Global Market Quick Take: Europe – 6 November 2023
Saxo Strategy Team
Summary: US and European equity futures traded steady overnight while Asian shares started the week catching up last Friday’s rally in US stocks and bonds as investors grew increasingly confident that interest rates are near their peaks. Since Wednesday’s FOMC meeting, the policy sensitive US 2-year yield has dropped 25 bps to 4.87%, while the dollar trades lower by 1.5%, both developments supporting the current risk on sentiment across markets. Crude remains stuck in the mid-80's with gold edging lower on profit taking following a near record buying spree from speculators.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: The combination of good earnings season that has painted a picture of a robust earnings growth, dovish signals from the FOMC last week, and softer labour market data on Friday have created positive backdrop for equities. In fact, last week was the best cross-asset week this year. Risk-on sentiment has been most clear in segments such as the the ARK Innovation ETF that surged by nearly 15% in two days, with a 5.6% increase on Friday alone. This Monday morning Asian equity futures have caught up with the Friday action in US equities while US and European equity futures are up around 0.1%.
FX: Friday’s weaker than expected USD NFP supported speculation the Fed is done, and it drove the Dollar index to a six-week low towards support around 104.75. NZDUSD climbed higher to test the 0.60 resistance and AUDUSD rose above 0.65 with RBA rate hike still in play for tomorrow. EURUSD surged above 1.07 as Lagarde said the ECB is determined to bring EU inflation down, adding that she was not worried about political backlash. USDJPY slid below 149.50 earlier only to rise back higher later as BOJ’s Ueda reaffirmed a dovish posture.
Commodities: Brent crude trades near $85 after falling 5% last week on a combination of rising demand concerns and fading geopolitical risks. Prices edged higher overnight after Saudi Arabia and Russia reaffirmed supply cuts until yearend. Meanwhile, prospect of an end to tighter monetary policies helped boost sentiment across the industrial metal complex last week, while gold is currently being weighed down by profit taking from speculators who recently bought a near record amount in the futures market. Last week's top performer was Arabica coffee which surged 6% after stockpiles plunged to a 24-year low.
Fixed income: The US Treasury yield curve bull-flattened last week following a dovish Federal Reserve and weak economic data. Two-year yields dropped by 15bps to 4.84%, while the 10-year yield slid by 9bps to 4.57%. The 30-year yield, which dipped as low as 4.67%, subsequently reversed and retraced most of the movement to settle at 4.77%, only 3bps lower than the previous close. The market is now nearly pricing that the Fed has finished raising rates, and what may follow are 100bp cuts in 2024, starting from June. That will pave the way for lower yields in the front part of the yield curve. On the other hand, long term yields might reverse last week’s drop as supply-demand dynamics remain unbalanced, with the US Treasury selling 3-, 10- and 30-year notes this week by the largest amount since 2021. We maintain the view that the Fed has completed its rate hikes, and the yield curve tends to continue to steepen.
Volatility: Last week saw a considerable decline in the VIX, starting the week at $21.13, while ending at $14.91, a drop of almost 30%. A confluence of macroeconomic events and favorable earnings reports dispelled investor fears and uncertainty, driving down the VIX and boosting stock prices. With such steep rise in stocks last week, it seems that a repeat of a situation like this, is unlikely this week. At least that is what the market is showing if we look at the expected moves for the coming week; S&P 500: + or – 53.19 (+/- 1.22%), compared to +/- 89.46 (2.17%) last week; Nasdaq 100: + or – 314.82 (+/- 2.08%), compared to +/- 398.07 (2.80%) last week. Reviewing these numbers implies that the market is expecting about 40% less volatility this week, compared to last week. This morning VIX futures were marginally lower (-0.100/-0.63%) after their overnight session, S&P 500 and Nasdaq futures show a similar image after their opening session of the week: +4.5 (+0.10%) and +11.25 (+0.08%) respectively.
Technical analysis highlights: S&P 500 rebounded strongly with strong resistance at 4,400. Nasdaq 100 testing falling trendline. DAX resistance at 15,280. EURUSD resistance at 1.0765. GBPUSD broken resistance at 1.2337 could move to 1.2475. USDJPY correction strong support at 148.80. Gold uptrend but expect correction possibly to 1,935. US 10-year T-yields key support at 4.50
Macro: US non-farm payrolls missed expectations. Headline rose 150k (prev. 297k revised down from 336k) shy of the expected 180k. Meanwhile the unemployment rate ticked higher to 3.9% (prev. & exp. 3.8%) and wages rose 0.2% M/M (prev. & exp. 0.3%) and 4.1% Y/Y (prev. 4.3%, exp. 4.0%). US ISM services fell to 51.8 from 53.6, and beneath the expected 53.0. Business activity and employment dropped to 54.1 from 58.8 and 50.2 from 53.4, respectively, while new orders jumped to 55.5 from 51.8 and prices paid moved marginally lower to 58.6 from 58.9.
In the news: Warren Buffett’s Berkshire Hathaway ended the third quarter with a record cash pile and reported a deeper net loss due to the sputtering stock market rally (WSJ), Lagarde Says ECB Will Get Inflation Down to 2% Target in 2025 (Bloomberg), China Pledges to Speed Up Fiscal Spending to Boost Economy (Bloomberg). Ryanair expects first ever dividend after good summer (Bloomberg).
Macro events (all times are GMT): German Industrial Orders (Sep) exp –1.5% vs 3.9% prior, EZ Final Services PMIs (Oct) exp 47.8 vs 47.8 prior.
Earnings events: Key earnings today Itochi, Ryanair, TripAdvisor, Teradata, Vertex Pharmaceuticals, and DBS Group. Our focus is on Vertex Pharmaceuticals, which reports Q3 earnings after the US market close with analysts expecting revenue growth of 7% y/y and EBITDA $1.28bn up from $1.22bn a year ago.
For all macro, earnings, and dividend events check Saxo’s calendar