Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Risk-off sentiment gripped markets after a disappointing start to technology earnings from Microsoft and Alphabet, followed by renewed concerns in the regional banking sector and finally with Fed Chair Powell pushing back on the expectations for a March rate cut. This pushed equities lower, bonds higher, and resulted in mild gains in USD with Japanese yen outperforming. More tech giants report earnings today, including Apple, Amazon and Meta. Along with that, Eurozone CPI and Bank of England rate decision will also be on the radar.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: The S&P 500 Index pulled back 1.6% and the Nasdaq 100 plunged 1.9%, driven by weakness in the Magnificent Seven. Alphabet tumbled by 7.5% after missing expectations on advertising sales while the other six fell by 1.9% to 2.5%. A Q4 loss and a resulting 37.5% collapse in share price in New York Community Bancorp triggered concerns among investors about a potential return of stress to the US regional banking sector. The SPDR S&P Reginal Banking ETF sank 5.9%. Powell’s downplaying of the possibility of a March rate cut also weighed modestly on sentiment but investors continue to anticipate that the Fed’s put is here if stress reemerges in the US financial system and the resilience of the labor market will not deter the Fed from cutting rates.
Fixed income: Treasury yields fell in New York morning on an unexpectedly small increase in ADP employment in January, coupled with renewed concerns about the health of regional banks, pushing the 10-year yield back below 4% to trade around 3.96%. After the FOMC statement and Powell’s hints at the presser suggested that a March cut was not yet on the table, the 10-year yield bounced but capped at 4% at multiple attempts. Investors took note of Powell’s optimism about the disinflationary trend and his confirmation of a discussion of tapering quantitative easing at the meeting. The 10-year yield dropped by 12bps to 3.91%, closing at the low, signaling strong buying towards the market close.
China/HK Equities:The Hang Seng Index declined 1.4%, while the CSI300 dipped 0.9% after China’s NBS manufacturing PMI increased less than expected. Despite numerous piecemeal supporting measures, manufacturing activities remain a drag. Apple supply chain stocks fell, dragged down by warnings of a 50%-55% Y/Y drop in net income from Sunny Optical. Coal miners bucked the market decline with China Shenhua gaining 2.1%. L’Occitane surged 7.8% on robust Q3 sales beating estimates.
FX: Powell’s pushback to March rate cut expectations, may not have pushed yields higher, but the dollar ended marginally higher after a choppy session as we expected. Some haven demand was also at play after a disappointing start to big tech earnings, and regional banking risks highlighted by a dismal New York Community Bancorp (NYCB) report. Japanese yen gained amid a sharp slide in Treasury yields and hawkish hints in BOJ summary of opinions yesterday, but USDJPY reversed from 146 support back to 147. AUDUSD attempted to move back above 0.66 after yesterday’s decline following a miss in Q4 CPI which opened up the scope for dovish RBA pricing, but pushed lower again to sub-0.6570. AUDJPY pierced through 96.90 support and 100DMA at 96.32 now coming in view. GBPUSD still wobbling around 1.27 and a hawkish BOE bent today may be likely, but 1.28 could continue to cap gains.
Commodities: Crude oil priced plunged sharply amid signs of rising US production with US inventories gaining. EIA data showed that commercial stockpiles in the US rose 1.23mbbl last week, the first build in three weeks, although Cushing hub saw a drawdown. Powell’s pushback to March rate cut also dimmed demand outlook. Still, oil closed higher for the month, given geopolitical escalation. Gold gained on lower Treasury yields, but a stronger dollar brought it back to $2,040.
Macro:
Macro events: China Caixin Manufacturing PMI (Jan), EZ/UK/US Manufacturing PMI (Jan F), EZ Flash CPI (Jan), BoE Announcement, US ISM Manufacturing PMI (Jan).
Earnings: Apple, Amazon, Meta, Merck, Shell, Honeywell, Roche, Sanofi
In the news:
For all macro, earnings, and dividend events check Saxo’s calendar.
For a global look at markets – go to Inspiration.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)