Global Market Quick Take: Europe – 4 January 2024

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

Equities: Sentiment remains mixed in equities in the first week of trading. STOXX 50 futures are trading around 0.3% higher in early trading hours. Last night’s FOMC Minutes revealed that the Fed is considering the timing of when to end its balance sheet reduction, but the message did little to volatility, bond yields or pricing of the Fed Funds Rate in December 2024 (SOFR futures). Today’s key macro events are German Dec preliminary inflation figures and later US ADP employment change figures for December and US initial jobless claims. Risks are still elevated in the Middle East with a bomb blast yesterday killing 100 people in Iran.

FX: Short covering saw the dollar extend its recent gains with the DXY hitting a December 14 high after the FOMC minutes release. Gains so far this week has been broad and lead by strength against the SEK, JPY and KRW. USDJPY reached a 143.88 high overnight while the EURUSD is looking for support around 1.0860 weighed down by expectations the ECB will cut rates sooner than the Fed.

Commodities: Crude oil jumped on Wednesday with geopolitical risks staying high on the agenda after explosions in Iran killed more than 100 and Houthi rebels continued to attack ships in the Red Sea. Adding to this a temporary shutdown of the largest oilfield in Libya due to protests, and yet Brent remains below key resistance around $82 with demand concerns offsetting what is seen as a limited risk of a major disruption. Gold reversed lower after FOMC minutes showed reluctance to commit to the quick deep cuts the market had priced in, but heightened geopolitical risks continue to add a layer of support, very visible in the continued underperformance of silver which has driven its relative value against gold to its weakest since last March.

Fixed income: After rising to briefly test 4%, the 10-year Treasury yield reversed and finished a choppy session 1 bp lower at 3.92%. The reversal was triggered by the December FOMC minutes, which showed that several participants suggested the Fed should start discussing the conditions for slowing down the pace of quantitative tightening.

Macro: The US JOLTS job openings unexpectedly fell to 8,790k in November from the revised upward figure of 8,852k in October, slightly below the projected 8,821k from the Bloomberg survey. The hiring rate decreased from 3.7% to 3.5%. The US ISM manufacturing index picked up to 47.4 in December from 46.7 in November, surpassing the median forecast of 47.1. Notably, the production sub-index increased to 50.3 from 48.5, and the employment sub-index improved to 48.1 from 45.8. The most important message from the US December FOMC minutes released yesterday was that several participants indicated that the Fed “would slow and then stop the decline in the size of the balance sheet when reserve balances are somewhat above the level judged consistent with ample reserve.”  They suggested the FOMC “begin to discuss the technical factors that would guide a decision to slow the pace of runoff”.  In other words, the Fed will start discussing reducing the size of quantitative tightening. The minutes did not provide new information about the timing of the first rate cut.

Volatility: The fear gauge, the VIX, has been steadily rising in recent days, reaching a close of $14.04 on Wednesday (+0.84/+6.36%). While still below historical averages, this upward trajectory indicates a growing sense of uncertainty among market participants. This trend is mirrored in the VVIX, which climbed to 89.65 (+1.56/+1.77%), and the VIX futures, which ended Wednesday at 14.700 (+0.6/+4.24%). Due to this heightened volatility, the major indices suffered their fourth consecutive day of losses. The S&P 500 retreated to 4704.81 (-38.02/-0.80%), and the Nasdaq 100 dropped to 16368.49 (-175.45/-1.06%). This volatility also spilled over to ETFs, with the IV Rank of the Russell 2000 IShares ETF reaching 52.03% (IV at 22.78%) and the Nasdaq QQQ Invesco ETF soaring to 50.67% (IV at 17.13%). With further job data scheduled for release today and tomorrow, market volatility is likely to persist.

Technical analysis highlights: S&P 500 correction unfolding, key support at 4,697. Nasdaq 100 correction, support 16,166. DAX support at 16,470 and 16,060. EURUSD tested 0.618 retracement and support at support at 1.0882, could rebound. USDJPY above minor resistance at 142.85, next 144.95. GBPUSD below rising trendline, support at 1.25. Gold bouncing from minor support at 2,030. 10-year Treasury future rejected at 113 8/32, support at 111 30/32, yields touched 4%

In the news: Over 100 dead in Iran explosions at event honouring general killed by U.S. drone strike (CBS), Apple dominates global premium smartphone market in 2023, but Huawei gains ground on the back of its new 5G handsets (SCMP), Samsung Places AI at Forefront as 2024 Phone Launches Kick Off (Bloomberg), Hezbollah, Israel appear to signal no desire for spread of Gaza war (Reuters).

Macro events (all times are GMT): Eurozone Services PMI (Dec Final) exp 48.1 (0800), UK Services PMI (Dec final) exp 52.7 (0830), Germany CPI (Dec) exp 0.3% & 3.7% vs –0.4% & 3.2% prior, US ADP Employment Change (Dec) exp 1256k vs 103k prior, US jobless claims (weekly), S&P Global US services PMI (Dec, final) exp 51.3 (1345)

Earnings events: Next important earnings releases are tomorrow from RPM International, Walgreens Boots Alliance, Conagra Brands, and Lamb Weston. Our key focus is on Walgreens earnings scheduled for US pre-market session (1200 GMT) with analysts expecting revenue growth of 5% y/y and EPS of $0.62 down 25% y/y.

For all macro, earnings, and dividend events check Saxo’s calendar