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: Asian equities are higher today with Nikkei 225 futures up 0.9% and Hang Seng futures up 0.9% as policymakers pushing back against the stronger USD and speculation is rising that some type of coordinated FX intervention is coming. Both US and European equity futures are pointing slightly higher ahead of the cash equity session. This morning Nordea has beat Q1 estimates on operating profit (€1.76bn vs est. €1.57bn) and reiterates ROE goal in FY24 of 15%. ABB is also reporting Q1 earnings this morning, beating expectations by a wide margin and lifting its EBITA margin outlook for Q2. UBS is planning another round of layoffs after the Credit Suisse takeover to shore up profitability. Netflix Q1 earnings tonight after the US market close is the key US earnings event today. Key macro events to impact markets are Philly Fed survey for April (12:30 GMT) and Japan March CPI (23:30 GMT).
FX: The US dollar has run out of steam with much of the Fed pushback to rate cuts now priced in and markets only expecting the first full rate cut from the Fed in November. The DXY index slipped below 106 which brought a recovery in activity currencies, followed by a recovery in JPY and Asian FX today as intervention threat in JPY picked up following reports of talks between Japan, South Korea and the US. USDJPY slipped below the 154 handle but has since rebounded back to 154.30+. AUDUSD rose to 0.6440+ iron ore prices rallied, but Australia’s employment data came in below expectations. The EURUSD bounced higher from 1.06 support and is currently knocking at 1.0690, risk of 1.07 break seen as dollar momentum slows. GBPUSD found support at 1.24 but remained choppy above 1.2450 despite hot UK inflation data.
Commodities: Crude slumped 3% on Wednesday after traders, once again, were forced to dial back a geopolitical risk premium after prices broke key support-now-resistance at USD 88.75 in Brent and USD 84.65 in WTI. The driver being doubts about an immediate response by Israel to Iran's weekend attack, while the trigger was the EIA report showing US crude stocks rising to a ten-month high, raising some doubts about the current level of demand. A reinstatement of sanctions against Venezuela and potential new US action against Iranian oil only helped stabilise prices. Copper rose to near a two-year high supported by positive soundings from the industry’s annual gathering in Chile. LME Tin (+20% MTD) on squeeze watch as one punter holds a commanding share of the May contracts. Gold remains bid near record highs, now supported by a small reversal in yields and the dollar.
Fixed income: Sovereign bonds on both sides of the Atlantic have attracted investors looking to capitalize on appealing yields as Brent crude prices soften on the back of the latest EIA report. U.S. Treasuries outperformed European peers, also helped by a stellar 20-year bond auction priced at the second-highest yield on record, stopping through When-Issue by 2.5bp. Positive sentiment extended into the secondary bond market, resulting in lower yields across the yield curve. By the day’s close, two-year U.S. Treasury yields had fallen by 5.5bps to 4.93%, and 10-year U.S. Treasury yields had dropped by 8bps to 4.58%. In Europe, the fall in yield was milder as the UK CPI came hotter than expected. Ten-year Bund yields dropped by 2bps after touching 2.5% for the fourth time since the beginning of the year. Market expectations are leaning towards rate cuts of about 45bps in the UK and the US and 80bps in Europe. Today, the focus is on initial jobless claims, the Philadelphia Fed's business outlook, and the Conference Board's leading index for March. Guindos, Nagel, Centeno, Simkus and Vujcic from the ECB, Bowman, Williams, and Bostic from the Fed, and Greene from the BoE.
