Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US and European equity futures trade lower following a negative Monday on Wall Street where the major US indices got dragged down by losses among the Magnificent Seven stocks with Tesla, Apple and Alphabet leading the year-to-date declines. Asia traded mixed following a slew of announcements from China’s NPC, including an ambitious 5% growth target. US Treasury yields rose as the market contemplated another delay in timing of the first US rate cut. Gold nevertheless reached a fresh record closing high while crude eased back following OPEC+ supply cut announcement. Focus on Fed Chair Powells semiannual testimony before Congress on Wednesday and Friday’s US jobs report.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Interesting session yesterday with several stocks seeing large declines across Tesla (-6.7%), Albemarle (-6.5%), Alphabet (-2.8%) while the broader market was only down slightly (S&P 500 -0.2%). In today’s session, Hang Seng futures are where the action is down 2.5% driven by declines across technology stocks such as Meituan (-5.7%), Alibaba (-3.5%), and Tencent (-3.1%). This bifurcation in equity markets could be an early sign of the current changing underneath the surface of broader equity indices and as we wrote last week US equity valuations are getting worringly high. On the positive side, Sea Ltd reported better-than-expected revenue and adjusted EBITDA with shares gaining 5.6% reaching the highest levels since August.
FX: The dollar treaded water again to start the week, amid a lack of clear data or commentary that could change the market narrative for now. Under the surface, however, there were significant crosscurrents, with AUD sliding to lows of 0.6480 as Chian set a modest growth target of around 5% GDP growth for this year. Sterling remained resilient ahead of Hunt’s budget announcement on Wednesday. GBPUSD touched the 1.27 handle, which has been a major resistance in February, but a break above could bring 1.28 in focus. EURUSD also rose above 1.0860 ahead of Thursday’s ECB meeting, while EURCHF rallied to 0.9620 amid the continued disinflation trend in Swiss CPI. USDJPY was steady around 150.50 despite a hot Tokyo CPI.
Commodities: Gold broke 2088 resistance - now support - to reach a fresh record closing high despite a run higher in yields, suggesting continued demand from momentum buyers and low short-selling appetite at a time of heightened geopolitical tensions along with market’s continued optimism around the rate cut trajectory. Crude oil prices eased from the highs seen following the announcement of OPEC+ production cuts, and China’s policy direction along with US jobs data and Powell’s testimony will be key this week. Natural gas rose to near USD2 resistance after EQT joined two other US production companies in announcing temporary production cutbacks to lower nationwide stockpiles after they ballooned to 26.5% above the long-term average.
Fixed income: The US yield curve bear-flattened yesterday following Atlanta Fed President Bostic remarks that a rate cut will be delivered in the third quarter of the year followed by a pause. Front-term yields rose as much as 8bps, while 10-year yields closed the session around 4.22%, higher by 4bps. The high-grade primary market is also putting pressure on US Treasuries as 14 companies tapped the market for more than $21 billion yesterday. Demand for T-Bills is also waning, with yesterday's three- and six-month bill auctions recording the lowest indirect bidders demand in months at 50.9% and 51.7% respectively, showing that investors are unsure the FOMC will be dovish this month. Gilts underperformed European sovereign bonds as traders are waiting for the UK budget on Wednesday. This week, the focus is on US Services ISM, Super Tuesday, Powell’s congressional testimony, and nonfarm payrolls on Friday. In Europe, the attention turns to the UK budget and the ECB meeting on Thursday, where inflation projections are expected to be revised downward, boosting European sovereigns (for a preview, click here).
