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: Negative Asia session with Japanese equities 0.4% lower and Hong Kong equities down 2.2% pulled lower by a worse than expected outlook from Chinese EV maker Li Auto (shares down 18.6%) questioning the rebound case for the Chinese economy. European and US equity futures are trading slightly lower this morning as the market awaits Nvidia earnings scheduled for tomorrow after the US market closing. Palo Alto Networks shares tumbled almost 10% in US extended trading hours yesterday as its fiscal Q4 revenue forecast came in a bit lower than consensus estimates highlighting the fragility to growth stocks with high equity valuations if revenue forecasts do not meet expectations. AstraZeneca is in focus this morning as the British drugmaker announces a plan to double revenue by 2030 to $80bn by 2030 driven by a strong pipeline including a late-stage trial drug that reduces asthma attacks and could reach $4bn in revenue.
FX: The U.S. dollar trades higher for a second day, echoing an uptick in Treasury yields as Federal Reserve officials reiterated a commitment to maintaining a tight monetary policy. The Bloomberg Dollar Spot Index, however, trades up a modest 0.2% on the week against its major peers with the Mexican peso's gains helping to temper the index's rise. USDJPY climbed to 156.55 23 with resistance nearby at 156.75. The euro’s month-long rally has paused with resistance found just below 1.09, as ECB's Martins Kazaks commented on aligning rate cuts with the slowing inflation in the eurozone. USDCAD held steady before Canadian CPI figures are released, while the Australian dollar weakened slightly alongside a retreat in copper prices and a decline in the offshore yuan. The New Zealand dollar underperformed, falling 0.4% as the market anticipates the upcoming RBNZ meeting.
Commodities: Silver’s technical and momentum driven surge above $30, which helped drag gold and copper to fresh record highs, have paused with fresh dollar strength leading to profit taking. Also, a bounce in the gold-silver ratio from key support below 76 highlighting the need for further gold strength to further fuel the rally. An RSI reading above 84 on the Bloomberg Commodity TR Index highlights the broad nature of the recent rally with MTD gains being led by precious metals (8.7%), industrial metals (7.4%), and grains (7%). Developments highlighting a short-term risk of consolidation, not least for natural gas, silver and copper. Wheat prices jumped 6% on Monday as frost hurt crops in key exporters Russia and Ukraine, while soybeans maintain support on concerns over flood related crop losses in Southern Brazil.
Fixed income: Government bond yields remain steady with the German 10-year yield still finding itself in the 2.4-2.6% range trading at 2.53% this morning. The next crucial macro event for European bond markets is Thursday’s Eurozone May preliminary PMI figures which will test the momentum in European macro. Is the rebound sustainable in Europe? The US 10-year yield is back above 4.4% after a strong bond rally in May with the FOMC Minutes tomorrow as the next key event to watch as we are getting to the first potential Fed rate cut.
Technical analysis highlights: S&P500 uptrend potential to 5,400. Nasdaq 100 uptrend potential to 19K. DAX uptrend potential to 19,285. EURUSD rejected at resistance at 1.0885, a daily close above potential to 1.10. GBPUSD testing strong resistance at 1.2710, a daily close above potential to 1.28. USDJPY bouncing from 0.618 retracement at 153.75, resumes uptrend potential to 158.45. EURJPY above resist at 169.40 uptrend potential to 170. AUDUSD broken resist at 0.6650 upside potential to 0.6750. USDCHF testing key support at 0.90, likely to rebound and resume uptrend. Gold new all-time high upside potential to 2,490. Silver above 30, could reach 33,58. Copper uptrend stretched and looks toppish, a correction down to 475 could be seen. US 10-year T-yield bouncing from 4.30 key support. Resist at 4.52
Volatility: The VIX remains in the lower range for the year, closing at $12.15 (+0.16 | +1.33%), slightly above Friday's close. With the VIX this low, along with the VVIX below 80 and the SKEW around 150, we are in a typical low volatility period. Expected moves for this week reflect a similar outlook: the S&P 500 has an expected move of plus or minus 50.18 (+/- 0.95%), and the Nasdaq 100 shows +/- 281.26 (+/- 1.51%). Both values are equal to or lower than those from the previous week, indicating reduced expected volatility ahead. This week is relatively light on economic news, with all volatility likely centered around Thursday's releases: Initial Jobless Claims, S&P Global Manufacturing PMI, S&P Services PMI, and New Home Sales. In earnings, all attention is focused on Nvidia's Q1 report, scheduled for Thursday evening. Yesterday's top 10 most traded stock options, in order: Tesla, Apple, Nvidia, AMC Entertainment, Marathon Digital Holdings, Advanced Micro Devices, GameStop, Amazon, Faraday Future Intelligent Electric, and Robinhood.
Macro: Fed Vice Chair Barr expressed disappointment with Q1 inflation, stating that it did not provide the confidence needed to ease monetary policy. He emphasized the need to allow tight policy more time to take effect and indicated that the Fed is in a good position to maintain a steady approach and monitor the economy. Additionally, he highlighted the Fed's vigilance towards the risks associated with inflation and employment mandates, deeming the current approach as prudent for managing these risks. Federal Reserve Vice Chair Philip Jefferson, speaking at a Mortgage Bankers Association conference in New York, stated that it is too early to determine whether the recent slowdown in disinflation will be long-lasting, but expressed encouragement at the better reading for April. Federal Reserve Bank of Cleveland President Loretta Mester mentioned the possibility of raising rates if appropriate but clarified that it is not the base case. She also indicated reasons to believe that the neutral rate may be higher than it used to be and expressed skepticism about a quick decrease in inflation, despite welcoming the latest CPI report. Mester also stated that she does not consider three rate cuts in 2024 to be appropriate.
In the news: JPMorgan CEO Jamie Dimon signals retirement is closer than ever (CNBC), Fed policymakers still cautious on inflation and policy (Reuters), Microsoft announces new PCs with AI chips from Qualcomm (CNBC), Palo Alto's quarterly billings forecast fails to impress investors, shares fall (CNA), Nvidia’s rivals take aim at its software dominance (FT)
Macro events: UK CBI Trends Total Orders (May) exp –20 vs –23 prior (0900), Can CPI (Apr) exp 2.7% vs 2.9% prior (1230), API’s Weekly Crude and Fuel Stock Report (2030)
Earnings events: This week’s big earnings event is Nvidia reporting FY25 Q1 (ending 30 April) earnings tomorrow with analysts expecting revenue at $24.7bn up 243% YoY and 11.8% QoQ as demand remains extremely high for GPUs used in generative AI modelling and applications. The key is the outlook and with the recent positive outlook from TSMC the bar is set high for Nvidia.