Summary: Equity markets traded largely sideways, as did the US dollar after the wild sell-off late last week in the wake of the soft US CPI data. Markets in Asia traded on a strong note overnight after friendly headlines from the long Biden-Xi talk yesterday. The focus on incoming data in the days ahead will be on US PPI today and Retail Sales tomorrow, with the UK set to announce a much anticipated autumn budget statement on Thursday, likely to include new windfall taxes on power and fossil fuel companies.
Despite a strong session in China there is little spillover effect into developed market equities with S&P 500 futures still hovering just below the 4,000 level. Today’s key events are earnings from Walmart and Home Depot, or news coming out of the G20 meeting. US equities are tilted short-term in favour of an upside move with the 200-day moving average in the S&P 500 futures at 4,080 being the natural gravitational point for the market.
Hong Kong and China’s equity markets surged for the third day in a row, with Hang Seng Index soaring 3.4% and CSI 300 climbing 1.7%, as optimism returned to the markets due to favourable policy shifts in China regarding pandemic control and property developers’ access to funding and goodwill gestures shown by China’s President Xi and the US’ President Biden at their first face-to-face meeting after President Biden took office. China Internet companies were among the top gainers, with Alibaba (09988:xhkg) up 11%, Tencent (00700:xhkg) up 10%, and Meituan (03690:xhkg) up 6%. Investors brushed off the rise of new Covid cases to 17,772 in mainland China as well as weaker-than-expected retail sales (shrinking 0.5%) and industrial production (+5%) in October.
After the massive two-day plunge last week on the release of the softer than expected US October CPI data on Thursday, the US dollar largely tread water in yesterday’s session, with traders unwilling to take it lower still after a huge, one-off adjustment to Fed expectations that will require more weak incoming data from the US if investors want to solidy their case for a coming Fed pivot. EURUSD continues to trade near the key 1.0350 area, which was the major low back in May and June and prior to that, back in early 2017. The first support is the 1.0200 area, the 38.2% retracement of the rally sprint, with the reversal level at 1.0100, the 61.8% retracement and near the prior important resistance. For USDJPY, while the market managed to briefly take out the 139.40, the prior major high in July, it has bounced back above 140.00 at times since yesterday.
Gold has so far seen three shallow corrections during the run up from the post-FOMC low at $1620 on November 3, highlighting an emerging “buy-the-dip" mentality as short positions are being reduced while others trade the current positive momentum. An attempt to reverse some of last week's drop in the dollar and yields initially supported a correction but gold did not get close to test key support at $1735 before receiving a bid after Fed Vice Chair Lael Brainard said it would be appropriate for the Fed to slow its monetary-tightening pace soon. Demand from ETF investors – net sellers for months – have yet to show any appetite while speculators cut their net short by 80% to –8k lots in the week to November 8. Expect some consolidation and potentially a recheck of support at $1735 with resistance at $1789 and $1804.
US treasuries failed to consolidate much of last Thursday’s enormous slide in yields, with the 4.00-4.10% area the somewhat far away upside swing zone, while the next major focus lower will be on the major pivot high near 3.50% from June.
After a three-hour talk between the US and Chinese heads of state, both sides issued statement suggesting a friendly reset of the tone between the two countries. The two sides are set to resume cooperation on climate change and food security and both leaders criticized Russia for its threatening the use of nuclear weapons. The Chinese Foreign Minister Wang Yi said the talks represent a “new starting point” with both sides hoping “to stop the tumbling of bilateral ties and to stabilize the relationship.”
Industrial Production rose 5% YoY in October, a slowing of the pace from the month before and below estimates of 5.3%. Retail Sales for the month were down –0.5%, far below expectations of a rise of +0.7%.
The German semiconductor manufacturer reports strong Q4 results (ending 30 September) with revenue at €4.14bn vs est. €3.93bn and segment profit of €1.06bn vs est. €970mn. For the current fiscal year, the company guides segment profit margin of 24% vs est. 22.2% and revenue of €15.5bn vs est. €15bn.
In an interview yesterday, Lael Brainard, widely considered the chief dove on this FOMC, confirmed forward market expectations for lowering the size of future rate hikes. After last Thursday’s softer US October CPI print, the market had already lowered expectations to a 50-bp move, so there was little market impact despite a flurry of headlines. Brainard said “It will probably be appropriate soon to move to a slower pace of increases...but I think what’s really important to emphasize, we’ve done a lot, but we have additional work to do.”
... from the New York Fed’s Survey of Consumer Expectations weighed slightly on bond markets. Median one- and three-year-ahead inflation expectations increased to 5.9% and 3.1% from 5.4% and 2.9%, respectively. The median five-year-ahead inflation expectations rose to 2.4% from 2.2%. Also weighing on the markets during the session was about $12 billion corporate bond issuance.
This is usually a non-event for traders, only ECB watchers care about that. But this is before the European Central Bank (ECB) decided on 27 October to change the rules retroactively and increase the targeted longer-term refinancing operation (TLTRO) rates from 23 November onwards. The interest rate will be directly indexed on the ECB’s deposit rate (which could peak at 2.50 % next year) instead of being calculated over the entire life of the operation. This creates strong incentives for commercial banks to repay in advance (the bulk of the TLTRO was going to be repaid in June 2023). This is aimed to reduce the eurozone balance sheet and with that to contribute to the overall monetary policy normalisation. At this stage, it is still unclear what will be the exact consequences on the flow of credit in the eurozone. This is something to monitor, however.
Traders will remain nervous around incoming US data after the wild reaction to last week’s Thursday October US CPI release. The US macro calendar highlights this week include today’s October PPI releases, the Oct. Retail Sales data on Wednesday and November NAHB Housing Market Index release the same day. Finally, the US reports October Housing Starts/Building Permits data on Thursday.
The new Prime minister Rishi Sunak needs to find savings worth about £30-40bn/year to convince the independent Office for Budget Responsibility that debt won’t rise across the medium-term as a percentage of GDP. At the same time, Sunak was out yesterday promising the return of the “triple lock” he suspended for 2022-23 as Chancellor, under which pensions are adjusted higher by the highest of inflation, average earnings, or 2.5%. Current Chancellor Jeremy Hunt is considering a new 40% windfall tax on electricity producers. He may also extend the current windfall tax on oil and gas producers to 2028 and raise it to 35% from 25% in Thursday’s budget statement.
Today’s US earnings focus is Walmart and Home Depot which are both giants in the US consumer sector. Walmart is expected to deliver 5.2% y/y revenue growth and lower EBITDA margin at 5.5% down from 6.3% a year ago. Home Depot is expected to deliver revenue growth of 3% y/y and unchanged EBITDA margin at 17.5% compared to a year ago. Sea Ltd is also reporting today and was at one point the darling of the market delivering high growth rates and strong returns but the last year has been brutal. Analysts expect revenue growth of 12% y/y down from a revenue growth rate of 122% y/y a year ago as e-commerce, gaming and financial services have slowed down in Southeast Asia.
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
2024: The wasted year
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.
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.
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)
