Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Saxo’s Q4 Outlook is out
In the news:
Macro
Macro events (times in GMT): Eurozone August PPI MoM est. 0.5% vs 0.8% in July (09:00), US initial jobless claims est. 221k vs 218k prior (12:30), US September ISM Services est. 51.7 vs 51.5 in August
Earnings events: JD Sports shares fell 6% yesterday following a slight miss on first half revenue. Tesco has reported this morning worse-than-expected first half like-for-like UK sales, but revised up the fiscal year operating profit.
For all macro, earnings, and dividend events check Saxo’s calendar.
Equities: Futures are indicating a 0.3% lower open in European and US equities. Hong Kong stocks declined 1.3% in today’s session signalling a potential pause or even turnaround in Chinese equities following a 30% move from the recent lows. OpenAI raised $6.6bn yesterday in a massive founding round underpinning the strong interest from investors in AI technology. Tesla shares are expected to be in focus today with Q3 deliveries missing slightly against estimates, but on a forward-looking basis the new Chinese government incentives to trade in old cars to new EVs have already boosted demand in the short-term.
Fixed Income: European government bond yields rose as traders shifted away from safe-haven assets due to easing geopolitical tensions. A strong U.S. jobs report also refocused attention on the resilience of U.S. economy. Meanwhile, France announced budget cuts and tax hikes for next year, but Michel Barnier’s plan to reduce the deficit to 3% by 2029 faces political and economic hurdles. The plan requires fiscal tightening, which could prove unpopular due to high spending and lower tax revenues. By the end of the day French 10-year yield were 7bps higher closing at 2.89% while 10-year Bunds and BTPS closed 8bps up at 2.11% and 3.45% respectively. In the U.S., Treasury yields increased following stronger-than-expected employment data and rising oil prices, leading to a steeper yield curve. The 10-year yield ended around 3.785%. Yields rose by 3 to 6 basis points, with futures trades contributing to the curve steepening before oil prices and long-term bond trades slowed the trend later in the day.
Commodities: The Bloomberg Commodity Index is up again today extending the gains to 9.3% from the lows in September responding to weather disruptions and the big stimulus from China. Gold spot remains in a tight range trading around the 2,655 level and supported by the forward expectations for lower US policy rates. Brent crude trades at $75/brl this morning up 8.3% from the lows in September. The geopolitical risks in the Middle East will continue to underpin oil prices in the short-term.
FX: The Japanese yen plunged 2% against the US dollar on reports that the supposedly hawkish new Japan PM Ishiba commenting that the economy is not ready for an additional rate hike. This has added weight to Bank of Japan Governor Ueda’s cautious stance on further normalization, at a time when markets are also seeing a pushback on Fed’s rate cut expectations after a hawkish tilt in Fed Chair Powell’s comments earlier in the week and upbeat labor market data from JOLTS job opening to ADP jobs survey last night. The US dollar gained, mostly on the back of yen’s losses. Activity currencies generally outperformed, led by Norwegian krone, while New Zealand dollar lagged the pack on the back of increasing rate cut expectations from the Reserve Bank of New Zealand.
Volatility: Volatility is steady ahead of today’s jobless claims report and key economic data. The VIX remains elevated at 18.90 (-1.87%), with the market seemingly in a holding pattern as traders await the crucial employment numbers coming tomorrow. Initial Jobless Claims are expected to provide a clue today, with forecasts at 222K. U.S. futures are in the red, with S&P 500 futures down 0.22% and Nasdaq 100 futures off by 0.36%. Expected moves, based on options pricing, indicate the S&P 500 could shift around 38 points (~0.66%) and the Nasdaq 100 by 177 points (~0.89%) either up or down. In the options market, Nvidia, Tesla, and Alibaba are leading activity, with Alibaba maintaining a high IV Rank of 97.52%, reflecting significant market expectations for price swings. Notable players also include PDD Holdings and Super Micro Computer, both showing strong implied volatility. With unemployment numbers due tomorrow, today's jobless claims and services PMI could set the tone for the remainder of the week. Investors are bracing for potential volatility as the economic picture comes into sharper focus.
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