US hourly earnings upside surprise could spook equities

Peter Garnry

Head of Equity Strategy

Today’s biggest event is the US change in nonfarm payrolls for April but it is the less glorified publication on US hourly earnings that will take the spotlight. It was the February 2 US hourly earnings print that started the chain reaction that ignited  the volatility explosion in early February.  Equities are still trying to regain their footing following those dramatic events when the VIX Index had its largest one-day move in more than 10 years, dwarfing the moves during the Lehman Brothers bankruptcy week.

In the past couple of weeks, strong earnings have failed to provide investors with enough comfort to squeeze out the shorts and the sellers on the long side. Yesterday, however, proved a dramatic rehearsal for today’s report with US non-manufacturing PMI disappointing, thereby igniting a renewed sell-off in equities. However, equities are often like a cork in water – popping back up – and here we are just above the 200-day moving average in S&P 500 futures, ready to take on the most important macro report in weeks.

If we get an upside surprise on hourly earnings then the long end of the US yield curve will wag its tail and this could restart another round of equity selling, likely pounding at the latest support area around the 2,590 level. The US option market seems vulnerable judging by yesterday’s reaction and an upside surprise with higher yield could lift the VIX and cause hedging programs to start selling US equity futures. Our view is to be cautious today and we believe the probability is higher for an upside surprise causing selling pressure in equities than the rosy outcome of in-line numbers and limbo outcome.
 May 04

If long-term yields do go higher, then the capital intensive sectors should feel the heat because it lifts expectations for refinancing costs and ultimately profitability. Potentially the most vulnerable segment are utilities which are often quite interest rate sensitive and within this sector the ones that have the highest valuation should be the most vulnerable.

Below is a snapshot from our equity factor model where we have sorted US utilities on the value factor(e.g. those with the highest valuation metrics are at the top).

May 04

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (