Macro surprises and rising ECB expectations

Equities 5 minutes to read
Peter Garnry

Chief Investment Strategist

Summary:  Equities will likely continue to rally into central bank meetings the next two weeks. The first test will be ECB on next Thursday. Expectations for ECB pulling out the 'bazooka' are rising and the most powerful change is if ECB introduces a tiering system for excess reserves. In this case European banks will immediately see a major repricing. We are overweight European banks going into the ECB meeting as believe ECB will shield banks from further pain when lowering the deposit rate. In today's equity update we also take a look at Lululemon and We Company.


Risk-on continues today albeit a bit more mildly than yesterday’s big move seeing equities climbing higher and gold getting crushed in one of its most ugly days in years. The weaker USD, continued upside surprises on macro on the balance, cease fire for now in US-China trade war until early October and rising expectations for ECB pulling out the ‘bazooka’ are all driving equities higher and we remain short-term bullish.

As we highlighted in our equity update two days ago we are still not seeing any spill over effects from the manufacturing contraction into the services sector which is the largest sector in the economy. ISM Non-Manufacturing made a big upside surprise yesterday adding more fuel to the ongoing equity rally. It helped Citi Economic Surprise G10 Index to continue its advance towards zero. Overnight Japanese leading indicators also surprised to the upside leading us to say on our Market Call today that Japanese equities look like an interesting opportunity.

Source: Bloomberg

USD on the decline again today loosening financial conditions in emerging markets and financial markets in general. A falling USD is typically a net positive for global equities. It reinforces our view that equities will continue to rise into the next two weeks’ central bank meetings. First central bank meeting is ECB on Thursday. We expect a bold move from ECB as the slowdown and lower inflation expectations are deviating ECB from its policy framework. In order to be credible ECB must deliver an accommodative package while balancing the need to protect European banks from further negative deposit rates. The most likely package is a combination of lower deposit rate, restart of QE programme and a tiering system for excess reserves. The tiering system allows banks (primarily German, French and Dutch banks) to move part of its excess reserves from the deposit facility (-0.4%) to the main refinancing operations (0%). If around 90% of the €1.9trn excess reserves (minus the €130bn minimum requirement) can be moved to the main refinancing operations, then European banks could in aggregate save around €7bn annually. This would immediately change valuations of European banks and lift sentiment broadly in Europe. We are overweight European banks going into the ECB meeting next week.

Source: Bloomberg

Bond volatility has recently risen dramatically measured by the MOVE Index to levels not seen since 2013 when former Fed Chair Ben Bernanke made is now famous ‘QE tapering’ remarks and 2015 during the emerging markets and oil market squeeze. This could have negative consequences for risk parity strategies and potentially lead to overall leverage reductions in risk parity portfolios causing these portfolios to be net sellers. In general liquidity is low in bonds and the last couple of weeks liquidity has been thin in corporate bonds where yields in some cases have dropped below the bid-ask spread. It seems many market participants are chasing momentum and price action in bonds which sets the bond market up for a “mini crash” when the flow reverses.

Source: Bloomberg

Lululemon shares jump 4% in extended trading yesterday as the company selling yoga pants lifted its FY guidance on EPS to $4.63-4.70 from $4.51-4.58. When shares start trading today in New York they are poised to reach a new-all-time-high. The Q2 numbers (ending on August 4) were strong with revenue growth y/y accelerating and gross margin expanded from Q1. Lululemon has an impressive free cash flow generation combined with good top line growth per CAPEX invested.

Source: Saxo Bank

We Company (pending IPO) is said to have lowered its IPO valuation from its recent $47bn valuation capital raise round with SoftBank Group earlier this year. People close to the deal have said to Bloomberg News that We Company’s valuation range has been lowered to $20-30bn. The NYC professor Scott Galloway, famous for commenting on everything happening in the technology industry, published a crushing view on We Company calling it WeWTF. In that same article he said that any Wall Street analyst who believes it’s (the company) worth over $10bn is ‘lying, stupid, or both’. 

Quarterly Outlook 2024 Q4

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.