dollar eighty one cents a share But obviously i think the big key support level on tesla is anywhere around these sorts of levels here Six hundred and twenty dollars. So i'm keeping an eye on that when tesla comes to release its numbers later this week If we look at um quickly look at brent crude just as we're tidying things up Some fairly decent support in and around the 200 day moving average We've seen a big sell-off If we break the 200 day moving average then we could well see further declines in brent crude Now obviously if we do see further declines in brent crude That will be because the market perceives that we're going to see a very significant slowdown Going forward nowhere is that better illustrated in This copper chart Where we're starting to see inflationary pressures in commodity prices more broadly Start to diminish quite sharply 20 months low For copper prices. So keep an eye On base metals keep an eye on precious metals more importantly Keep an eye on Agricultural commodities because we've also seen steep falls in the price of corn and wheat And oats and that is playing out in the cmc markets Commodities index which has seen some fairly decent falls Since the peaks back in may and june and again That is likely to have a dilutive effect when it comes to inflation repressions Okay, so ladies and gentlemen, that is very much it For me for this week. Once again, thank you very much for listening I hope you all have a great weekend and are able to Cope with the upcoming heatwave on monday and tuesday until the same time same place next week. Thank you very much for listening It's michael hueson talking to you from cmc markets