Equities: New extremes and a challenging opportunity set
Discover insights on the future of equity markets in Q1 2024 and navigate the potential recession with strategic investment choices.
Summary: US equity markets posted another strong day yesterday, with the S&P 500 even managing a new all-time high before pulling back lower before the close. The mood in Asia was largely upbeat as well. Yesterday, the ECB indicated it would move forward some of its asset purchases, which the market took as a dovish message, but then indicated it did not want to give the impression that this would lead to more stimulus, rather muddling the overall guidance.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)–the divergence in US equity markets was clear again yesterday with the S&P 500 closing at an all-time high while the Nasdaq 100 Index was still down around 6% from its all-time high. This pattern illustrates well what we could continue to experience as US interest rates move higher towards 2-2.5% as the output gap is closed, namely that highly valued technology stocks are more sensitive to rising interest rates than the rest. Overall, we maintain a positive view on the US equity market driven by strong economic growth over the coming years. With the US 10-year yield bouncing back sitting at 1.58% this morning Nasdaq 100 futures are yet again selling off. Yesterday’s price range was so big in Nasdaq 100 that we do not expect any major breakouts today, unless we see a break below 12,700.
STOXX 50 (EU50.I) - European equity futures are flat to slightly lower this morning on mixed Asian session and many bad news yesterday around the AstraZeneca vaccine has been suspended in seven European countries due to reports of blood clots after the first shot in one of the batches. The vaccine is a cornerstone in Europe’s vaccination rollout so these events could postpone the reopening of the economy. Earnings and momentum continue to be strong in Europe with the STOXX 50 futures very close to take out the highs from before the Covid-19 sell-off.
Bitcoin () and Ethereum () - Bitcoin took a poke at its all-time highs yesterday and overnight above 58,000, but eased back lower into today’s trade. The recent return of buying pressure in the crypto space may be in part on the anticipation that some of the stimulus checks handed out in the US could be plowed into crypto assets. Ethereum is a bit more bogged down than Bitcoin, still some 10% below the all-time highs from last month.
EURUSD – after the ECB softened its dovish indication that it would increase the pace of QE purchases with the further message that it is not declaring any increase in the overall size of purchases, the EURUSD rally added to gains and got within striking distance of 1.2000 before easing back lower overnight, with the USD likely support in part by a new rise in US treasury yields. The next keys for whether the EURUSD is set to stay in the lower zone below 1.2000 and toward 1.1600 and even 1.1500 or pop back into the higher range will likely be whether US yields remain contained and/or the FOMC meeting next Wednesday.
USDJPY and JPY crosses – the Japanese yen is the weakest major currency, trading lower on the combination of global reflation making its very low yields all across the curve very unattractive and as commodity prices rise (Japan produces very few commodities andalmost no oil or gas).Next week should prove very interesting for both the USD and JPY crosses on the FOMC on Wednesday and just as much, the Bank of Japan meeting on Friday, as Governor Kuroda and company are struggling with their messaging around their intent to prevent long JGB yields from rising -which has led to notable volatility. Moves in USDJPY could prove particularly dramatic if US yields are pulling to new highs and the sends the message that it is capping 10-year JGB yields – on the flip-side, a less stern guidance on yields and an orderly or lower US treasury market could lead to a climactic reversal. It feels like an either/or setup next week. 110 in a major chart point in USDJPY.
Crude oil (OILUKMAY21 & OILUSAPR21) - trades close to flat on the week as the market struggle for direction. Supported by the US stimulus bill and signs of a fuel consumption rebound around the world being somewhat offset by the risk of rising non-OPEC production. OPEC struck a cautionary tone in its Monthly Oil Market Report after downgrading the outlook for demand for its crude over the next six months amid a weaker demand outlook and stronger non-OPEC supply growth. A development that calls for an extended period of production discipline and restraint from the OPEC+ group of producers. Next week, the International Energy Agency will release its Oil Market Report
Gold (XAUUSD) - continues to slip from a one-week high as the direction continued to be dictated by developments in the dollar and bond market where yields rose again in response to the passing of the $1.9 trillion stimulus package.While the deal will support growth, it will also stoke inflation risks but following a weak CPI reading earlier in the week, such risk is not yet being reflected in the numbers. However, with this in mind, today’s PPI figures may receive some attention.Gold is still caught in a downtrend with key support being the area between $1670 and $1690 whilepotential buyers are in no rush as long gold stays below $1765/oz
No drama with thirty-year bond auction, but the 5-year breakeven rate rises to highest level since 2008 indicating more downside ahead (TLT, IEF). The 30-year bond auction tailed slightly yesterday, although bidding metrics were solid. Ahead of the auction the 5s30s steepened by around 5bps indicating that sentiment in treasuries continues to be bearish. In the meanwhile, the 5-year breakeven rate hit the highest level since 2008, showing that Treasuries remain at risk of another selloff.
The ECB boosts sentiment in European sovereigns but fails to remove volatility in the periphery (BTP10, IS0P). The ECB said that is going to increase purchases under PEPP, although it left the market guessing how much more it will buy under the program in the coming months. During the Q&A Mrs. Lagarde made sure to underline that PEPP purchases remain an emergency tool that the central bank may decide to tweak and stop when needed. This doesn’t remove the volatility in the periphery which currently rely on such program. As yields rise in the US, investors might decide to dump debt from the periphery in favor of the US safe heaven. Particularly at risk is Greece which sovereigns are held by foreign investors. Greece is currently offering a yield of 0.8% while US Treasury bonds with maturity from 7-10 years hedges against the EUR offer around 1.37%
What is going on?
ECB sends a muddled message at yesterday’s meeting - EU yields fell sharply on the initialindication that the ECB is to increase the pace of its purchases, though it did not specify the exact rate. Later, this message was rather muddled by the guidance that it did not want to give the impression that it was increasing the overall size of the PEPP (Covid emergency QE) , sending yields back a bit higher and supporting the euro a bit further as EURUSD teased toward 1.2000 yesterday before easing back lower overnight.
In China, a resurgence in African swine fever has sent local corn prices down to the lowest level this year and if not contained, the price weakness may spread to overseas markets, most noticeable to Chicago grain and oilseeds futures. The Bloomberg Grains Index trades lower on the week and while the losses, led by corn (CORNMAY21) are relatively small, a potential slowdown from China could leave the sector vulnerable to demand downgrades and with that the risk of selling from funds holding an elevated exposure in both corn and soybean futures.
What are we watching next?
Next week’s FOMC meeting and the SLR issue -back during the pandemic outbreak last year, the Fed enacted a special “supplemental leverage ratio” (SLR) rule to allow banks to lower the amount of capital held versus Treasury bonds and deposits they hold at the Fed. The rule is set to expire at the end of this month unless the Fed extends it, and a failure to extend it could mean difficulties with liquidity in the US Treasury market as large US banks unwind treasury positions. There are other issues in the US Treasury market and Repo market that the Fed may have to address soon if it wants to avoid disruption in money markets and elsewhere. Some of this may be addressed at next week’s March 17 FOMC meeting.
Earnings releases to watch this week:
should have reported yesterday but has postponed its earnings release to Wednesday next week. JD.com, one of the largest e-commerce companies in China, reported Q4 earnings that were much stronger than expected and revenue also exceeded expectations showing the resilience of China’s rebound in consumer spending.
Today: China Mengniu Dairy, , Fortum, AIA Group
Economic Calendar Highlights for today (times GMT)
1000 – Euro Zone Jan. Industrial Production
1330 – Canada Feb. Employment Data
1330 – US Feb. PPI
1500 – US Mar. Preliminary University of Michigan Sentiment
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