Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: All major indices are down across the board following Israel’s attack deep into Iran in a retaliation move from Iran’s recent missile attack on Israel. Japanese equities are down 2.6%, Chinese equities are down 1.3%, while Stoxx 50 futures are pointing 1.3% lower ahead of the European session. S&P 500 futures are down 0.8% after being down as much as 1.7%. The attack, but also the reaction across markets, shows that geopolitical risks are real and should be taken seriously by all investors. A further escalation between Israel and Iran could push energy prices higher and deal blow to economic growth and equity risk sentiment. Last night, after the US market close, Netflix reported strong Q1 results with net change in paying subscribers of 9.3mn vs est. 4.8mn and EPS of $5.28 vs est. $4.52 underscoring that Netflix’s profitability initiatives are working well. Netflix also said it expects growth to slow sending the shares 5% lower in extended trading. Key focus today is of course the response from Iran and the market’s interpretation of what happens next in the Middle East.
FX: The dollar trades back to a five-month high after reversing its early Thursday slide on hawkish Fed comments, strong data and haven bids following an Israeli strike against Iran overnight. EURCHF took a look below 0.969 and USDJPY pushed below 154 to lows of 153.60 before reversing back higher and intervention threat remains especially if the move extends towards 155 again. AUDJPY dropped to sub-99 and AUDCHF tested a break below 0.58. Meanwhile, safe haven Gold (XAUUSD) and Silver (XAGUSD) erased the surge, as did Bitcoin which was down to $60k at one point ahead of the halving this weekend. Response from oil related currencies NOK and CAD was more limited. The EURUSD came under pressure as well as the dollar rally resumed and slipped below 1.0640 after a test of 1.0690 failed.
Commodities: Brent briefly soared back above $90 before reversing lower after Iranian media downplayed a retaliatory strike by Israel. Overall, most of the five-dollar range seen this past week has been driven traders attempt to quantify the level of risk premium needed to reflect heightened tensions but with no impact on supply. Expect prices to bid ahead of the weekend. Copper prices reached a fresh 22-month high near $4.5, supported by tight supply and focus on rising demand for green transition and AI. Gold briefly broke $2400 on the Israel attack reports before pairing back gains. Still on track for a fifth weekly gain despite strong US data, hawkish comments from Fed members and a stronger dollar
Fixed income: US Treasuries experienced a decline yesterday following remarks from Fed officials Williams and Bostic, reinforcing expectations of prolonged interest rate levels. Earlier data from the Philadelphia Fed and jobless claims indicated a robust economy reinforcing this concept. The ten-year yields increased by 4 basis points to 4.6%, while two-year yields surged by almost 6 basis points, closing at 4.98%. The 5-year TIPS auction demonstrated strength, stopping through by 3 basis points. In comparison, European sovereign bonds outperformed US Treasuries, with German two-year yields rising by 3.7 basis points to 2.97% and ten-year yields climbing by 3 basis points to 2.49%. Attention now turns to next week's release of US preliminary GDP data and the upcoming 2-, 7-, and 10-year bond sales.
Macro: US jobless claims again suggested that labor market remains strong. Claims for the week of April 13 were unchanged at 212k, marginally shy of the expected 215k, leaving the 4-wk average unchanged at 214.5k. Fed speakers were a key focus, and Bostic repeated that a rate cut may be unlikely this year while Williams and Kashkari added to the hawkish rhetoric. Williams, a key voice in the Fed committee and a voter, even warned that if the data called for higher rates, the Fed would hike. Japan’s March CPI came in marginally softer-than-expected with headline at 2.7% YoY vs. 2.8% expected and previous. Core CPI was at 2.6% YoY vs. 2.7% expected and the core-core measure was at 2.9% YoY from 3.2% previous and 3.0% expected. This reduces the risk of another rate hike at the BOJ meeting next week, after comments from Governor Ueda earlier that yen-induced inflation will be key to monitor.
Technical analysis highlights: Downtrend unfolding in Equities. Futures lower overnight. S&P500 support at 4,953 and 4,845. Nasdaq 100 support at 17,128 and 16,963,128. DAX support at 17,620 and 17,326.
EURUSD minor correction seems over, downtrend resuming potential to 1.0565 and 1.05. GBPUSD resuming downtrend, support at 1.2375. USDJPY stalling but uptrend potential to 155.30. EURJPY volatile correction testing rising trendline, uptrend with potential to 166.30. USDCAD uptrend intact, potential to 1.39. AUDUSD resuming downtrend, support 0.6335 Gold range bound 2,319-2,431. WTI bouncing from support at 82.56., uptrend potential to 90.37 Brent from support at 87.35, resist at 93.05. US 10-year T-yield minor correction possible down to around 4.50 but uptrend intact
Volatility: The VIX closed down yesterday at $18.00 (-0.21 | -1.15%), with the VVIX and SKEW indices also declining. However, hawkish comments from several Fed speakers are keeping volatility elevated. There are no major economic news releases today, but geopolitical tensions in the Middle East are expected to cause a significant rise in volatility. This is already reflected in the futures market, where the VIX futures are up at 18.550 (+1.165 | +6.71%). The S&P 500 and Nasdaq 100 futures are both down considerably overnight, at 5008.50 (-40.50 | -0.80%) and 17378.50 (-168.50 | -0.97%) respectively. These signs point towards a negative market open, which will likely impact option premium prices across the board. The top 10 most traded stock options yesterday, in order, were TSLA, NVDA, AAPL, AMD, TSM, AMZN, META, MSFT, MU, and DJT.
In the news: Netflix Reports Record Profits As Subscriber Growth Tops Estimates (Forbes), TSMC beats first-quarter revenue and profit expectations on strong AI chip demand (CNBC), Modi Bets on Third Term as India’s Massive Election Kicks Off (Bloomberg), No Link Too Tenuous for Retail Traders in China AI Gold Rush (Bloomberg), BOJ's Ueda signals possible rate hike if weak yen boosts inflation (Reuters)
Macro events (all times are GMT): UK Retail Sales (Mar) exp 0.3% & 1% vs flat & -0.4% prior (0600), Germany PPI (Mar) exp 0.1% & 3.1% vs –0.4% &-4.1% prior (0600). CFTC and ICE weekly commitment of traders reports (2000), Speakers: BoE’s Ramsden; Fed's Goolsbee
Earnings events: Today’s key earnings release is American Express reporting before the US market open with analysts expecting revenue growth of 10.4% YoY and EPS of $2.96 up 23.5% YoY.
For all macro, earnings, and dividend events check Saxo’s calendar