Summary: A huge squeeze across equity markets developed yesterday on no readily identifiable catalyst, with yields easing a bit lower and the US dollar dropped falling sharply, as most markets posted a sudden reversal of the Friday melt-down in sentiment. One possible driver for the fresh thaw in sentiment was a report that the Bank of England may delay its quantitative tightening programme, perhaps raising hopes that other central banks will eventually do the same.
Strong equity session yesterday with S&P 500 futures closing at their highest level since 7 October as the index futures rebounded 2.6%. The momentum is continuing this morning with S&P 500 futures trading around the 3,742 level with the 3,800 as the next major resistance level on the upside. Nasdaq 100 futures are trading around the 11,295 level this morning with 11,494 as the next upside level to watch. The US 10-year yield is still hovering around the 4% level and US financial conditions remain around their average historical level. As we scan across different markets there are no obvious reasons for the major rebound so our best guess is short coverings and technical flows. Our medium-term outlook is still negative on equities.
Stocks traded in Hong Kong bounced the second day in a row with the benchmark Hang Sang Index rising nearly 1.5%. Heavy weight HSBC (00005:xhkg) gained 2.6% and China Internet names surged from 3% to 7%. BYD (01211:xhkg) surged 6.4% after the leading EV maker said its Q3 profit may soar up to 365%. CSI300 was bouncing around small gains and losses. China’s National Development and Reform Commission said China’s economic growth “rebounded significantly” in Q3 while the National Bureau of Statistics delayed the release of Q3 GDP, September industrial production, retail sales, and fixed asset investment data that were scheduled to come today without providing a reason or a new schedule. A document from the European Action Service advises EU’s finance ministers that EU must take a tougher line in its dealing with China and see the latter as an all-out competitor.
Yesterday was the third consecutive session in which risk sentiment posted a sharp U-turn, as equities rallied sharply and the US dollar sold off steeply, led initially by a drop versus a hard rallying sterling yesterday on hopes that newly minted Chancellor Jeremy Hunt’s elimination of most of PM Liz Truss’ initiatives will stabilize the currency and the country’s bond market. An additional report from the FT that the Bank of England would look to delay its original quantitative tightening (QT) plan may be at the root of some of the broad risk-on, as hopes that other central banks will slow the tightening pressure could bring some relief to deteriorating liquidity across markets.
Crude oil prices stabilized in early Asian hours on Tuesday after a slight decline yesterday. WTI futures rose towards $86/barrel while Brent was above $91. Chinese demand concerns however weighed on the commodities complex coming out of the weekend CCP announcements on Zero Covid. On the OPEC front, Algeria's Energy Minister echoed familiar rhetoric from the group that the decision to reduce output is a purely technical response to the world economic circumstances.
US treasury yields fell slightly, and the curve steepened in a session marked by far less volatility than the gyrations elsewhere, as the US dollar sold off and risk sentiment squeezed sharply higher. At stake for the longer end of the curve is whether yields remain sticky near the key 4.00% level and head higher still. Data this week is generally second tier stuff. If treasuries rally, the downside focus would be on the 3.84% pivot low in yields.
The Q3 CPI report came in far above expectations, with the headline printing at 2.2% q/q and +7.2% YoY, far above the 1.5/6.5% expected. This took RBNZ rate expectations sharply higher, and the NZD snapped higher as well. The market is now leaning for the RBNZ to hike by 75 basis points (about 70 bps priced in) at the November 23 meeting, which would be the first time the bank has hiked by more than 50 basis points for this cycle. NZDUSD rose to 0.5700 and AUDNZD punched lower to near 2-month lows after breaking below 1.11 with RBA minutes continuing to highlight concerns of rapid tightening for housing market and household budgets.
Bank of America beat estimates yesterday with stronger earnings on disciplined cost controls and robust client activity across both the commercial banking and investment banking activities. Q3 EPS was down 5% y/y, which is much better than its peers, and up q/q to $0.81 from $0.79 in Q2. The US bank is seeing a little slowdown in consumer spending, but it is still minimal supporting the view that the US consumer remains strong and with confidence in the future despite the tighter financial conditions this year. S&P 500 Q3 EPS is down 1.9% q/q but given the weakness among US banks q/q it is too early to say whether this will end up being the conclusion when the entire S&P 500 has reported earnings.
The US dollar moved lower on Monday, but that was no respite for the Japanese yen, which was the only G10 currency that weakened further on Monday, continuing to test the intervention limits of the authorities. USDJPY rose to 149.08, printing fresh 32-year highs. Bank of Japan Governor Kuroda was out overnight noting that the BoJ is watching the market and that JPY weakening drives inflation, but that inflation would eventually fall. He was also defiant when a lawmaker suggested he should resign, saying he had no plans to quit. While intervention expectations rose, the yen remains weak, with EURJPY, for example, hitting new cycle highs and the highest level in nearly eight years.
… with the Netherlands 1-month forward contract falling more than 10% yesterday and at its lowest level since late June as EU storage is essentially fully and weather has been mild thus far this fall. Germany announced that it would keep its three remaining nuclear plants in operation until at least mid-April, cancelling their planned mothballing for now, although there are still no strong signs of a strategic rethink from Germany on the future of nuclear power.
The NY Fed manufacturing survey for October fell to -9.1, contracting for a third consecutive month and coming in below the expected -4.0 and the prior -1.5. While survey data remains hard to trust to decipher economic trends, given a small sample size and questioning techniques impacting results, it is worth noting that more factories are turning downbeat about future business conditions which fell 10 points to -1.8 and was the second weakest since 2009. Also, the prices paid measure rose for the first time since June, echoing similar results as seen from the University of Michigan survey.
According to the latest data released by the real estate company Redfin, the U.S. housing market is going through a severe drop in prices in several major cities. From May 2022 to October 2022, the drop in sale prices is the most pronounced in Oakland (minus 16 %), San Jose (minus 14 %), Austin (minus 14 %), Ogden in Utah (minus 11 %) and San Francisco (minus 9 %). The decrease is the most important in California and Texas where home prices jumped sharply in the aftermath of the Covid outbreak. So far, the decrease in prices is positive news for inflation and for home buyers, as the affordability index was at historical levels a few months ago. But this could seriously increase the ongoing economic slowdown. Note that we will see important indicators on the US housing market this week – more below.
Housing markets are very interest rate sensitive and thus generally a leading indicator on the direction of the economy. Financing for US house purchases is mostly done on a 30-year fixed mortgage basis, meaning that most of the impact from rising rates, a global phenomenon, is on new purchases in the US. (This contrasts with the floating rates that are popular elsewhere – note the Australian RBA’s and Bank of England’s concerns on housing impact from sharp rate rises). Today we get the Oct. NAHB Housing Market survey, one of the more leading US indicators on housing demand and a survey that has been in freefall in recent months – dropping from 83 in January to 46 last month and expected
Today’s earnings focus is Netflix, Johnson & Johnson, and Lockheed Martin. Headwinds have been building for Netflix since the pandemic growth sprint and analysts expect revenue growth to have slowed down to 5% y/y in Q3 and EPS of $2.22 down 23% y/y and down 12% q/q. Johnson & Johnson is expected to see flat revenue growth in Q3 which given other consumer staples companies might be a bit too pessimistic and we believe there is a good chance that Johnson & Johnson can surprise to the upside given what we know about the US consumer.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.
Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.
The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?
The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.
Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
