What is happening in markets?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) took a pause in light volume
U.S. stocks sold off in early trading after a solid ADP employment report and ISM Services Index which poured cold water onto the notion of Fed pivot. S&P500 managed to pare losses and settled 0.2% higher while Nasdaq 100 was down 0.1%. Volume was light partly because it was Yom Kippur, a Jewish holiday. Eight of the 11 sectors of the S&P 500 declined with the exception of energy, information technology, and healthcare. Energy stocks were helped by the news that OPEC+ agreed to cut production by two million barrels of crude oil a day. Exxon Mobil (XOM:xnys) and Halliburton (HAL:xnys) rose by 4% and Occidental (OXY:xnys) climbed 2.4%.
U.S. treasury yields (TLT:xnas, IEF:xnas, SHY:xnas) climbed on solid economic data
Yields in U.S. treasuries surged most in the belly of the yield curve, with the 5-year and 10-year yields finishing the session from 11bps to 12bps higher to 3.65% and 3.75% respectively, but a smaller 5bp rise to 4.14% in the 5-year notes. San Francisco Fed President Mary Daly and Altanta Fed President Raphael Bostic pushed back on the market notion of a pivot. Across the pond, the Bank of England did not buy any bonds at the buyback operations.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg) rallied 5.9% to catch up with the gains in the global markets after a mid-week holiday
The Hang Seng Index soared 5.9% to catch up with the S&P 500 Index’s 5.7% rally over the past two days after Hong Kong returned from a public holiday. Weaker U.S. economic data recently have helped fuelled the notion of peak tightening from the Fed and contributed to the turnaround in global stocks this week. Index heavy-weights jumped, HSBC (00005:xhkg) up 5.7%, AIA (01299:xhkg) up 7.4%, Tencent (000700:xhkg) up 5.8%, Meituan (03690:xhkg) up 8.2%, and Alibaba (09988:xhkg) up 8.4%. The resumption of the Beijing Marathon this year on Nov 6 boosted sportswear and textile names, with Li Ning (02331:xhkg) up 10.4%, Anta (02020:xhkg) up 10.5%, Shenzhou (02313:xhkg) up 13.7%. The Beijing Marathon and media stories that some major tourist attractions received high visitor traffic during the Golden Week holiday helped arouse hope of some sort of normalization and boosted mainland catering stocks and Macao casino names. BYD (01211:xhkg) soared nearly more than 9% after the Chinese automaker reported record sales of over 200,000 electric and hybrid vehicles in September, a growth of 183% from last year, and the seventh consecutive month of sales growth. Nio (09866:xhkg) and Li Auto (02015:xhkg) gained from 6% to 8% but XPeng (09868:xhkg) fell 1% as the latter reported a 19% Y/Y decline in vehicle deliveries. Hong Kong local property names were the laggards following the release of the city’s home sales data that registered a 48.1% Y/Y decline in value in September. The mainland bourses remain closed for the rest of the week for the National Day golden week holiday.
Dollar on the backfoot in early Asian hours
The US dollar gains returned on Wednesday as US yields clawed back higher, but was off highs into the NY close and slid further in early Asian trading. Stronger US ISM data and hawkish Fed speak further supported the case for more Fed rate hikes, and the OPEC+ production cut has deteriorated the global inflation picture. EURUSD was therefore unable to move back above parity after testing the key level yesterday, although its back above 0.99 this morning. GBPUSD tested 1.1500 but slid from there amid further concerns on the UK policymakers, as well as a Fitch downgrade of the UK economy. USDJPY stayed short of testing the key 145 level again, with Japan continuing to sound the intervention alarm with warnings such as one from a finance ministry official yesterday saying there is no limitation on funds available for intervention.