Macro: There was no major data, but Fed and ECB speakers took centerstage. Fed’s Mester said that they want more information to be sure that inflation is on a sustainable path to 2%, and that there is no hurry to cut rates. Bowman also said that progress on inflation may have stalled. Meanwhile, ECB speakers (Centeno and Nagel) continued to talk about a June rate cut, although Lagarde said that they are watching exchange rates, and a weaker EUR could be inflationary. This continues to highlight that there is room for the Fed-ECB divergence to extend, and we discuss in this article how market participants can play that. UK CPI came in hotter-than-expected with headline at 3.2% YoY for March vs. 3.1% expected but still cooling from 3.4% last month. Core CPI cooled from 4.5% YoY in Feb to 4.2% YoY in March, but deceleration trends are intact with upside being driven primarily by housing and phone apps and not broad-based. This may rule out the case for a BOE rate cut in May, but the door for a June rate cut is still open. Australian employment unexpectedly fell in March as the jobless rate edged higher, reflecting restrictive monetary policy settings, adding to the potential for a late cutting cycle beginning in the fourth quarter
Technical analysis highlights: Corrective downtrend unfolding in Equities. S&P500 support at 4,953. Nasdaq 100 support at 17,478 and 17,128. DAX support at 17,620.
EURUSD bouncing from 1.06, possibly up to 1.0710 but downtrend intact with no strong support until 1.05. GBPUSD bouncing from strong support at 1.24, potential up to 1.2525. USDJPY uptrend potential to 155.30. EURJPY uptrend with potential to 166.30. USDCAD correction likely to 1.37, uptrend intact, potential to 1.39. AUDUSD bounce from support at 0.6400 possibly up to 0.6485. Gold range bound 2,319-2,431. WTI testing support at 82.56. Brent support at 87.35. US 10-year T-yield minor correction, possibly down to around 4.50 but uptrend intact
Volatility: On Wednesday, market sentiment calmed slightly, with the VIX dipping to $18.21, a modest decline of -1.03%. Lingering interest rate uncertainties continue to fuel volatility. Today’s market focus shifts to economic indicators with the Initial Jobless Claims and the Philadelphia Fed Manufacturing Index on deck, while Netflix's post-market Q1 results could sway sentiment further. Yesterday, ASML’s earnings disappointment impacted the semiconductor sector, sending stocks down. VIX futures signal a continuation of the downward trend at 16.850, a decrease of -2.09%. Meanwhile, futures indicate a possible positive opening with S&P 500 at 5082.00 (+19.75 | +0.40%) and Nasdaq 100 at 17760.50 (+102.00 | +0.58%). The most traded stock options were TSLA, NVDA, AMD, AAPL, AMZN, UAL, META, ARM, TSM, and BA.
In the news: China is moving towards full monetary independence (FT), Foreign holdings of US Treasuries hit record high; Japan holdings rise, data shows (Reuters), Google lays off employees, shifts some roles abroad amid cost cuts (Reuters), Buffett’s Berkshire Targets Narrower Spreads on Yen Bonds as BOJ Bets Ease (Bloomberg), Yellen Meets Japan, South Korea Counterparts in Bid to Boost Economic Ties (Bloomberg), Oil stabilizes after sharp drop on demand concerns, easing of Middle East tension (Reuters), Short Squeeze Fears Grip Tin as LME Says It’s Watching Market (Bloomberg).
Macro events (all times are GMT): Philadelphia Fed April Business outlook (1230), US Existing home sales (Mar) exp 4.2m vs 4.38m prior (1400), Initial jobless claims exp 215k vs 211k prior (1230), EIAs Weekly Natural Gas Storage Change, exp. 51.7 bcf vs 24 bcf prior (1430)
Earnings events: Today’s key earnings releases are Nordea, ABB, Netlix and Horton. Nordea and ABB are key European earnings releases reflecting the outlook for the financial and industrial sectors. In the US, Netflix Q1 earnings tonight after the market close will kickstart technology earnings. Analysts expect Netflix to report revenue growth of 13.5% YoY and EBITDA of $2.6bn up from $1.8bn a year ago. Dr Horton, a large US homebuilder, reports before the market opens and is expected to report revenue growth of 3.2% YoY and EPS of $14.15 up 1% YoY, but DR Horton is an interesting company to watch in terms of understanding the outlook for the US housing market.
For all macro, earnings, and dividend events check Saxo’s calendar
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