Summary: US equities managed their fifth straight positive session yesterday, which has taken the S&P 500 Index close to its all-time highs from early September. US treasury yields are making a splash again as the 10-year benchmark closed at a local high after a prior attempt higher was beaten back. Elsewhere, the renminbi was quiet after its largest strengthening move in nearly a year yesterday, while Chinese authorities moved against the spike in domestic coal prices.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities put in yet another strong day yesterday, taking the S&P500 to well within a percent of the all-time high posted back in early September near 4,539, the last resistance remaining. The Nasdaq 100 index has a bit more wood to chop to get back to the all-time highs some 2% higher from yesterday’s close near 15,400 and we have a bit more tension for the yield-sensitive megacap-heavy index as long US treasury yields have picked back up to new local highs at the 10-year portion of the US yield curve at least (more below), even as the 30-year yield remains below cycle lows.
USDCNH – yesterday's chunky US dollar move was clearly inspired by a sudden move lower in USDCNH, which moved nearly a full percent lower, the largest drop in nearly a year and not clearly inspired by any identifiable trigger. Given that the lows for the cycle just above 6.35 are suddenly looming into view after this move that took the pair below 6.38 yesterday, USD traders will watch this pair closely for further developments and as a coincident indicator for the status of the USD, which has struggled to new local lows versus pro-cyclical currencies for more than a week, even as the EURUSD trend resistance remains intact and USDJPY is pushing at multi-year highs.
EURUSD – the most important of USD pairs backed up into that key 1.1650-1.1700 zone yesterday, with the timing of the move clearly triggered by the significant drop in USDCNH during the Asian session yesterday (See above). US 10-year treasury yields suddenly poking back to cycle highs yesterday inject a bit of relative fundamental US dollar support, but whether it is enough to stave off a reversal in the pair looks critical here going into the rest of the week, as the USD is on the defensive elsewhere.
Netflix (NFLX) - beat estimates for Q3 subscriber growth as it added 4.38 million subscribers versus projections of 3.7 million and estimated that it could add 8.5 million more subscribers in the coming quarter, slightly stronger than the consensus expectations. The company reported after the close after closing modestly higher yesterday.
Copper – after poking close to record all-time highs this week, copper prices eased sharply yesterday to below 465 cents/pound in the US. A Bloomberg article says that commodity trader Trafigura played a prominent role in draining London’s copper inventories to their lowest levels since 1974, aggravating the price rise on the impression of short supply. The resulting swings in prices have the LME now changing its rules and is launching an inquiry into what happened. Separately, China is thought to become a net copper exporter as domestic demand is shriveling on the decline in demand from the construction sector after recent policy moves that have put pressure on developers and are seen as slowing activity in the sector for some time.
US Treasuries (IEF, TLT). Yields will quickly take the spotlight from here if the rise yesterday in the 10-year portion of the yield curve and longer picks up pace from here, as yields snapped to new local highs for the cycle at the 10-year portion of the US yield curve above 1.63% and the curve overall steepened, a change of direction from recent flattening that suggested growing growth worries. An auction of 20-year treasuries is on tap for later today.
What is going on?
China warns on coal price, sending most active coal futures contract tumbling 8.5%. Chinese authorities verbally intervened in the market after coal prices on the Zhengzhou futures exchange had more than doubled for the spot contract just since August - when prices were already very elevated relative to the range of recent years. Authorities vowed to increase production and expressed zero tolerance for hoarding, collusion or spreading false information.
Hungary hikes by modest 15 basis points to take rate to 1.8% – after surprising markets at the previous meeting with a mere 15 basis point rate hike (versus 30 bps expected) that saw the Hungarian forint weakening sharply, the Hungarian central bank met expectations and once again hiked by this small increment with the same result – a weaker HUF weaker, as EURHUF traded above resistance since earlier this year around 362. The central bank chief Virag said in the wake of the decision that “the fight against inflation is similar to long-distance running, not to a sprint”, but it looks like the central bank will need to hike more and more quickly to slow the HUF’s descent.
UK Sep. CPI slightly lower than expected – Out just this morning, the headling CPI was out at +0.3% MoM and +3.1% YoY, both 0.1% below expectedand versus +3.2% YoY in August. The core CPI, meanwhile was out at +2.9% YoY vs. 3.0% expected and 3.1% in August. Before the data release, the market had priced about 80% odds that the Bank of England is set to initiate a tightening cycle with a 25 basis point hike at its meeting on November 4 and is fully priced to move rates twice more before mid-year next year.
What are we watching next?
US 20-year treasury auction up at 1700 - comes at an interesting time after yesterday’s modest yield curve steepening that represented a direction change and after yields at the 10-year portion of the curve rose to a new local high above 1.63%.
US Fed Beige Book - is a release to watch today for anecdotal reporting from the various regions of the US economy on the pace of economic activity and the outlook from here, especially for demand relative to the available supply of labor and parts, as well as the status of supply chains and logistics.
Earnings Watch – the big names up today include Netherlands’ semiconductor lithography equipment maker ASML, which surprised negatively this morning and issued a weak forecast for Q4 even as it continues to grow – with the weakness down to supply chain issues that seem nearly universal for all companies involved in the physical world. Also up is Tesla, a noted “bubble stock” which has managed to climb all the way back to within a few percent of its all-time highs near 900 ahead of its earnings report after the close today. Special focus there on how the semiconductor shortage is affecting its outlook.
Wednesday: Tesla, Verizon, IBM, ASML, Lam Research, Biogen, Canadian Pacific Railway
Thursday: Barclays, AT&T, Intel, Union Pacific, Snap, Whirlpool, American Airlines, Southwest Airlines, Freeport-McMoRan, Nucor, Genuine Parts, Tractor Supply
Friday: Honeywell, American Express, Schlumberger
Economic calendar highlights for today (times GMT)
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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.
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