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.
Macro:
Macro events (times in GMT): Germany Nov. ZEW Survey (1000), US Oct. NFIB Small Business Expectations (1100), Canada Sep. Building Permits (1330), US Fed’s Waller, voter, to speak (1500), US Fed’s Barkin, voter, to speak (1515)
Earnings events:
For all macro, earnings, and dividend events check Saxo’s calendar.
Equities:
Volatility: Volatility eased further, with the VIX dropping below 15 and short-term volatility (VIX1D) now under 10, reflecting reduced risk expectations post-election and rate cut. VVIX sits around 90, and SKEW has declined, showing a drop in tail risk premiums. VIX futures are also signaling a continued decline in volatility. Options markets reflect increased interest in crypto-linked equities as Bitcoin rallies, while the overall put/call ratio in equities at 0.747 indicates more call activity as investors lean towards bullish bets.
Fixed Income: German sovereigns saw a bull steepening in the yield curve as traders lowered expectations for the ECB’s terminal rate, driven by concerns over German growth if debt plans face opposition. Italian bonds outperformed on increased risk appetite. Gilts rose modestly, underperforming Bunds. The U.S. market was closed Monday, but the 10-year Treasury yield rose up to three basis points to 4.34% in the Asian session. This week, investors will focus on U.S. inflation, retail sales, industrial production, and Federal Reserve speeches, particularly from Chair Powell. In Europe, key events include UK employment data, ECB minutes, EU Commission forecasts, and a speech by BOE Governor Bailey.
Commodities: Gold was punished for steep losses yesterday and is pushing near an important prior low area near 2,600 as the appeal of this safe haven as faded relative to more speculative assets post-US election. Silver has traded within a percent of the 30 dollar/ounce level. Elsewhere, oil prices slumped, with WTI crude below 68 dollars a barrel this morning and Brent sub-72. The 70 dollars per barrel area in Brent is a multi-year low stretching back to 2021.
Currencies: The USD remains strong but more selectively so, with the euro and sterling weak against the greenback since yesterday. Overnight, China fixed the yuan at its weakest level versus the US dollar as USDCNH rose above 7.25 for the first time since early August as US president elect appears set to appoint China hawk Marco Rubio to the position of Secretary of State. Rubio has been specifically sanctioned by Beijing. Mike Waltz, another China hawk, appears set to be appointed national security adviser. The 7.37 area is the highest that exchange rate has been since the offshore yuan was created in 2010.
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