Summary: Equity markets managed a comeback from an intraday sell-off yesterday as treasury yields eased back lower after briefly threatening to challenge the cycle highs. Today is the first day of the blitz of earnings releases this week and will include Microsoft and Google-parent Alphabet reporting after the close of trading today. In Asia, even while the US dollar treads water, the Chinese yuan slipped to a new cycle low versus the greenback after a weak official fixing.
US equities are continuing to climb ahead of key earnings tonight with S&P 500 futures trading around the 3,811 level this morning and potentially could reach for the 50-day moving average around the 3,876 level if we get better than expected Q3 earnings over the coming days.
Euro STOXX 50 (EU50.I)
Momentum is extending this morning with STOXX 50 futures trading around the 3,542 level with yesterday’s high at the 3,551 level being the key resistance level on the upside. The key drivers are lower energy prices caused by recently very mild weather in Europe. If flows into EUR continues, European Q3 earnings surprises, and energy prices remain in easing stance then the 3,600 level could be the next big level to be tested.
FX: USD treads water, CNH continues broad plunge
The continued local softness in US yields and resilient risk sentiment here have kept the US dollar trading sideways and kept USDJPY out of the headlines. But USDCNH extended sharply higher after a surprising weak fix for the onshore CNY last night, and USDCNH spiked all the way to 7.368 before the move was cut about in half by later in the session. China is clearly happy to allow the CNH to weaken broadly, with EURCNH, for example, rallying hard since earlier this month and trading near the range high of the last year close to 7.30.
Crude oil (CLZ2 & LCOZ2)
Crude oil has settled into a relatively tight range, in Brent between $90 and $95 per barrel, while the market assesses the overall impact on demand from the global economic slowdown against a tight supply situation, especially in the distillate market, which is likely to worsen once OPEC producers in the Middle East reduce production of high yielding middle distillate crude oil from next month. In addition, EU sanctions against Russia starting in December is already having an impact on supplies reaching the region. Overall, the oil market judging from the bullish curve structure remains tight and may tighten even further during the coming months. Focus this week on earnings from Exxon, Shell and their Big Oil peers.
US treasury yields threatened back higher toward the cycle highs yesterday, but the move was tamed as treasuries found support. The 10-year yield has been almost unchanged on a daily close basis for the last three days running (near 4.22%). The circulation of an article from “Fed whisperer” Nick Timiraos suggesting that the Fed will consider slowing the pace of hikes after the November 2 FOMC meeting saw no follow-on drop in short yields. The treasury will auction 2-year t-notes today, 5-year notes tomorrow and 7-year notes on Thursday.
for the first time since June with the “Next hour” contract briefly trading negative following a warm start to the heating season, a development that looks set to continue in the next couple of weeks, thereby leaving storage sites near full. While a great deal of weather-related volatility, and potentially even lower prices, can be expected at the front of the curve, it is important to watch TTFMG3, the peak winter demand contract for February, which remains anchored above €140/MWh. However, the longer the warm spell continues, and LNG arrivals remain strong the worry about next winter will fade, thereby providing a much-needed boost to industries trying to navigate through the current crisis. EU energy ministers meet today to discuss the emergency actions proposed by the Commision last week.
There is nothing new here. As expected, activity weakened more quickly in October. The eurozone October business activity is down at 47.1 versus prior 48.1 and expected at 47.6. It looks increasingly clear that the Eurozone economy is set to contract in the fourth quarter. The factors driving the contraction in activity are well-known: fears of a recession, widespread and higher inflation (especially in the services sector), worries about high inventories, weaker than expected sales etc. We all know the next step: companies will start to cut costs, reduce their employment expectations for 2023 and ultimately cut their labor force. All of this even before we enter winter. This is a high-risk period for the Eurozone due to the energy crisis and potential energy disruptions in some countries.
Europe’s largest logistics company is raising its EBIT outlook this morning as Q3 results are better than estimated with revenue at DKK 60.6bn vs est. DKK 56.3bn and adjusted net income of DKK 4.8bn vs est. DKK 4.7bn. The company also says that it expects a gradual decline in profitability as logistics prices are coming down from their high prices reached during pandemic bottlenecks in the global supply chain.
Europe’s largest software company reports Q3 revenue of €7.8bn vs €7.6bn driven by strong performance in its cloud business.
The bank reports this morning Q3 adjusted revenue of $14.3bn vs est. $13.5bn and adjusted pre-tax profits of $6.5bn vs est. $6.1bn. The bank is also lifting its outlook and announcing the replacement of its CFO.
The French retirement home group Orpea is facing a rough time since allegations of systematic mistreatment and patient abuse were discovered earlier this year. Yesterday, the stock was suspended by the French regulator AMF on rumors that the French government could step in to save the company. The stock is down 80 % year-to-date. Orpea is facing a mountain of debt (around €9.5bn). The group operates nearly 1,200 homes worldwide, with around 350 of them in France. It used to be one of the best performing stocks in the French stock market.
Sunak is said to be keeping Jeremy Hunt on as Chancellor and is expected to proceed with prudence in keeping the UK’s fiscal deficits on a more sustainable path, with the austerity likely to mean a harder landing for the UK economy and the Bank of England possibly unwilling to hike interest rates as much as the market expects (or forced to do so because inflation remains stubborn and the currency weak). EURGBP jumped back higher toward 0.8750 yesterday after selling off on the news that Boris Johnson would not run for the leadership.
Today’s US earnings focus is on Microsoft, Alphabet, Visa, UPS, General Electric, Halliburton, and Enphase Energy. Microsoft’s business model is robust due to its large market share and dependency for its software, but the company is facing rising input costs on wages and energy cost for running its datacenters. Alphabet could post Q3 weakness as Snap’s Q3 results last week showed advertising weakness. UPS earnings are important for insights into the global economic slowdown.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
