Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
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The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: The S&P 500 Index tumbled to a nadir unseen in over a fortnight on Thursday, briefly pausing due to a pricing hiccup, amid persistent anxieties that the Federal Reserve may persist with its stringent monetary stance, casting a pall over market sentiment.
Dragging the index down to 5,235 were notable declines in the technology sector. This was exacerbated by a slowdown in the approval process for export licenses by U.S. authorities, impacting prominent chip manufacturers like Nvidia Corp. and Advanced Micro Devices Inc. These firms have reportedly been facing delays in obtaining permissions necessary for shipping advanced AI accelerators to the Middle East, insiders say.
In contrast, Asian equities are poised for an uptick on Friday, buoyed by the latest tranche of U.S. economic figures which suggest a deceleration in economic activity, potentially bolstering arguments for the Federal Reserve to commence a rollback of interest rates within the current year. Futures markets signal a positive opening for stocks in Australia, Japan, and Hong Kong, while the Golden Dragon Index—a barometer of Chinese firms traded on the Nasdaq—saw an ascent of over 1%. Meanwhile, futures tied to U.S. equities dipped following a downturn in Dell Technologies Inc.'s stock during after-hours trading, as the company's reported revenue growth fell short of investor expectations.
FX: The US dollar slumped again yesterday, erasing Wednesday’s gains as US economic data sent dovish signals and brought yields lower. Fedspeak had little new message and continued to reiterate high-for-longer. USDJPY slid from highs of 157.60+ to dive back below 157 handle as intervention threat picked up, but yen still continues to be a favored funding currency for carry trades as we discussed here, and pair was back higher in early Asian trading. AUDUSD took a look below 0.66 but bounced back higher to 0.6630 in the overnight session, while NZDUSD ended the session broadly unchanged and trades close to 0.6120. Eurozone inflation print is on the radar today ahead of the likely ECB rate cut next week, and EURUSD traded higher to 1.0830+ levels.
Commodities: Gold prices inched up 0.2%, reaching $2,341.92 per ounce and crude prices extended their decline for a third consecutive session, with market indicators pointing to excess supply ahead of an upcoming OPEC+ gathering this weekend.
West Texas Intermediate crude dipped below the $78 mark, following a 1.7% drop on Thursday, and Brent crude hovered around $82, with both benchmarks on track for their second successive monthly decline. The immediate Brent futures spread shifted into a contango—a market scenario where near-term prices are lower than those in future months—for the first time in months, signaling concerns of a supply glut.
Copper continued to backpedal from its peak, while aluminum receded from its highest level in two years, as traders seized the opportunity to realize profits following a sustained surge in the industrial metals sector. In a widespread pullback on the London Metal Exchange, it witnessed declines for the sixth session out of seven, shedding up to 3.8%.
Fixed income: A day before the Federal Reserve is set to review its preferred inflation metric, new data indicated that the U.S. economy expanded at a more modest rate, with revisions suggesting both consumer spending and inflation have moderated. This economic downshift may strengthen the argument for the Fed to begin reducing interest rates within the year. However, the prospect of subdued consumer spending could raise red flags for U.S. businesses. In the bond market, yields on two-year Treasury notes fell by five basis points to 4.92%.
Market participants are also closely monitoring the Bank of Japan for any signs of adjustments in its bond-buying activities and its strategy for June, alongside the release of Tokyo's May inflation figures, which could provide clues about the BOJ's trajectory toward policy normalization. Additionally, traders are keeping an eye on the Ministry of Finance's currency intervention records, especially with the yen hovering near the 157 level against the dollar—a threshold where Japanese authorities are rumored to have previously intervened to bolster the currency.
Macro:
Macro events: China PMIs (May), EZ Flash CPI (May), US PCE (Apr), Canadian GDP (Q1), US Dallas Fed (Apr).
Earnings: BRP, Genesco
News:
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