Financial Markets Today: Quick Take – November 4, 2022 Financial Markets Today: Quick Take – November 4, 2022 Financial Markets Today: Quick Take – November 4, 2022

Financial Markets Today: Quick Take – November 4, 2022

Macro 6 minutes to read
Saxo Strategy Team

Summary:  Markets sold off yesterday in continuation of Fed Chair Powell’s blast of hawkish rhetoric at the Wednesday FOMC meeting, although a slightly softer than expected October ISM Services survey helped reverse the rise in yields yesterday and pushed back against further USD strength. As the lows for the cycle in the US equity market have now zoomed into view again, the next important event risk is today’s US October jobs report and whether it continues to drive Fed tightening expectations and with them, the US dollar higher still.


What is our trading focus?

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

US equities declined again yesterday with mega cap technology stocks being weak, but the news that China is working on a plan to ease Covid restrictions is lifting overall equity sentiment. S&P 500 futures are trading around the 3,735 level with yesterday’s low at 3,704 being the critical support level to watch on the downside and yesterday’s open price of 3,767 being the key level on the upside. Today’s key event is the Nonfarm payrolls for October with the most important sub-release being the average hourly earnings figures as the wage pressures are what will keep inflation alive for longer.

Euro STOXX 50 (EU50.I)

More rumours in China that the country is getting closer to ease its Covid restrictions are driving equity sentiment higher in Asia with spillover into European equities. STOXX 50 futures are staging a comeback this morning up 0.6% trading around the 3,614 level with the 3,620 level being the first resistance level just above. European equity futures are also receiving some tailwinds from strong earnings this morning from Societe Generale significantly beating estimates.

Hong Kong’s Hang Seng (HSIX2) and China’s CSI300 (03188:xhkg)

Stocks in Hong Kong and the mainland surged on intensification of speculation on relaxation (not abandoning but relaxing) of the Dynamic Zero-Covid strategy, newswire stories reporting that the U.S. Public Company Accounting Oversight Board (PCAOB) has completed the first round of inspection on Chinese ADR ahead of schedule, and an article from Vice-Premier Liu He on the People’s Daily pledging to boost domestic aggregate demand.  Hang Seng Index jumped more than 7% and CSI300 surged 3.5%. China Internet stocks climbed 10% to 20%, with Alibaba (09988:xhkg) up 15%, and Tencent (00700:hkxg) up nearly 10%.

FX: USD strength reversed further in Asian session overnight ahead of US jobs report later today

The US dollar posted fresh local highs only to see strength fading on a weaker than expected October ISM Services survey, which tempered the rise in yields. The US dollar weakened further overnight, with USDCNH correction particularly sharply even after a weaker than expected fixing of the onshore CNY rate that the CNH tracks, suggesting improved CNH sentiment. The critical next test here after Fed Chair Powell’s blast of hawkish rhetoric at the FOMC press conference and the ensuing jump in US treasury yields is today’s US October jobs report, with an eye not only on the payrolls change data (expected around +200k after +263k in September) but also on the Average Hourly Earnings (more below).

Gold (XAUUSD)

Gold trades higher on short covering after once again finding support in the key $1615 area. The bounce being supported the dollar and US Treasury yields both pausing their advances following a weaker than expected October ISM Services Survey. Also supporting the price is a further inversion of the yield curve signaling increased risks of an economic slowdown. The benchmark 2-10 year Treasury yield spread has risen to a four-decade extreme at –57 basis point. Having returned to safer ground the market will be watching the incoming economic data, starting with US payrolls today. Support as mentioned at $1615 while the first key upside challenge awaits in the $1675-80 area where we find a recent high, the 50-day moving and trendline from the March high.

Crude oil (CLZ2 & LCOF3)

Crude oil jumped to a one-week high overnight, thereby reversing the shallow dip that followed the hawkish FOMC meeting on Wednesday. Just like earlier in the week, the market is once again responding to rumours on social media that China may change its Covid zero policy. A change is increasingly a question about when, not it, and once it happens several key commodities look set to receive a boost from the prospect of a pickup in demand from the world’s top consumer of raw materials. In addition, the market is trying to weigh the bullish implications of the OPEC production cuts and EU sanctions on Russian crude next month against a global economic slowdown. Brent resistance at $97.25 and $98.75 while WTI, having broken above $90, may look at $93.64 next.

Cotton (CTZ2) jumps on short covering and signs of demand rebounding

Cotton, down by more than 50% since May on worries about the health of the global economy and with that demand for garments from consumers, has bounced 16% since last Friday. Despite renewed dollar strength weighing on other agriculture commodities cotton has bounced on signs China’s yarn production seems to be picking up. A story supported by weekly US export sales to China showing a 98% jump from a year ago.

US treasuries (TLT, IEF)

The short end of the curve remains just below the highs for the cycle posted yesterday, with the 2-year yield trading near 4.70% and peak Fed expectations for next year near 5.15%, while the US 10-year treasury yield benchmark rise was tempered yesterday by a slightly weaker than expected October US ISM Services survey, rolling back lower toward 4.14% this morning from a 4.20% high. The next test for treasury yields is today’s October jobs report, with strong numbers likely lifting the entire curve higher. For the 10-year yield, the focus is on the cycle highs at 4.34%. Next Thursday’s October CPI release will be the next nail-biter for US treasuries and all markets.

What is going on?

