Global Market Quick Take: Europe – 24 September 2024

Key points:

• Equities: Steady opening following another record-breaking US session on Monday
• Currencies: Eurozone PMI weakness drives the euro lower
• Commodities: Unprecedented Chinese stimulus blitz lifts key commodities
• Fixed Income: U.S. Treasury steady while German yield curve turns positive for the first time since November 2022.
• Economic data: German IFO & US consumer confidence

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news:  China central bank releases slate of support measures amid a deepening economic slump (CNBC). Biden proposes banning Chinese vehicles from U.S. roads with software crackdown (CNBC), Euro zone business activity unexpectedly contracts in September, PMI shows (Reuters),UniCredit boosts its stake in Commerzbank, applies to own up to 29.9% of the German bank (CNBC), Fed officials leave door open to another large interest-rate cut (BT)

Macro:

• PMI data was weaker across the board, but weakness in Europe, particularly in Germany, was the most alarming. German manufacturing PMI for September slipped to 40.3, its lowest levels in a year, from 42.4 in August. This signaled structural manufacturing woes for Germany. Meanwhile, France’s services PMI also reverted back to contraction at 47.4 from August’s Olympics-driven surge to 53.1. Overall, Eurozone composite PMI fell to 48.9 in September from 51.0 in August. UK’s PMIs also slowed but still remained in expansion and looked far more robust than the Eurozone’s with manufacturing PMI at 51.5 and services at 52.8 from 52.5 and 53.7 respectively in August. US manufacturing flash PMI for September also unexpectedly fell to 47.0 from 47.9 (exp. 48.5), while services declined less than forecast to 55.4 (exp. 55.2, prev. 55.7), which meant composite marginally dipped to 54.4 from 54.6.
• Fed speakers generally supported the 50bps rate cut decision from last week and remained open to more such jumbo moves if labor market deteriorated sharply. Kashkari noted that the balance of risks have shifted towards risk of further labor market weakening and higher unemployment. Atlanta Fed President Bostic said that the economy is normalising more quickly than previously thought, so monetary policy needs to as well. Goolsbee stated that many additional rate cuts will likely be needed over the next year, stressing the need for rates to be lowered "significantly". Several Fed policy makers are speaking or giving remarks at various events this week, including Chair Jerome Powell and New York Fed President John Williams on Thursday. In today’s line-up we have Michelle Bowman (Voter) at 1300 GMT.
• China’s CSI index, the yuan, and several key commodities rose after the People’s Bank of China unleashed an unprecedented stimulus blitz of policy support for the economy. In a rare press conference, Gov. Pan Gongsheng announced a flood of support measures, including cutting the amount of cash banks need to have on hand, known as the reserve requirement ratio (RRR), by 50 basis points in the near term, and the 7-day repo rate by 0.2%. A 0.2–0.25% cut in the loan prime rate could follow. In addition, the PBOC lowered borrowing costs on up to USD 5.3 trillion in mortgages while easing rules for second-home purchases.
• The Reserve Bank of Australia — as expected — kept its cash rate at 4.35% for a seventh straight meeting and restated it isn’t “ruling anything in or out” on policy. The RBA has sought to hold onto significant post-Covid job gains and as a result inflation is taking longer to come down.

Macro events (times in GMT): German Sep Ifo (0800), US Consumer Confidence (Sep) exp 104 vs 103.3 prior (1400), Richmond Fed Mfg index (Sep) exp –12 vs –19 (1400), Fed’s Bowman (1300), API’s Weekly Crude and Fuel Stock report (2000)

Earnings events: A light earnings week ahead but with three important earnings releases from Micron Technology (Wed), Costco Wholesale (Thu), and Accenture (Thu). Micron Technology is key to watch as a beacon for consumer electronics and global demand as memory chips are used in a wide range of products. Analysts expect Micron Technology to report revenue of $7.7bn up 91% YoY.

• Tuesday: Exor, AutoZone
• Wednesday: Vantage Towers, Oracle Japan, Micron Technology, Jefferies Financial, Cintas
• Thursday: Costco Wholesale, Accenture, H&M, Jabil, CarMax, TD Synnex

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: Futures indicated a positive open in Europe, supported by the People’s Bank of China announcing additional support measures. On Monday, the S&P 500 rose by 0.3%, while the Dow Jones gained 0.1%, both achieving new record highs after last week's rally driven by the Fed's first rate cut in four years. The Nasdaq 100 also edged up by 0.3%. Investors closely analyzed comments from several policymakers to understand the rationale behind the Fed's significant rate cut. Fed officials, including Raphael Bostic, Neel Kashkari, and Austan Goolsbee, expressed support for the recent cut and hinted at the possibility of further reductions in the coming months. Among stocks, Intel shares jumped 3.4% following reports of potential multibillion-dollar investments from Apollo Global Management. Tesla climbed 4.9% as investors anticipated the upcoming robotaxi launch and third-quarter sales figures. However, concerns over economic growth persist, with US manufacturing data hitting 15-month low and job market indicators showing signs of weakening.

