Global Market Quick Take: Europe – 13 March 2024

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

Equities: Despite a US February inflation report showing core services inflation increasing to 5.8% YoY and the US 10-year yield increasing 6bps during the session, the US equity market continued its ascent. Nasdaq 100 futures reached a new high gaining 1.4% and today Nasdaq 100 futures have pushed beyond the 18,500 level reflecting strong sentiment, but also worrying signs of speculative fever. Inditex has reported earnings in Europe this morning with Q4 revenue and EBIT in line with estimates. The Spanish fast fashion retailer is raising 2023 dividends to €1.54 per share up 28%. Adidas is disappointing in its Q4 earnings release with a 2024 outlook on operating profit at €500mn vs est. €856mn.

FX: The dollar struggled to hold onto gains seen following the hot CPI report, leaving it only small up on the week with pockets of strength seen primarily against the NOK, GBP and JPY. The Japanese yen weakened again on the rise in US yields, and USDJPY rose for the first time after five days of declines, but with a sustainable wage growth cycle taking hold, traders will likely bet on more yen upside in anticipation of an imminent move from the Bank of Japan. GBPUSD reversed back towards 1.28 after touching lows of 1.2746 after wage data showed some signs of cooling, creating scope of a les hawkish BOE next week.

Commodities: Gold traded lower following the US CPI print (see below) and as the recent surge was driven by momentum-driven speculators, a period of consolidation can now be expected ahead of next week’s FOMC meeting. ETF investors reduced holdings by 1.2 tons bringing the YTD reduction to 114 tons. Range bound crude received a boost after the API reported an across-the-board inventory reduction, but upside capped with the EIA seeing US production rising faster than previously expected and OPEC said Iran was producing 200k b/d over its limit. Industrial metals reached a YTD high with copper supported by supply issues and China smelters discussing cutting production to lift processing charges.

Fixed income: Higher-than-expected US headline and core CPI showed that inflation continues to be persistent, and it will be carefully considered at next week’s FOMC meeting. The dot plot shows three rate cuts for this year. While two cuts can be delivered in November and December, the Fed is unlikely to start cutting rates during the US election campaign in September. If the dot plot continues to show three rate cuts for this year, it means the Fed will need to begin cutting rates in July or June. With inflation remaining persistent, the bond market would see the Fed committing a policy mistake and demanding a higher return for holding US Treasuries. On the back of the CPI report US Treasuries sold off with 2-year yields up by 5bps and 10-year yields up by 5.4bps. To contribute to the bear-steepening of the yield curve was a mediocre 10-year US Treasury auction, which showed weakness in demand, and tailed by 0.9bps. Today’s focus is on the 30-year auction, which will provide a better insight into appetite for duration extension. To learn more about it click here.

Macro: US CPI was modestly hot again for February. Headline CPI rose 3.2% YoY vs. 3.1% expected and previous and was up 0.4% MoM as expected and 0.3% prior. Core rose 3.8% YoY from 3.9% previously but was higher than 3.7% forecast. Core MoM also exceeded consensus expectations to come in at 0.4%. The annualised measures rose, with the core CPI 3mth annualised rate ticking up to 4.1% from 3.9%, and the 6mth rising to 3.8% from 3.5%. These numbers have dismissed the argument that January’s hot print was a one-off seasonal effect and raised concerns on the disinflation trend. But the beat wasn’t strong enough to bring a hawkish shift in Fed expectations with the first rate cut only due in June/July and plenty of data to chew on before that. UK labor market data for the three months ending January showed that labor market is cooling, even as it remains tight by historical standards. Wage growth, excluding bonuses, came in softer than expected at 6.1% YoY (vs. 6.2% exp) in the three months to January. In the same period, Average Earnings growth, including bonuses, eased to 5.6% from the prior reading of 5.8% and expected growth of 5.7%. The unemployment rate also increased to 3.9% unexpectedly in the three months to January.

Technical analysis highlights: S&P 500 & Nasdaq 100 Bearish top and reversal pattern. Key support for S&P 500 and 17,808 for Nasdaq 100. DAX still uptrend key support at 17,620. Below expect sell-off to 17,326-17,118.
EURUSD rejected at 0.618 retracement at 1.0970, expect minor correction but likely to push higher. USDJPY bouncing but must break above 148.20 to resume uptrend. EURJPY rebounding from 0.618 retracement at 160.23, resuming the uptrend. GBPUSD uptrend but minor correction, potential to 1.2945-1.30. AUDJPY is likely to resume an uptrend, close above 98.20 will confirm.  Gold correction unfolding could test support at 2,134, possibly 2,115. Silver rejected at resistance at 24.60, could see setback to 24 before resuming uptrend. US 10-year T-yields back above 4.10, expect range bound between 4.00-4.30 

Volatility: Yesterday, in the aftermath of hotter-than-expected CPI figures, the VIX notably decreased to $13.84 (-1.38 | -9.07%), highlighting a significant reduction in market volatility. This was paralleled by a huge (expected) drop in the VIX1D to 10.45 (-8.74 | -45.54%). The VVIX also saw a notable decrease to 83.76 (-5.21 | -5.86%), while the SKEW index remained almost unchanged at 142.23 (-0.04 | -0.03%), indicating ongoing concerns about potential outlier events despite the general volatility drop. Contrastingly, VIX futures experienced a rebound overnight, climbing to 15.200 (+1.240 | +8.88%), pointing to anticipations of higher volatility ahead. Meanwhile, S&P 500 and Nasdaq 100 futures showed marginal adjustments, to 5244.00 (+2.75 | +0.06%) and 18487.00 (+9.75 | +0.05%) respectively, indicating a wait-and-see approach in equity markets. Tuesday's options trading was led by, in order: TSLA, NVDA, AAPL, AMD, META, ORCL, BA, PLTR, AMZN, and MSFT.

In the news: A focus at the next Fed meeting will be whether most officials continue to expect three cuts this year—or fewer (WSJ), BOJ to offer guidance on bond buying pace upon ending YCC – sources (Reuters), How TikTok Was Blindsided by U.S. Bill That Could Ban It (WSJ), IBM is slashing jobs in marketing and communications (CNBC)

Macro events (all times are GMT): UK Industrial production (Jan) exp flat & 0.8% vs 0.6% & 0.6% prior (0600), Eurozone industrial production (Jan) exp. -1.8% vs 2.6% prior (0900), EIA’s weekly crude and fuel stock report (1330)

Earnings events: In Europe, the key earnings to watch today are Inditex and Adidas, while in the US session focus is on UiPath as the company is part of the AI cluster of stocks. Analysts expect UiPath to report FY24 Q4 (ending 31 Jan) revenue growth of 24% YoY and EBITDA of $82mn up from $-27mn a year ago.

• Today: Inditex, Foxconn, Snam, Geberit, Lennar, Volkswagen, Adidas, E.ON, Dollar Tree, Williams-Sonoma, UiPath
• Thursday: AIA Group, East Money Information, Ping An Bank, Hapag-Lloyd, Verbund, Adobe, Ulta Beauty, Wheaton Precious Metals, Bollore, Dollar General, RWE, Swiss Life, Rheinmetall
• Friday: CATL, Vonovia, Jabil