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: Again, a mixed session in Asia with Japanese equities up 1.2% and Hong Kong equities down 1.5% with tensions around Taiwan coming back into markets with a big Chinese military drill taking place around Taiwan in the coming days. FOMC minutes initially sparked a sell-off due to several members hinting that they are reading to hike rates if inflation is not coming down. However, the hawkish tilt in the FOMC minutes was quickly reversed with strong Nvidia earnings beating on revenue and earnings with its shares rising 6%. Nvidia’s revenue outlook was materially above estimates and the company also announced a 10-for-1 stock split on top of increasing its quarterly dividend per share to $0.10 from $0.04. The strong demand for AI applications begs the question of whether electricity is soon the next big theme that will run in the market. The two other earnings releases from Snowflake and PDD (parent company of Temu) were also better than expected with the market responding positively. Nasdaq 100 futures are trading 0.8% higher ahead of the US session.
FX: The dollar trades steady after a three-day rally that was given an added boost on Wednesday after FOMC minutes lowered the prospect for rate cuts with some officials showing willingness to tighten policy further if needed to get inflation under control. While the AUD and JPY led the weakness, a great deal of activity was seen on the euro crosses, not EURCHF which reached a 13-month high above 0.99. EURGBP meanwhile traded near a one-year low just above key support at 0.85 after UK inflation slowed less than expected, threatening a rate cut delay while the surprise announcement of a UK election on July 4 saw volatility rise. The result of these two opposite moves saw GBPCHF reach an August 2022 high at 1.1640.
Commodities: Gold, silver and copper all tumbled on profit taking and after the FOMC minutes hammered home a higher-for-longer message with some members even questioning whether current policies were restrictive enough. A stronger dollar was an added headwind for commodities with crude oil falling to near its range low after the EIA reported a weekly stock build. Copper slumped 5% on profit taking on the realisation current fundamentals, especially in China, are not yet strong enough to justify the recent surge. While the long-term outlook remains very supportive the depth of the correction will depend on the level of long liquidation pressure from hedge funds. US and EU gas prices rose amid June heat expectations and after Austrian energy supplier warned of possible disruption to flows from Russia. US gas prices.
Fixed income: A slower-than-expected disinflationary trend in the UK, coupled with hawkish Federal Open Market Committee (FOMC) minutes, prompted a bond sell-off across both sides of the Atlantic. In the UK, the yield curve bear-flattened, with 2-year yields rising by 14.7 basis points to 4.43%, and 10-year yields increasing by 10 basis points to 4.23%. This movement reflects market expectations that the Bank of England (BOE) may maintain the interest benchmark rate on hold for a longer period as chances for a June cut fell from 52% the day before to 12% by the end of the day. In the U.S., Treasury yields surged following the release of the latest Fed minutes, where policymakers expressed clear reluctance to begin cutting rates. Several participants even suggested the possibility of further tightening monetary policy. Before the minutes a $16 billion 20-year U.S. Treasury auction saw a noticeable decrease in bid-to-cover ratio, which dropped to its second lowest level since October 2022. However, the auction stopped through, indicating that investors are willing are happy to buy at current yield levels. By the end of the day, the Fed Minutes and the Treasury Auction had a modest impact on yields with 2-year yields rising by 4bps closing at 4.87% and 10-year yields rising only by 1bps closing at 4.42%. Today the focus shifts on global flash PMIs for May, The European Commission’s preliminary consumer confidence indicator, Jobless claims in the US and several central banks’ speakers: Bostic for the Fed, Villeroy for the ECB and Pill for the BOE.
Volatility: The VIX closed at $12.29 (+0.43 | +3.63%), marking its first increase in seven days and indicating a potential bottoming out around the $12 level. The VIX1D experienced a significant spike, reaching 16.23 (+9.22 | +131.53%), likely due to anticipation surrounding Nvidia's earnings release last night and the FOMC Meeting Minutes released just prior. Following the positive Nvidia earnings, short-term volatility is expected to ease. Upcoming economic data with potential market impact include Initial Jobless Claims, S&P Global US Manufacturing PMI, S&P Global Services PMI, and New Home Sales. No major earnings reports are scheduled for today. VIX futures have declined this morning to 13.45 (-0.215 | -1.57%). S&P 500 and Nasdaq 100 futures responded positively to Nvidia's earnings, currently at 5358.25 (+30.25 | +0.57%) and 18952.25 (+165.50 | +0.88%), respectively. Yesterday's top 10 most traded stock options, in order: Tesla, Nvidia, Apple, Advanced Micro Devices, GameStop, Starbucks, AMC Entertainment, Amazon, Intel, and Pfizer.
Macro: The big story in macro right now is the sign from UK this week that inflation is not cooling as quickly as expected. Yesterday’s hawkish FOMC minutes underscored this worry, and the market continues to price out its previous take of two rate cuts implied one week ago. This sets up an interesting backdrop ahead of the ECB rate decision in June where the European central bank has backed itself into a corner committing to a rate cut, but with the current trends in inflation and economic growth it could prove premature and a wrong decision.
In the news: Nvidia Delivers on AI Hype, Igniting $140 Billion Stock Rally (Bloomberg), Global Chips Battle Intensifies With $81 Billion Subsidy Surge (Bloomberg), China holds military drills around Taiwan as 'punishment' (BBC), UK campaign kicks off after surprise election announcement (BBC)
Macro events: Eurozone Manufacturing & Services PMI (May) exp. 46.1 vs 45.7 and 53.6 vs 53.3 (0800), UK Manufacturing & Services PMI (May) exp 49.5 vs 49.1 and 54.7 vs 55 (0830), US Weekly Jobless Claims exp 220k vs 222k prior (1230), US Manufacturing & Services PMI (May) exp 49.9 vs 50 and 51.2 vs 51.3 (1345), Eurozone consumer confidence (May) exp –14.2 vs –14.7 prior (1400), US New Home Sales (Apr) exp 678k vs 693k prior (1400), EIA’s Weekly Natural Gas Storage Change, exp. 85bcf vs 70 bcf prior (1430)
Earnings events: After Nvidia earnings last night the earnings calendar is less impactful on markets ahead of the weekend. In medical technology Medtronic earnings will be key with the company reporting earnings before the US market opens. Analysts expect revenue to be down 1% YoY but EPS up 12% YoY.
For all macro, earnings, and dividend events check Saxo’s calendar