Bank of England’s dovish hike crushes sterling

The BOE hiked by 75 bps to 3%, as expected by the consensus, but strongly pushed back against expectations for the scale of future moves, saying that the terminal rate priced in currently by the markets would induce a two-year recession. There were also two dovish dissenters at the meeting, one calling for 50 bps rate hike and another for a mere 25 bps. New forecasts were also released, which gave a particularly grim outlook for the economy, looking for a GDP print of -0.5% QoQ in Q3 2022 vs -0.1% expected in September. The inflation forecast now shows a peak around 11% in Q4, which is marginally hotter than the prior meeting’s projection. Sterling was crushed lower, having already fallen heading into the meeting, and traded as low as 1.1150 in GBPUSD and as high as 0.8743 in EURGBP, the latter a huge reversal after the pair threatened support.

US weekly jobless claims tick lower, ISM services softened

There was a slight decline in initial jobless claims to 217k from previous 218k, coming in marginally below the expected at 220k. Still, the US labor market remains tight despite some signs of cooling and continues to provide room to the Fed to continue its tightening cycle. Meanwhile, the ISM services index fell more than expected to 54.4 in October from 56.7 previously, however the prices paid gauge increased by 2% pts to 70.7 and remains elevated.

Societe Generale in massive beat

The French bank is following the rest of the industry beating estimates with Q3 net income at €1.5bn vs est. €1bn and revenue at €6.8bn vs est. €6.3bn. The CEO says that he sees a –2% recession in Europe in 2023.

Norges Bank hiked by 25bps

With expectations split between a 25 or 50bps rate hike, Norges Bank took the dovish path as well despite a deteriorating inflation outlook. However, the Committee continues to place emphasis on the growth situation writing "there are signs that some areas of the economy are cooling down" and acknowledging the tightening effect that the higher policy rate is beginning to exert. For the December gathering, the Committee points to a further hike being likely.

European governments are introducing new energy bill relief schemes

Over the past few days, several European governments announced new measures to limit the increase in energy prices. In Germany, the gas and electricity price brake has been finalized with gas at 12 cents and electricity at 40 cents for households and 13 cents for industrial firms. According to the government, €13bn in total will be made available to further support SMEs and service providers such as hospitals. In Poland, the President signed on Wednesday into law the government’s bill to cap coal prices at 2,000 zloty per tonne for households and electricity prices at 693 zloty per MWh for households (785 zloty per MWh for certain other entities, with certain usage limits). In France, the government mentioned in the draft budget bill for 2023 that energy subsidies will remain in place…until 2027. This confirms the energy crisis is structural and here to stay for long. The fiscal « whatever it takes » will not disappear overnight. But expect that at one point taxation will increase significantly to finance such a high amount of fiscal stimulus.

LNG tankers loaded with gas to Europe have started to divert their cargoes

Dutch TTF benchmark gas has lost 50% of its value during the past two months and the combination of lower prices and congested terminals have resulted in cargoes starting to be diverted away to other destinations. A very mild beginning to the heating season has seen gas demand across the continent plummet, thereby lifting storage closer to full. Four cargoes bound for the region changed course to Asia since October 20, while another shipment has diverted to Colombia, according to Kpler via Bloomberg.

What are we watching next?

US October jobs and earnings to cap a hectic week after Wednesday’s hawkish blast from Fed Chair Powell

The week may end with further volatility today on any surprises in today’s US jobs and earnings data. The October Nonfarm Payrolls Change is expected around +200k after a +263k in September, while the unemployment rate is expected to tick higher to 3.6% (the cycle- and modern record low unemployment posted in July and September has been 3.5% and is determined by the separate and mroe volatile household survey, where the participation rate is important to watch as well in calculating the rate). Perhaps most importantly: the October Average Hourly Earnings data is expected to come in at +0.3% MoM and +4.7% YoY. The latter would be a low since the summer of 2021. Significantly surprises in the earnings data in either direction would likely drive a large market reaction.

US mid-term elections next Tuesday

Pundits suggest that the Republicans have very strong odds of flipping the House of Representatives in their favour, while the odds look finely balanced for whether the Senate ends retaining the slimmest of Democratic majorities. Republicans taking both houses has few immediate ramifications, as US President Biden has the presidential veto, but a stronger than expected Democratic showing that somehow sees them retaining the House and strengthening their Senate majority would be a game changer – opening for more policy dynamism from the US over the next two years rather than the expected lame-duck presidency. Uncertainty is high as pollsters have had a hard time gathering accurate indications for the election results since Trump’s victory in 2016.

Earnings to watch

Today’s earnings calendar is light in the US with only Duke Energy being one of the larger earnings releases to watch and could be interesting given the recent acceleration in M&A activity in the US utility sector. Analysts will be watching whether Duke Energy is getting along in its review and possible sale of its $4bn portfolio of solar and wind assets.

  • Today: Enbridge, Societe Generale, Intesa Sanpaolo, SoftBank, Amadeus IT Group, Duke Energy

Economic calendar highlights for today (times GMT)

  • 0815-0900 – Eurozone final Oct. Services PMI
  • 0930 – UK Oct. Construction PMI
  • 0930 – ECB President Lagarde to speak
  • 1000 – Eurozone Sep. PPI
  • 1215 – UK Bank of England Chief Economist Huw Pill to speak
  • 1230 – US Oct. Nonfarm Payrolls Change
  • 1230 – US Oct. Unemployment Rate
  • 1230 – US Oct. Average Hourly Earnings
  • 1230 - Canada Oct. Unemployment Change/Rate
  • 1400 – Canada Oct. Ivey PMI
  • 1400 – US Fed’s Collins (Voter 2022) to speak
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:

Apple Sportify Soundcloud Stitcher

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.