Crude oil (CLX2 & LCOX2)
A big production cut from OPEC+ yesterday boosted crude oil prices, with markets getting nervous about further use of energy as a weapon in the war. The move was met with disapproval by many western countries. US President Joe Biden said that the US would release another 10mbbls from its strategic reserve in response to the cuts. At the same time, the European Union announced a new package of sanctions against Russia, including a price cap on oil sales to third countries. The EIA inventory report also reported a crude inventory decline of 1.36mn barrels last week, with gasoline inventories falling to their lowest levels since November 2014. WTI futures rose towards $88/barrel while Brent was above $93.
What to consider?
Saxo’s Q4 2022 Outlook: Winter is coming
In Q4, Europe and the UK brace for the impact of a winter season that will likely bring an economic winter with it as the power and gas crisis reaches peak impact. Figuratively speaking, economic and financial turbulence is creating a volatile, unaccommodating environment for investment. It is however worth keeping in mind that it will be spring after winter. The potential for longer-term investment returns increases as a function of declining asset prices. You can read the Q4 2022 Outlook here and listen to the key highlights of the Outlook here.
OPEC+ production cut to more inflation concerns
A very political move by the OPEC+ to cut production by 2 million barrels/day based on current production baselines. The impact is likely to be around 1 million b/d with the majority currently producing below and would not need to cut. These cuts are to be effective from November, while OPEC+ agreed to extend the cooperation deal until end-2023, and the JMMC will meet bi-monthly with OPEC+ ministers set to meet every six months. The White House was unimpressed, with comments saying that the OPEC+ production cut is a 'clear' indication that the bloc is 'aligning with Russia'. The move is likely to add fuel to the inflation fire globally, putting further downside pressure on growth and suggesting an even stronger dollar and more hawkish Fed.
US ISM services PMI smashed Fed pivot expectations
US ISM services softened slightly to 56.7 in September from 56.9 previously, but was far better than expectations of 56.0. Gains were mostly underpinned by strong employment gains to 53 from 50.2 in August, while business activity slowed to 59.1 from 60.9 and new orders slowed to 60.6 from 61.8. Prices paid also eased, dipping to 68.7 from 71.5, but still showing that prices are picking up, just at a slower pace. This stronger than expected ISM print has smashed expectations of a Fed pivot that were gaining traction after a miss in ISM manufacturing and weaker JOLTs data this week, and an RBA pivot as well.
Solid ADP sets the tone for NFP, and Fed members stay hawkish
ADP data showed an increase of 208k, suggesting demand for workers remains healthy. Next to watch today will be the weekly jobless claims which dipped to sub-200k last week, before the focus turns to NFP data on Friday. Meanwhile, Fed's Daly noted that the Fed is resolute at increasing rates into restrictive territory before holding rates there for a while, pushing back on talk of a Fed pivot. She added that she doesn’t see a rate cut happening next year “at all”. Raphael Bostic sounded similar notes, saying he favors lifting the benchmark to between 4% and 4.5% by the end of this year, and hold it there.
The November 6 Beijing Marathon marked the return of large public events
The 2022 Beijing Marathon is scheduled for November 6 and registration has started. The event will allow 30,000 runners to compete in Beijing after being cancelled in 2020 and 2021. It will be the largest public event being held in the Chinese capital city since the Winter Olympics. Residents from other mainland Chinese cities other than Beijing however are not allowed to attend. Residents of Taiwan, Hong Kong and Macao, and foreigners plus invited “elite” athletes are allowed to participate.
The U.S. Government plans to further restrict China’s access to U.S. semiconductor technology
It is reported that the U.S. Commerce Department will launch additional regulations this week to further restrict the exports of semiconductor technologies to China.
New Zealand’s RBNZ hikes 50 basis points as expected
This was the fifth consecutive meeting to bring a half-point hike and took the official cash rate to 3.5%. The bank signalled more tightening to come in its statement, as it noted that “core consumer price inflation is too high and labor resources are scarce. Still, short NZ rates continue to trade lower, if not falling as rapidly as for Australia after the RBA surprised with only a 25 basis point hike earlier in the week. The AUDNZD rate dropped below 1.1250 at one point overnight from the 1.1350 range before the announcement.
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