Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Risk sentiment got a boost yesterday from ECB’s hint of ‘peak rates’, PBoC’s policy rate cut, and better-than-expected macroeconomic figures in the US and China. In commodities oil prices are hitting fresh highs and iron ore prices are firm on China data. In currencies the CAD and AUD on the back of better growth sentiment. In equities, the Adobe earnings last night came in as expected and Arm shares rose 25% in the first day of trading.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures are extending recent gains with a potential test of the 4,600 level in sight. Stoxx 50 futures are bouncing back on yesterday’s ‘peak rates’ comments from ECB Lagarde and China’s monetary stimulus. Adobe earnings were in line with expectations sending shares down 2% in aft-mkt trading as generative AI features are still not lifting growth. Arm shares rose 25% on the first day of trading.
FX: The US dollar rose to fresh 6-month highs with EURUSD breaking below 1.07 and the May lows of 1.0635 on yesterday’s ECB rate hike. A close below 1.0635 was still not seen and pair recovered to 1.065 in Asia as upbeat China data boosted growth sentiment. AUDUSD broke above 0.6450 after a hot labour report yesterday and China sentiment at the cusp of a turnaround. CAD was the G10 outperformer as oil prices continued to surge, and EURCAD – as hinted in the FX Watch – slumped below 1.44.
Commodities: Fresh highs in Brent crude this morning trading around the $94.40/brl level as oil market remains tight and demand outlook got a boost from hot US economic data as well as China RRR and better-than-expected industrial output and retail sales in China. Iron ore continued to climb higher breaking above $120, the highest in five months on the back of strong production from China steel mills with a seasonal pickup in construction. Meanwhile, uranium futures are surging higher driven by supply tensions as nuclear reactor capacity growth increases.
Fixed income: The bond market believes the ECB is overtightening the economy, which is the reason the German yield curve bull flattened following yesterday's ECB rate decision. Italian BTPS gained the most as investors believe they will benefit the most from upcoming accommodative monetary policies. Meanwhile, in the US, Treasury yields rise across the yield curve amid higher-than-expected retail sales and PPI retail sales and PPI numbers. Overall, we favour the front part of the yield curve over a long duration. Bonds will gain as the economy starts to show signs of deceleration.
Macro: The ECB raised interest rates 25bp, taking the deposit rate to 4.0%, however the hike was dovish as it came with hints of the end of tightening cycle even though President Lagarde stayed short of saying that ECB is at peak rates. 2023 inflation was upgraded to 5.6% from 5.4%, 2024 (in line with the leaked numbers in Reuters) raised to 3.2% from 3.0% and 2025 lowered to 2.1% from 2.2%, but still ultimately seen just above target. Growth projections for 2023-25 were lowered across the board. US retail sales for August came in firmer than expected although July’s print was revised lower. Headline up 0.6% MoM (exp 0.2%, prev 0.5%) as gasoline station sales surged to 5.2% from 0.1% in July.
In the news: Speculations in the US have surfaced that China’s defence minister Li Shangfy is under investigation as he has not been in public for more than two weeks – full story in the FT. China’s economy shows signs of stability across industrial output and retail sales in August – full story on Bloomberg.
Technical analysis: S&P 500 is at key resistance at 4,540. Nasdaq 100 is at key resistance at 15,561. EURUSD downtrend, testing key support at 1.0635. AUDJPY uptrend after broken resist at 95.00. AUDUSD could move to 0.66. Crude oil uptrend stretched, expect minor correction. Medium-term uptrend strong
Macro events: US Sep Empire Manufacturing est. -10 vs prior –19 (1230 GMT), US Sep P University of Michigan Consumer Sentiment est. 69.0 vs prior 69.5 (1400 GMT).
Earnings events: Adobe reports FY23 Q3 earnings (ending 31 August) after the US market close with analyst expecting revenue growth of 10% y/y and EPS of $3.98 up 63% y/y. Read our earnings preview here.
For all macro, earnings, and dividend events check Saxo’s calendar.
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