Fixed Income: On Monday, U.S. Treasury yields closed mostly unchanged, though the yield curve saw a slight steepening. Early in the session, yields climbed following a stronger-than-expected U.S. services PMI and Federal Reserve officials signaling a low likelihood of large rate cuts. However, yields later declined as oil prices dropped, influenced by easing Middle East tensions and reduced demand from China. The market continues to price in around 75 basis points of rate cuts by year-end. Attention now shifts to Friday’s Personal Consumption Expenditures (PCE) price index, where core PCE is expected to remain steady at 0.2%, driving the annual figure to 2.7%. Notably, the sole dissenting Fed member opposing a 50bps rate cut is scheduled to speak at a Kentucky banking association, and her insights on the current macroeconomic environment will be closely monitored. Ten-year U.S. Treasury yields have been flirting with resistance at 3.76%, if they break and close above this level they might surge above 3.8%. In European sovereign markets, Germany’s two-to-10-year yield curve turned positive for the first time since November 2022. This shift follows weak private sector data, which heightened expectations for European Central Bank rate cuts, with traders now increasing bets on a rate cut at the ECB’s upcoming meeting. We look at the risks and opportunities within this macroeconomic environment here.

Commodities: Copper and iron ore, as well as several other China-centric commodities, jumped after Beijing announced a series of major measures to boost growth and shore up its beleaguered property market. Copper reached a 10-week high and has now recovered around 13% from the August low, while iron ore jumped 5% in Singapore. Crude oil is trading higher as well on China support measures and geopolitical concerns, but so far Brent has yet to challenge key resistance above USD 75. Watch out for signs of recovery in diesel after the fuel led the recent sell-off, leading to a record speculative net short in gas oil and ULSD. Gold hit a fresh record high in Asia at USD 2640 as it continues to defy calls for consolidation, but into the European session, silver is doing the heavy lifting amid support from industrial metal strength. Arabica coffee jumped 5.1% on Monday amid extreme weather conditions in Vietnam and Brazil, fuelling crop worries.

FX: The relative weakness in European PMI was discussed in the Weekly FX Chartbook yesterday and turned out to be the key theme in FX markets yesterday. This made euro the underperformer among the major currencies as markets increased the odds of an October ECB rate cut. Euro’s weakness was most pronounced against the activity currencies kiwi dollar and Australian dollar, and it also fell over 0.6% against the British pound amid the odds of diverging economic and policy dynamics. Germany’s Ifo will be in focus today given risks of a recession signaling need for faster rate cuts from the ECB. The weakness in euro also filtered through to other European currencies, particularly the Scandies. The Australian dollar hit a fresh high for the year after the RBA, as expected, kept its key rate at a 12-year high - thereby defying global easing trends - only to surrender all the gains after RBA Govenor Michele Bullock said the bank can't guarantee the economy will avoid recession. Meanwhile, Japanese yen was down again overnight as BOJ's Ueda again signaled no rush to hike rate again. 

Volatility: Volatility is continuing its retreat after last week’s Fed rate cut, with the VIX down to 15.89 (-1.61%), edging closer to pre-announcement levels. Market sentiment is relatively calm this morning, with S&P 500 futures steady and the Nasdaq 100 futures up 0.05%. Expected moves for today, based on options pricing, show the S&P 500 could swing by approximately 22 points (~0.39%) and the Nasdaq 100 by around 122 points (~0.61%). Today’s key economic event is the release of the CB Consumer Confidence data, expected to come in at 103.9, slightly up from last month’s 103.3, reflecting a stable consumer outlook. With no other significant events scheduled, volatility is likely to remain subdued unless the data surprises significantly. In the options market, Nvidia, Tesla, and Apple are seeing the highest activity, with Tesla displaying elevated implied volatility at 67.73%, indicating higher anticipated price swings. As markets digest the recent interest rate changes and today's data release, we may see a gradual normalization of volatility levels. Keep an eye on the consumer confidence figures for any unexpected shifts in market sentiment.

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