Financial Markets Today: Quick Take – November 1, 2022 Financial Markets Today: Quick Take – November 1, 2022 Financial Markets Today: Quick Take – November 1, 2022

Financial Markets Today: Quick Take – November 1, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Risk sentiment remains near the local highs heading into tomorrow’s FOMC meeting, where the market is hoping for guidance that suggests a downshift in the pace of tightening. Another micro-hike of 25 basis points from the RBA increases the sense that more central banks are set to slow their fight on inflation via rate hikes. Elsewhere, unconfirmed stories swirling overnight in China that that Covid restrictions are set to be lifted saw a potent rally in Chinese equities.


What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

Momentum is trying to come back into US equities after yesterday’s retreat with S&P 500 futures trading around the 3,902 level. A higher close today could set in motion an extended rally into tomorrow’s FOMC rate decision lifting expectations for the Fed to signal a slowdown in rate increases. Given the latest macro figures we have gotten this might still be too early for the market to expect this, but if the Fed confirms the ‘peak hawkishness’ narrative then the 4,000 level in the S&P 500 futures is not outrageous.

Euro STOXX 50 (EU50.I)

Strong earnings from BP lifting sentiment in early trading in addition to positive spillover effects from the Chinese equity session seeing Hang Seng futures 6.1% higher on unconfirmed news that Chinese policymakers are considering phasing out its strict Covid policy. STOXX 50 futures are pushing higher this morning trading around the 3,649 level, which is the highest level since 13 September. The market is increasingly adjusting to the ‘peak hawkishness’ theme and if momentum extends here the 200-day moving average at the 3,675 level is the big area to watch out for.

FX: USD on its back foot as market hopes for dovish downshift at FOMC meeting

The market’s hope for a dovish downshift in the Fed’s guidance is a bit nuanced, as the expectations for the coming handful of meetings are back near the cycle highs, with the Fed funds priced to reach nearly 5.00% at the March or May FOMC meeting next year, while expectations farther out into next year and in 2024 are 25 or more basis points from the cycle highs. But with the USD on its back-foot and risk sentiment clearly unafraid of the Fed at the moment, the surprise side this Wednesday would be a stern message from the Fed that checks sentiment. Watching parity in EURUSD as an important psychological barometer, 1.1500 in GBPUSD, which was briefly broken yesterday, and eventually 145.00 in USDJPY and 7.25 area in USDCNH if the sudden USD drop overnight on hopes that China Covid policy is set for relaxation sticks and follows through.

HG Copper (HGZ2) recovered all of Monday’s losses during Asian trading

...partly driven by a report that a “Reopening Committee” has been formed led by a Politburo Standing Member. The committee is reviewing data to assess various opening scenarios, targeting a March 2023 reopening. In addition to a weakening dollar and demand towards renewable energy, the copper market is being supported by persistent supply challenges highlighted by top supplier Codelco lowering its annual guidance for the second time in three months. The futures price remains stuck within a narrowing trading around $3.45 and looks poised for a breakout soon. Given the latest developments the risk of an upside break has risen.

Gold (XAUUSD) trades higher

… after falling for a third consecutive day on Monday, thereby extending its monthly losing streak to seven, the longest since the late 1960’s. The market bounced with support from lower bond yields and a softer dollar but as a minimum the yellow metal needs to break above $1730 before an end to the month-long downtrend can be called. The WGC reported that central banks bought a record 400 tons during the third quarter, more than quadruple the amount of a year earlier, thereby more than offsetting the 227 tons reduction in holdings across bullion-backed ETFs

Crude oil (CLZ2 & LCOZ2)

Crude oil trades higher within the established range after advancing with the broader market overnight as OPEC+ begins to cut production by around 1.2 million barrels per day, a decision that has been driven by excess supply according to its secretary-general. OPEC also released its World Oil Outlook in which they estimate demand will climb 13% to reach 109.5mb/d in 2035, then hold around that level for another decade. A weaker global economic growth hurting demand, OPEC+ production cuts and EU sanctions on Russian crude from December have all clouded the outlook, thereby supporting the current rangebound price action. Focus on Wednesday’s FOMC meeting and its potential impact on the dollar. Brent has since the September low several times been bouncing off trendline support, currently at $92 with resistance at $97.25 and $98.75.

US treasuries (TLT, IEF)

US 10-year treasury yields have eased back toward 4.00% after briefly touching above 4.1% yesterday. The focus on continued strength in bond markets will be the 3.90% pivot low yield posted last week, which could open up for a run to the 3.50% area, but would such a move represent a flight to safety (weak risk sentiment) or be celebrated as a sign of easing pressure on asset valuations. The key two event risks are the FOMC meeting Wednesday and how the yield curve reacts as well as the US jobs report on Friday, with the ISM Services Thursday also an interesting data point.

What is going on?

RBA hikes 25 bps, ups inflation forecasts, downgrades GDP and remains dovish

Will the RBA stop hikes early? The RBA hiked the cash rate by 25bps (0.25%) as most expected to 2.85%, maintaining its dovish stance and bordering on restrictive, as it again acknowledged tighter financial conditions are yet to be felt in mortgage payments, but higher rates and inflation have put pressure on household budgets, causing a small amount of loan arrears and insolvencies. This rate hike cycle since May, has been the second fastest in history. We note the RBA was the first major central bank to under-deliver on rate hike expectations last month. The RBA raised its year-end 2022 CPI forecast from 7.8% to around 8%. The RBA revised its GDP forecast down, with growth of around 3% expected this year and 1.5% in 2023 and 2024. AUD knee-jerked lower on the decision, but recovered most of the lost ground against a stumbling US dollar in Asia, while sticking near local lows against the NZD.