Macro: Fed’s Bostic was hawkish on the margin. He said he would not anticipate that cuts, when they start, would be “back-to-back”. The Atlanta Fed President noted a third quarter cut will likely be followed by a pause, but he still expects two 25bps rate cuts this year (current market pricing has 84bps of cuts in 2024, vs the 75bp suggested in the Fed December Dot Plots). Switzerland February CPI came in a notch higher than expected, albeit still cooling from January. Headline inflation was at 1.2% YoY vs. 1.1% expected and 1.3% prior. Core CPI slowed to 1.1% YoY from 1.2%, and the odds of a March rate cut reduced to less than 50%. Still, about 35bps of easing is priced in by June. Japan’s Tokyo CPI was also a hot read, although softer base effect underpinned, headline CPI rose to 2.6% YoY from an upward revised 1.8% YoY in January, coming in above 2.5% expected. Core measures were in-line with expectations, coming in at 2.5% YoY for core and 3.1% for core-core, which is a further reason to expect a change from the BoJ in either March or April. China’s National People’s Congress (NPC) started today and will conclude on March 11. The announcement of not holding a premier press conference, against the norm in the past three decades, stirred up some speculation among investors and dampened the already low expectations of aggregate demand-boosting measures from the NPC. In his Government Work Report this morning, Premier Li Qiang set targets of around 5% for GDP growth (higher than the 4.6% market consensus), 3% for on-budget fiscal deficit, 3% for CPI, and a 5.5% unemployment rate. For more details, read our preview and stay tuned for updates from us.
Technical analysis highlights: S&P 500 uptrend stretched but could reach 5,176. Nasdaq 100 spiked higher, short-term potential to 18,593-18,763. DAX uptrend could have exhausted. EURUSD range bound 1.08-1.09. USDJPY dipped below support at 149.75 but closed above, could be caught range bound 149-151. EURJPY uptrend likely to 164.20. GBPUSD range bound 1.2535-1.27. USDCHF rejected at key resist at 0.89. USDCAD likely to test resist at 1.3624. AUDUSD resuming downtrend, potential to 0.64. Gold uptrend, likely to test previous peak at 2,134. WTI oil uptrend but struggling for momentum, potential to 87-90, resistance at 82.56. US 10-year T-yields below key support at 4.20, next 4.11 but expect range bound
Volatility: On Monday, the VIX increased to $13.49, marking a rise of +0.35 (+2.90. Accompanying this, the VVIX advanced to 79.41 (+1.73 | +2.23%), while the SKEW index decreased to 145.94 (-4.48 | -2.98%), suggesting a reduction in the market's anticipation of extreme events. The day's potential for increased volatility is eyed around the ISM Non-Manufacturing PMI release. Noteworthy earnings reports due include Nio and Target ahead of the market open, with CrowdStrike's results expected after the close, events that are closely watched for their possible impact on market dynamics. In futures trading, VIX futures moved up to 14.150 (+0.120 | +0.86. Meanwhile, S&P 500 futures dipped to 5127.00 (-11.25 | -0.22%) and Nasdaq 100 futures fell to 18182.75 (-79.25 | -0.44%). Monday's most actively traded stock options were, in order: TSLA, NVDA, AAPL, AMD, INTC, GOOGL, MARA, NIO, PLTR, and SMCI.
In the news: Tesla shares skid after China sales fell to the lowest level in over a year (Reuters), Apple hit with $2 billion EU antitrust fine in Spotify case (Reuters), China Sets Ambitious GDP Growth Target of Around 5% at NPC 2024 (Bloomberg), Bitcoin bursts above $68,000, record high comes into view (Reuters), Japan’s Nikkei 225 Breaches Key 40,000 Level for First Time (Bloomberg), Houthis Threaten More Red Sea Attacks (OilPrice), Netanyahu rival’s visit to US highlights cracks within Israel’s wartime leadership (ArabNews).
Macro events (all times are GMT): Feb PMIs (Final) from Italy (0745), France (0950), Germany (0755), and Eurozone (0800), UK (Feb Final) PMIs (0830), Eurozone PPI (Jan) exp. -0.1% & -8.1% vs –0.8% & -10.6% (0900), US Factory Orders (Jan) exp –3% vs 0.2% (1400), US Durable Goods (Jan final) exp –6.1% vs –6.1% (1400), US ISM Services (Feb), exp 53 vs 53.4 prior (1400), APIs weekly crude and fuel stock report (2030).
Earnings events: Today’s earnings focus is NIO and Crowstrike. With Tesla’s 6% decline yesterday and the recent trouble at EV maker Fisker there is enormous pressure on the EV industry. NIO had a tough Q4 on deliveries and the market is nervous about the lack of new EV models, so NIO must deliver something positive on the outlook to avoid more downside pressure. Crowdstrike is enjoying strong demand in cybersecurity and is expected to deliver revenue growth of 32% YoY and EPS of $0.83 up from -0.19 a year ago.