Global Market Quick Take: Europe – September 28 2023

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

Equities: Shares in Asia fell overnight as investors responded to an ongoing rally in global oil prices supporting the higher-for-longer narrative, which has driven 10-year US Treasury yields to a 2007 high near 4.6%. Wall Street meanwhile ended flat on Wednesday following a late-session recovery while the MSCI World index recorded its longest losing streak in more than ten years.

FX: Dollar range-bound in Asia after further yield-driven gains in the US session brought the DXY index to fresh YTD highs. Weakest on the G-10 FX board was AUD despite a higher inflation print yesterday boosting RBA’s rate hike bets and support of authorities for the yuan. AUDUSD dipped below 0.6340 but back at 0.6380 now. NZDUSD tested the 0.59 handle but reversed back to 0.5950. EURUSD broke below 1.05 but so far holding above the January low at 1.0484, a key level ahead of 1.04, while GBPUSD touched at 1.2130 low. USDJPY printed fresh highs of 149.71 but was back below 149.50 amid intervention risks.

Commodities: Crude oil prices got another push from shrinking inventory data, and fresh new YTD highs were seen with WTI touching $95 and Brent moving closer to $100. Inventories at Cushing Oklahoma – the biggest crude hub in the US – dropped just below 22 million barrels, close to operational minimums and lowest since the seasonal lows of 2014. Gold slipped below $1885 support amid ongoing pressures from rising yields and the strong dollar.

Fixed Income: The Federal Reserve’s higher-for-longer message reverberates though higher long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly, or that the economy is slowing down quickly, long-term yields will continue to soar. With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening and less foreign investors demand, it’s not unlikely to see yields to continue to rise towards 5% until something breaks. Yesterday’s 5-year notes auction received solid demand while offering the highest auction yield for that tenor since 2007. Yet, robust demand at yesterday’s auction failed to tame selling sentiment in the bond market as rates continued to rise after together with oil and the US dollar. Our attention turns to today’s 7-year notes auction, a tenor normally not liked by investors, which might add to the selling pressure. Overall, we continue to favour short-term maturities and quality.

Volatility: The CBOE Volatility Index fell 0.7 to 18.22% on Wednesday after the underlying S&P 500 index managed an unchanged close following earlier weakness

Macro: Fed voter Kashkari, a dove-turned-hawk, was on the wires again and was open to the possibility of more than one additional rate hike. He said that the FOMC may do less if a shutdown or prolonged UAW strike slows the economy, but "there is that risk" of more increases should tightening not have the intended effect.  Euro-area credit data showed further evidence of interest rates biting, with borrowing by companies and lending to households hitting the slowest pace in eight years. Australia’s August CPI rose to 5.2% y/y from 4.9%, as expected. Trimmed mean was unchanged, showing inflation remains sticky beyond the impacts of a soft base and high gasoline prices on the headline. RBA real rates remain negative, and the inflation print raises expectations of another rate hike, but the quarterly inflation print due in end-October may be awaited.

In the news: US crude stockpiles fall as Cushing continues to drain (Reuters), Micron projected a fiscal first-quarter loss of as much as $1.14 a share, excluding some items. Analysts had estimated a 96-cent loss (Bloomberg). McCarthy still lacks votes for GOP stopgap, increasing odds of a shutdown (Politico), Meta launches AI chatbots for Instagram, Facebook and WhatsApp (FT), China Puts Evergrande’s Billionaire Founder Under Police Control (Bloomberg), Treasury ‘Term Premium’ Gauge Positive for First Time Since 2021 (Bloomberg).

Technical analysis: S&P 500 downtrend support at 4,200. Nasdaq 100 support at 14,254. DAX downtrend support at 14,933. EURUSD downtrend at 1.05 support, expect rebound. GBPUSD below support at 1.2175, oversold, next support 1.2012. USDJPY uptrend stretched but could reach 150. Gold testing support at 1,870. Crude oil in uptrends Brent resist at 99.45, WTI above 93.74 resist. US 10-year T-yields uptrend could reach 4.70

Macro events:  Euro-area consumer confidence (0900 GMT), German CPI (Sep) exp 4.6% vs 6.1% prior, US GDP (2Q) exp 2.2% vs 2.1% prior, US Initial Jobless Claims 215k vs 201k prior, US Pending Home Sales exp –1% MoM vs 0.9% prior, EIA’s Weekly Natural Gas Storage Change Report (1430 GMT)

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