BP had exceptional Q3 in gas marketing and trading

The European oil and gas major is lifting sentiment in Europe with strong net income beating expectations while cash flow generation is coming in below estimates. The energy company is increasing its buyback programme further by $2.5bn.

Toyota down 2% on big operating income miss

Japan’s largest carmaker is lowering its fiscal year production target as Volkswagen also recently did while posting a Q2 operating income of JPY 563bn vs JPY 765bn due to soaring materials costs and one-off items. The lower production target comes as the industry is still facing a chips shortage.

UK Treasury says all Britons will have to pay more tax

Chancellor Hunt said that “those with the broadest shoulders should be asked to bear the greatest burden” as the clear message from the new Sunak government, after the previous Truss-Kwarteng team triggered chaos in UK Gilts and sterling, is that financial stability is priority number one. The particulars of the new budget and policy will be laid out in a statement on November 17.

US President Biden rails against oil companies not reinvesting profits, promising to raise taxes on profits that are “windfall of war”...

... saying that “The oil industry has not met its commitment to invest in America.” Such a move would require a bill to pass through Congress, however, which would likely prove difficult after the mid-term elections next week, if projections of a strong GOP showing flip the House and possibly the Senate into their hands, making for a largely lame-duck presidency for the next two years.

Eurozone GDP and inflation prints continue to make the ECB’s job tougher

Eurozone inflation data for October YoY printed another record as it soared to 10.7% (prev. 9.9%), and well above the median Bloomberg expectation of 10.3%. Meanwhile, Q3 GDP growth slowed to 0.2% QoQ or 2.1% YoY (prev. 0.8% QoQ, 4.1% YoY). While mild weather and full storage has not unleashed the full effects of energy shortages this year, the threat continues to loom, and this could mean the macro story could deteriorate further.

Japan spent a record $42 billion to defend JPY in October

The Finance Ministry is said to have another 10 trillion yen, or about $68 billion in ready cash left to throw after defending the JPY if pressure mounts again, although Japan’s central bank reserves are many, many multiples of these amounts, currently at $1.24 trillion.

What are we watching next?

Another small hike from a central bank (the RBA) encourages speculation of dovish shift at the FOMC meeting on Wednesday

A number of recent central bank meetings of late, including the latest RBA meeting overnight, which saw Australia’s central bank only hiking rates 25 basis points for the second consecutive time, encourage the notion that the Fed is set for a dovish shift at this Wednesday’s FOMC meeting. Working against that narrative have been a number of possible “leaks” by journalists at key publications thought to have strong Fed sources, including the WSJ’s Nick Timiraos and a NY Times reporter, whose latest musings suggest that the Fed is not set to indicate any backing down from its hawkish message. An overtly defensive and hawkish FOMC meeting tomorrow could badly shock the market, which coming into this morning, at least, seems hopeful that the Fed is set to downshift its tightening guidance this week. Or at least, given that Fed expectations for the next six months or so are within a few basis points of the cycle highs, isn’t obviously afraid of the message the Fed is set to deliver: equities are up near the local highs after a ripping rally off October lows.

Earnings to watch

Today’s US earnings focus is AMD, Airbnb, and Uber with analysts expecting revenue growth of 31% y/y for AMD but EPS down 5% y/y as input pressures are eating up growth coming from strong product introductions. Airbnb is still riding the reopening tailwind with revenue expected to increase 26% y/y in Q3 and EBITDA expanding significantly to $1.39bn up from $888mn a year ago. Uber has a goal of becoming self-funded by 2024 and could achieve this based on the current trajectory. The company is expected to deliver revenue growth of 67% y/y and EPS of $-0.06 up from $-0.42 a year ago.

  • Today: Toyota Motor, Sony, BP, Eli Lilly, Pfizer, AMD, Mondelez, Airbnb, Uber
  • Wednesday: Suncor Energy, Nutrien, Novo Nordisk, Maersk, Vestas Wind Systems, GSK, Electronic Arts, Qualcomm, CVS Health, Estee Lauder, Booking, Fortinet, Ferrari, Albemarle
  • Thursday: Verbund, Barrick Gold, Orsted, Novozymes, BNP Paribas, BMW, Enel, ING Groep, DBS Group, ConocoPhillips, Amgen, PayPal, Starbucks, Regeneron Pharmaceuticals, EOG Resources, Moderna, MercadoLibre, Block, Cloudflare, Coinbase
  • Friday: Enbridge, Societe Generale, Intesa Sanpaolo, SoftBank, Amadeus IT Group, Duke Energy,

Economic calendar highlights for today (times GMT)

  • 0820 – Australia RBA Governor Lowe to speak
  • 1400 – US Sep. JOLTS Job Openings
  • 1400 – US Oct. ISM Manufacturing
  • 2000 – New Zealand RBNZ publishes Financial Stability Report
  • 2030 – API Weekly Report on US Oil Inventories
  • 2145 – New Zealand Q3 Average Hourly Earnings
  • 2145 – New Zealand Q3 Employment Change/Unemployment Rate
  • 2230 – Canada Bank of Canada Governor Macklem to speak
  • 0030 – Australia Sep. Building Approvals

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