Global Market Quick Take: Europe – October 4 2023

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

Equities: S&P 500 futures broke below the established trading range trading around the 4,240 level with the 200-day moving average likely to be tested down at the 4,227 level. Equities are right now dictated by the bond market and how high yields will go be the move exhausts itself. As we wrote in yesterday’s equity note the weakest link in equities on higher bond yields is green transformation stocks.

FX: The big move in US long bond yields is relentlessly pushing the USD Index higher trading around the 107.18 level this morning the highest since November 2022. EURUSD is also declining again this morning trading at the 1.0460 level with no major support levels down to 1.0400.

Commodities: Oil stabilised yesterday after some selling earlier in the week, but Brent crude is back below $91/barrel as higher bond yields are expected to slow the economy and thus demand for oil.  Gold continues to slide lower this morning trading around the 1,818 level falling for eight straight sessions in the most brutal selloff over the past year.

Fixed income: US Treasuries continue to tumble as the 3-month SOFR rate shows the Federal Reserve will not cut rates below 4.25% in the foreseeable future. The selloff continued despite US Treasury Secretary Janet Yellen trying to comfort markets saying that the higher-for-longer scenario is not a given. Selling pressures pushed ultra-long maturities to test critical levels on both sides of the Atlantic with 20-year US Treasury yields breaking above 5% a level not seen in 10- nor 30-year maturities since 2007. This morning, 30-year US Treasury yields are also rising to test 5%. In England, 30-year Gilt yields broke above 5%, a level not seen since 2002. In Europe, 10-year German real yields rose to 0.64%, doubling in merely ten days and reaching a level not seen since 2011, pushing 10-year Bund nominal yields to 3%. We believe that yields will continue to soar and that the yield curve will steepen further as 10-year US Treasury yields rise to 5%. In the meantime, financing conditions will tighten further putting pressure of risk. We therefore remain cautious, and favour low duration, high-grade bonds.

Volatility: The VIX Index still remains below the structural level (around 22) for when the market switch from being positive to negative in terms of expected returns.

Macro: The big macro data point yesterday was the August JOLTS Job Openings at 9610K vs est. 8815K underpinning the narrative of ‘higher for longer’. Having said that it is important to acknowledge that this time series is very volatile on m/m figures and that the smoothed 6-month average is still pointing down (pressures in US labour market slowly easing).

In the news: Big moves in the long end of the US yield curve reverberate through financial markets (Bloomberg). Kevin McCarthy was ousted yesterday as Speaker of the US House of Representatives as a first in US history (FT).

Technical analysis: US and EU stocks Bearish trend: S&P500 support at 4,169. Nasdaq 100 support at 14,254. DAX likely support at 14,933. EURUSD downtrend close to exhaustion, minor support at 1,0438. GBPUSD downtrend, support at 1.20. USDJPY uptrend intact but stretched, resistance at 152. Brent Crude oil correction likely down to 88.10. US 10-year yields towards 5%.

Macro events: US Sep ADP Employment Change (1215 GMT) est. 150K vs prior 177K. US Sep ISM Services Index (1400 GMT) est. 53.5 vs prior 54.5.

Earnings events: Tesco reports FY24 1H results (ending 31 August) before the European equity market opens with analysts expecting revenue growth of 5% y/y and no change in operating profits.

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