Global Market Quick Take: Europe – October 5 2023
Saxo Strategy Team
Summary: Weaker than estimated ADP employment change yesterday extended the reversal in US bond yields pushing the US 10-year yield below 4.75% again which lifted equity markets. Oil markets tanked more than 5% yesterday as demand worries increased in the US after inventory data showed weaker seasonally demand for gasoline. The lower bond yields also halted the advance in the USD.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures bounced back yesterday pushing back to around the 4,300 level as weaker than estimated ADP employment figures for September reversed the rally in US bond yields. Equities are still in a downtrend, and we remain defensive on equities favouring sectors such as health care, consumer staples, utilities, and energy.
FX: The relief in bonds brought a sell-off in the USD, with GBP and CHF posting the biggest gains on the G-10 board. GBPUSD rose to 1.2177 from lows of 1.2037 while EURUSD rose back above 1.05. The respite in US yields did not however bring much of a relief to JPY, with USDJPY trading close to 149 before falling slightly to ~148.50 levels in Asia. AUDUSD also bounced higher from 0.63, extending the gains to 0.6370+ with NZD just above 0.5940. CAD and NOK underperformed due to the sharp plunge in oil prices.
Commodities: Crude oil prices saw a sharp plunge, down 5% in its biggest slide in a year, bringing WTI below $85 and Brent below $85. Demand risks were back in the focus as US labour data showed cooling, and inventory data also signalled weak seasonal demand for gasoline. EIA data showed 2.2mln barrels crude stock draw offset by a net 5.2mln barrel build in the products. Meanwhile, the OPEC+ JMMC meeting affirmed no change to the group's output policy, as heavily touted. The drop came despite Saudi confirming it would continue its voluntary 1mln barrels/day supply cut until the end of 2023.
Fixed income: US Treasuries found relief yesterday as private payrolls for September surprised on the downside. Yet, the yield curve continued to steepen as front-term yields dropped faster than long-term yields. Dropping oil prices and a weak non-farm payroll report on Friday could add to the rally, but Treasuries are headed towards an intense week of T-bills and coupon supply which could push again long-term yields higher. We expect yields to continue to soar with 10-year US Treasury yields peaking around 5%-5.25%. In the meantime, financing conditions will tighten further putting risky assets under pressure. We therefore remain cautious, and favour low duration, high-grade bonds.
Volatility: The VIX Index came lower yesterday to around the 18.5 level and the VIX futures forward curve has flattened significantly recently indicating an increase in risk adverse behaviour by investors, but still not in panic mode.
Macro: US ADP Employment change for September at 89K was the lowest since January 2021 and down from 180K in the previous month and way below estimates of 150K. This negative surprise because the key driver in yesterday’s trading session pushing bond yields lower. US ISM Services Index was in line with consensus falling from the month before.
In the news: Only a crash in equities can stop the rally in bond yields (Bloomberg). The rising yields mean that US fiscal deficits finally matter to investors (WSJ). Birkenstock IPO in focus scheduled for pricing next week on Tuesday (Reuters).
Technical analysis: S&P 500 support at 4,212. DAX bouncing from support at 14,933. EURUSD downtrend exhaustion, likely correction to 1.06. GBPUSD likely correction to 1.23, support at 1.20. USDJPY could see correction, key support at 147.30. Gold strong support at 1,800. WTI Crude oil correction close to be done at 84.25. US 10-year yields expect correction down to 4.56%, still potential to 5-5.20%
Macro events: US Initial Jobless Claims (1230 GMT) est. 210K vs prior 204K, US Continuing Claims (1230 GMT) est. 1671K vs prior 1670K.
Earnings events: Conagra Brands reports FY24 Q1 (ending 31 August) results at 1130 GMT (bef-mkt) with analysts expected revenue growth of 2% y/y and EPS of $0.59 up 4% y/y.
For all macro, earnings, and dividend events check Saxo’s calendar.