Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: Risk sentiment steadied in the US yesterday as US treasury yields fell further, with the market seemingly increasingly convinced that inflation is set to roll over quickly next year, allowing the Fed to begin cutting rates in the second half of the year and beyond. The 10-year treasury yield fell below the important 3.50% level while gold rose. Sentiment in Europe is a bit more downbeat as frigid weather spikes energy prices.
S&P 500 futures closed right on the 100-day moving average yesterday to the lowest close since 10 November washing away most of the gains delivered post the surprise inflation report back in November. The equity market is finding itself in limbo for the rest of the year with no clear narrative to build a direction on. Downside risks are related to the war in Ukraine and higher interest rates if the market begins to doubt itself on the Fed pivot. Upside risks are mostly related to momentum building in Chinese equities and the government seems to strengthen the policy trajectory of reopening society. The 3,900 level in S&P 500 futures is still the key level to watch on the downside.
Hang Seng Index rallied strongly, up 2.8% and recovering most of the loss from yesterday. The 10 additional fine-tuning measures to ease pandemic containment may be underwhelming relative to the high expectations. However, when reading together with the readout of the Politburo, an overall direction of a gradual and now seemingly determined loosening of restrictions seems to have taken hold. Omitting the language of “housing is for living in, not for speculation” and pledging to “be vigilant of large economic and financial risks and strive to prevent systemic risks” point to conditional support to the property sector when socioeconomic and financial stability are at stake. Technology names led the advance. Hang Seng TECH Index surged 5.6% with Bilibili being the top gainer within the index. Alibaba, Meituan, and Tencent climbed 5%-6%. Shares of China online healthcare platforms, China education services providers, China consumption, and Macao casino operators were other top performers.
The USD softened yesterday as risk sentiment trade sideways and, more importantly, as US treasury yields fell all along the curve, taking the 10-year Treasury benchmark yield below the important 3.50% chart point. The USD will likely struggle unless the market begins to reprice its rising conviction that inflation will allow a significantly lower Fed Funds rate in 2024 and beyond and/or risk sentiment rolls over badly as the market prices an incoming recession and not a soft landing. The key event risks for the balance of this calendar year are next Tuesday’s US November CPI print and the FOMC meeting the following day. Somewhat surprisingly, the new lows in US yields have yet to drive USDJPY to new lows: that pair recently traded below 134.00 but trades this morning well clear of 136.00.
Gold traded higher on Wednesday as the dollar weakened and US Treasury yields slumped (see below) and the yield curve inversion reached a new extreme on rising recession fears, and after China joined the lengthy list of other countries who have been strong buyers of bullion. The PBoC added 32 tons to its holdings in November, the first increase in more than three years. This brings its total gold reserves to 1980 tons. This is also potentially a step towards our outrageous prediction on a new reserve asset, as speculations mount that China, Russia and several other countries could be looking to move away from USD reserves. Friday’s US producer price report may provide the next round of price volatility. Key resistance at $1808 with support below $1765 and $1735.
Oil posted its fourth straight day of losses on Wednesday, erasing all the gains of this year, before bouncing overnight as China edges toward reopening. While demand concerns are rising with the aggressive global tightening seen this year, the supply side has remained equally volatile. US crude inventories fell by a less-than-expected last week as exports slowed and production reached 12.2m b/d. In addition, distillate stocks rose by more than 6 million barrels as demand on a four-week rolling basis slumped to the lowest level since 2015. Short-term technical traders are in control as the overall level of participation continues to fall ahead of yearend.
US treasury yields dropped at the long end of the yield curve, with the 10-year benchmark dipping well below 3.50%, a key chart- and psychological point. The yield curve inverted to a new extreme for the cycle as the market is pricing that inflationary risks are easing and for the Fed to begin cutting interest rates by late next year.
The new coking coal mine in Cumbria was approved by levelling-up secretary Michael Gove and will employ approximately 500 people and will cost £165 million to develop. Coking coal is used in steel-making, unlike thermal coal used for power stations.
