Global Market Quick Take: Europe – October 23 2023

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

Equities: Stocks had a terrible ending to last week with S&P 500 futures declining 3.5% in the previous three trading sessions driven by the rally in the US 10-year yield, almost touching the 5% yield level, and the rising geopolitical risks in the Middle East as Israel is preparing an invasion of Gaza City. The Q3 earnings season has been mixed so far with around 17% of the S&P 500 companies having reported with around equal upward and downward revisions to earnings. This week is the key earnings week with earnings releases from important US technology companies such as Microsoft (Tue), Alphabet (Tue), Meta (Wed), Amazon (Thu), Mastercard (Thu), Exxon Mobil (Fri), and Chevron (Fri).

FX: The dollar traded a touch firmer in Asia with USDJPY on intervention alert after briefly trading above 150 on a report the BOJ may review its yield-curve control policy.  AUDUSD continues to test a hold of the 0.63 handle and Q3 CPI this week will be key, GBPUSD reversed from 1.21 support to reach back above 1.2160 while EURUSD still struggling to break above 1.06. EURCHF pushing above 0.945 and USDCHF above 0.8940 amid improved risk sentiment.

Commodities: Crude oil prices ended lower on Friday but recorded a second consecutive weekly gain as the risk of supply disruptions hangs over the market. But risk sentiment seems to be taking a breather for now, as Israel has delayed its ground invasion in Gaza amid hostage talks. Some profit taking also emerging in gold following an 8% two-week rally that was driven by concerns the US bond market slump may ‘break’ something. Key support at 1950 and 1931. Copper still testing $3.54 key support amid rising LME inventories, high borrowing costs, geopolitical uncertainties, and China’s prolonger property market slowdown.

Fixed income: long term yields continue to rise on both side of the Atlantic. This week, the bond selloff might continue as Federal Reserve members entered a blackout period and PMI data are released tomorrow, US GDP on Thursday and the PCE deflator on Friday. At the same time the Treasury is selling 2-year notes tomorrow, 5-year notes on Wednesday and 7-year notes on Thursday. We expect the yield curve to continue to steepen, with the front part of the yield curve remaining anchored, and long-term yields continuing to rise. We favour quality and short duration.

Volatility: Last week proved to be a volatile week for the stock market with the VIX ranging from below 17 to finally end the week at $21.71, levels we’ve not seen since March this year. VIX futures point a little lower towards 20.60 this morning. Big tech earnings this week could lead to another volatile week for the market. Options volatility suggests that expected moves will be considerable, once again: + or – 80 points for the S&P500 (or about 1.9%) and 371 points for the Nasdaq (or about 2.54% up or down).

Technical analysis highlights: Stock markets bearish: S&P500 support at 4,195. Nasdaq 100 support at 14,505 and 14,254. DAX key support at 15,482. EURUSD likely to have another go at strong resistance at 1.0635. USDJPY resistance at 150.16. Gold rejected at 1,985, expect correction to 1,945-1,925. US 10-year T-yields uptrend stretched, if breaking above 5% room to 5.25%

Macro: UK retail sales was weaker than expected, coming in at -1.0% m/m ex-auto fuel vs. +0.6% prior and -0.4% expected. On Friday, Cleveland Fed president Loretta Mester (2024 voter) said that “From my forecast I would say we are within one of the peaks, then we can hold it there for a while.” Nikkei reported that BOJ has begun to discuss another tweak possibility in YCC. Move may be discussed at next policy meeting, though Nikkei said that some officials remain cautious and see a need to monitor wage increases. 

In the news: China launches investigation into iPhone maker Foxconn, says state media (FT). The return of the rice crisis (FT’s Big Read). Israel Latest: Hostage Talks Delay Invasion as Gaza Awaits Aid (Bloomberg). BOJ May Review Yield-Curve Control Policy as Rates Rise: Nikkei (Bloomberg). Philips is raising full-year revenue and profit target on improved supply chain conditions while orders are down sequential (Bloomberg).

Macro events (all times are GMT): Chicago Fed National Activity index (Sep) exp -0.14 vs -0.16 prior. Note no more speeches from Fed members as the blackout period ahead of the November 2 FOMC meeting has started.

Earnings events: Sandvik reports Q3 earnings results at 09:30 GMT with estimated revenue growth at 9% y/y and EBITDA SEK 7.8bn up from 5.2bn a year ago. Cadence Design Systems reports Q3 earnings results today (US aft-mkt) with estimated revenue growth of 12% y/y and EBITDA $440mn up from 307mn a year ago.