Summary: Risk aversion was pared at the start of the new week with Israel’s ground operation in Gaza remaining cautious for now, and US equities rallied despite higher Treasury yields. Dollar was sold, with AUD outperforming as RBA rate hike remains in play. EURUSD moved above 1.06 and EZ GDP and CPI data will be on watch today. Big focus however on Bank of Japan with rising speculation around a policy tweak after a Nikkei report overnight saw USDJPY dip below 149.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: Markets rebounded, driven by advances in mega-cap technology names. Amazon added 3.9%, and Microsoft gained 2.3%. The lower-than-expected Treasury borrowing estimates for Q4, GM's deal with the UAW to end strikes, and the diminishing fear of an escalation in the Middle East conflict boosted sentiment. McDonald's gained 1.7% after reporting revenue and earnings that beat estimates. Regarding earnings, all eyes are now on Apple's results scheduled for Thursday.
Fixed income: Treasuries started weak, with yields rising early in the session after Nikkei reported that the BoJ is considering allowing 10-year JGB yields to exceed 1%. The long end led the market to pare losses when the Treasury announced a lower estimate for its Q4 borrowing at $776 billion, which is below the consensus of $800 billion and the Treasury's July projection of $852 billion. The 2-year yield ended the day 5bps higher at 5.05%, and the 10-year yield climbed 6bps to 4.89%. All eyes are now on the FOMC meeting and the quarterly refunding announcement of 3, 10, and 30-year auction sizes, scheduled for Wednesday.
China/HK Equities: While the broader Hang Seng Index finished unchanged, strong gains in hardware technology stocks boosted the Hang Seng Tech Index, leading to a 1.3% increase. Xiaomi, Sunny Optical, and AAC Technologies surged by approximately 6%. On the other hand, Chinese banks saw a decline of 2-4% after reporting earnings that indicated a contraction in net interest margins. HSBC lost 1.5% following its earnings report, which included setting aside additional provisions for credit losses arising from commercial real estate lending in mainland China.
FX: Dollar was weaker amid a strong risk sentiment to start the week, but month-end flows could be key. AUD led the gains again on the G10 board, as AUDUSD rose to 0.6380 with RBA rate hike still in play. AUDNZD has also broken above 1.09 but 1.10 is key for upwards momentum. EURUSD rose above 1.06 despite both Spanish and German CPI coming in cooler than expected and focus will be on GDP and CPI data out today. GBPUSD also moved above 1.216. BOJ decision is key today and could have repercussions on global markets. USDJPY dropped 1 big figure to 148.80 on Nikkei report overnight, and now trades around 149.
Commodities: As Israel’s ground operation into Gaza remained more cautious that expected, oil markets unwound gains from Friday and both WTI and Brent were down over 3%. Lack of a serious regional impact led to war premium being erased, and central bank meetings from BoJ, Fed and BOE will be in focus this week. Gold also weakened after touching highs above $2000 as safe have bid retreated and US yields rose, but the decline was modest.
Macro:
Macro events: BoJ Announcement and Outlook Report, Chinese Official PMIs (Oct) Manufacturing exp. 50.2 vs 50.2 prior and Services exp. 52.0 from 51.7 prior, EZ Flash CPI (Sep) Core exp. 4.2% YoY vs. 4.5% prior and GDP (Q3) exp 0.2% YoY vs. 0.5% prior, US Employment Cost Index (Q3) exp. 1.0% vs. 1.0% prior
Earnings: Pfizer, AMD, Amgen, Caterpillar
In the news:
For all macro, earnings, and dividend events check Saxo’s calendar.
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Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