Elon Musk and his advisors are considering another margin loan with Tesla shares as collateral to swap with more expensive debt carrying high interest rates ($3bn at 11.75% interest rate) issued during the Twitter takeover. These considerations underscore the increased risk in Elon Musk’s investments, including Tesla.
The final estimate of the EZ Q3 GDP shows an increase to 0.3 % versus prior 0.2 %. Growth fixed capital formation was the biggest contributor to growth (0.8 percentage point) behind household spending (0.4 percentage point). The contribution from government expenditure was negligible during the period. This shows that households and companies are rather resilient despite the negative economic environment and inflation across the board. Based on the latest PMI for November (the last estimate was published on Monday), we expect a small GDP contraction in the eurozone in Q4. This would be marginal (probably minus 0.1 %).
Following drone attacks on three Russian air bases that Moscow blamed on Kyiv, Putin has now warned that the Ukraine conflict could go on for a long time and nuclear tensions have also risen because of it. He also did not clearly stay away from pledging that Russia will not be the first to use nuclear weapons, and rather said that Russia will defend itself and its allies “with all the means we have if necessary. The irresponsible talk on nuclear weapons is a sign that Putin is getting desperate with Ukraine gaining military grounds, and his actions will be key to watch. Risk sentiment likely to be on the back foot today, and food prices as well Uranium will be in focus.
The database provider delivered Q3 earnings that surprised the market with revenue at $334mn vs est. $303mn and adjusted EPS of $0.23 vs est. $0.17, but more importantly MongoDB raised its fiscal guidance on revenue to $1.26bn vs est. $1.20bn.
The final print of Japan’s Q3 GDP was released this morning and it was slightly better than the flash estimate of -1.2%, but still showed a contraction of -0.8% annualized seasonally adjusted q/q. Stronger than expected growth in exports and a build of inventories led to the upward revision, private consumption was slower than previously expected at just 0.1% q/q. Lower oil prices and the return of inbound tourists may further aid the Japanese economy, but slowdown in global demand will continue to underpin a weakness in exports.
Bank of Canada hiked policy rate by 50bps to 4.25%, in line with market expectations but higher than the market pricing of 25bps. The central bank signaled the next move will be data dependent by saying that the “Governing Council will be considering whether the policy needs to rise further to bring supply and demand back into balance and return inflation to target.” Still, there was some “hawkish optionality” as the Bank said that the BoC will consider if future rate hikes are necessary to bring supply and demand back into balance and return inflation to target, which means there is potential for more rate hikes after a temporary pause. Canadian two-year rates were a basis point or two lower after considerable intraday volatility and near the lows for the cycle.
Campbell Soup shares popped 6% higher on Wednesday, gapping up to $56.18 after the company reported stronger quarterly earnings than expected. Its shares are now 15% off their record high that it hit in 2016. Campbell Soup shares are up 45% from last November. Another stock that did well overnight was General Mills, rising 2% to an all-time high of 87.50 after the wheat price jumped 3% on supply concerns returning. Despite the wheat price falling 19% from September, General Mills has been able to grow its quarterly profit and free cash flows.
What are we watching next?
There are several different paths from here, the one the market is least prepared for is one that shows resilient US economic growth and higher than expected inflation in coming months. But even if data does continue to prove the market’s strong conviction that inflation is headed lower and that growth will soften, will markets price some version of a soft landing or will fears of a “standard” recession cycle begin to weigh on risk sentiment as credit spreads widen and asset prices drop on fears of rising unemployment and falling profits? Until this week, financial conditions have been easing sharply and credit markets look complacent, so there is little fear priced in. After a wild year of volatility, large macro players may be unwilling to place large bets on the direction for markets until we have rolled into the New Year.
Today’s US earnings focus is Broadcom, Costco, and Lululemon. With a market value of $200bn, Broadcom is the most important earnings release for market sentiment and analysts remain bullish with a revenue growth expected at 20% y/y for the quarter that ended in October.
Economic calendar highlights for today (times GMT)
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
What happened to the future?
What happened to the future?
Mitigate risks by emphasizing high-quality sovereign bonds and exploring potential opportunities in corporate bonds.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
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)