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Global Market Quick Take: Europe – October 16 2023

Macro 3 minutes to read
Saxo Be Invested
Saxo Strategy Team

Summary:  European and US equity futures trade steady following declines in Asia after markets there responded to Friday’s decline by the S&P 500. Focus on the Middle East where efforts to prevent further escalation of the Israel-Hamas conflict continue, the result being a small rise in US Treasury yields following Friday’s safe haven softness. Crude oil prices hold above $90 following Friday's surge with gold lower as the short covering rally runs out of steam. Geopolitical fears also included announcement of expanding US curbs on China’s chipmaking and overshadowed the strong start to the US earnings season with big banks reporting strong results but with a downbeat outlook.

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

Equities: Stocks fell on Friday with the Nasdaq 100 down over 1% as big tech led the sell off on concerns a widening conflict in the Middle East could drive up oil prices and tip the global economy into a recession. The earnings season gets under way in earnest this week after JPMorgan and Wells Fargo both reported strong results but with a downbeat outlook. In focus this week we have Goldman Sachs and Bank of America on Tuesday followed by Morgan Stanley, Netflix and Tesla on Wednesday. 

FX: Risk aversion seen in the FX markets on Friday amid concerns of widening conflict in Gaza. Dollar extended gains, as did Swiss franc although some reversals were seen in the Asian session. EURCHF slid below 0.95 to dip to its lowest level in over a year, although bid in JPY was far more contained as USDJPY still trades around 149.50. Risk currencies were hit badly on Friday and NZDUSD plunged below 0.59 handle, although a recovery was seen this morning on reports of opposition’s win in the weekend elections, as we discussed in this FX note. The euro meanwhile remains stuck in downtrend that currently offers resistance at 1.06.

Commodities: Brent trades near $91 after jumping by more than 5% on Friday amid concerns of escalating tensions in the Middle East and especially with Iran’s foreign minister saying that others in the region were prepared to act. Gold spiked 5.5% last week but with safe haven and not least short covering from speculators being the main drivers, the risk of a correction remains, especially with ETF investors not yet showing any signs of involvement following months of selling. 

Fixed Income: this week, the bond market is monitoring US retail sales on Thursday, the 20-year US Treasury auction on Wednesday, and Powell’s speech on Thursday. Yet, wages and CPI numbers in the UK will also be in focus with China’s GDP and Japan’s inflation data. Following last week’s US Treasury auctions, we remain concerned about for Treasuries demand, especially considering this week’s 20-year bond sale, a tenor normally disliked by investors. As long-term Treasuries yields remain in an uptrend, we remain cautious, favoring quality and the short part of the yield curve.

Volatility: Fear of escalation in Israel and Gaza made the VIX go up on Friday, pushing it from below the 17 marks to above 20, ending around $19.30. With an expected move of + or – 83 points on the SPX for this week (or about 1.9%), and even more on the Nasdaq (+ or – 2.14%), the week ahead has a volatile outlook. With earnings season starting to pick up momentum, eyes are on some of the big names such as TSLA and NFLX. The latter is clearly showing some rise in its implied volatility rising to nearly 50%, up from around 35% a month ago. With a put/call ratio of 0.95, the market is unclear about its outlook for the upcoming earnings-publication.

Macro: US headline prelim UoM for October fell to 63.0 from 68.1, and way beneath the expected 67.0 driven by a fall both in conditions and expectations to 66.7 (prev. 71.4, exp. 70.3) and 60.7 (prev. 66.0, exp. 65.7), respectively.  Fed’s Harker (2023 voter) said the Fed is likely to be done with rate hikes and he supports a higher for longer interest rate stance but can't say for how long. Impending Israeli invasion into Gaza continued to spur risk aversion on Friday and into this morning. Key focus remains on how this affects the Middle East region and whether Iran is drawn into the conflict. Deflation fears returned in China, with September CPI at 0% YoY (vs 0.1% YoY and 0.2% expected) and PPI showed a larger-than-expected decline of 2.5% YoY (-3.0% last and -2.4% expected). More details here.

In the news: US Will Tighten Curbs on China’s Access to Advanced Chip Tech (Bloomberg), New Zealand Opposition Wins Election as Labour Ousted From Power (Bloomberg), US Banks Brace For New Rules, Loan Losses After Earnings Windfall (Bloomberg). Polish nationalists PiS on brink of losing power, exit poll shows (Reuters)

Macro events: US Empire Manufacturing (Oct) exp. -6 vs 1.9 prior, Philadelphia Fed President Harker speaks on the economic outlook (1430 GMT)

For all macro, earnings, and dividend events check Saxo’s calendar and Peter Garnry’s earnings update here


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