Global Market Quick Take: Europe – 5 September 2024

Key points:

• Equities: Quiet equity markets ahead of critical US jobs reports
• Currencies: Safe haven currencies in demand
• Commodities: Iron slump sends weak China signal weighing on crude and copper
• Fixed Income: Sovereign bonds surge as weak job data boosts central bank rate cut bets
• Economic data: EU Retail Sales, US ADP Employment Change

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news: Sept 50bps cut rate gets boost as JOLTS report flags labor market weakness: Citi (Yahoo), BOJ policymaker signals more rate hikes with eye on markets (Reuters), Wall Street’s China Growth Pessimism Spreads as BofA Cuts View (Bloomberg), Germany’s Image as Auto Superpower Hit by VW’s Slow Decline (BNN), Citi says 2025 oil prices could average $60/bbl without deeper OPEC+ cuts (Reuters), Long-Time Bull Bails on ASML, Warning AI Potential Overhyped (Bloomberg)

Macro:

• US JOLTS job openings for July printed 7.673mn falling from the prior 7.91mn (revised lower), and well short of the expected 8.1mn. The job openings were also the lowest since early 2021. The dip in the vacancy rate and rise in the quits rate is also notable, the vacancy rate fell to 4.6% (prev. 4.9%, rev. 4.8%), with the quits rate rising to 2.1% (prev. 2.1%, rev. 2.0%). Regarding the vacancy rate, Fed Governor Waller has previously said that if it were to dip beneath 4.5%, it would likely suggest that excess labour demand has been worked off, and the unemployment rate could start to rise. The number of vacancies per unemployed worker, a ratio the Fed watches closely, declined to 1.1, still the lowest in three years. At its peak in 2022, the ratio was 2 to 1. Overall, the report send slowdown shivers to market and expectations are now starting to tilt more in favour of a 50bps Fed rate cut at the September meeting.
• The Bank of Canada cut rates as expected to 4.25%, marking its third consecutive 25bp rate cut. The statement was largely as expected and providing inflation continues to ease, and the price increases in shelter and some other services don't see inflation reverse higher, the BoC look set to continue on their easing path. The market currently fully prices in 50bps of easing through year-end, implying two 25bp rate cuts in October and December.
• Japan’s July wage report strengthened the case for more rate hikes from the Bank of Japan. Labor cash earnings rose 3.6% YoY, less than a revised 4.5% gain in June, but higher than the consensus forecast of 2.9%. Adjusted for inflation, wage growth slowed to 0.4% YoY from 1.1% in June, but again it was stronger than the consensus expectation of -0.6%.
• German factory orders unexpectedly rose for a second month — a rare piece of good news for the country’s important manufacturing sector, with demand in July rising 2.9% from June, against expectations for a 1.7% drop. The prior month also was stronger than initially reported, at 4.6% instead of 3.9%. The uptick was due to large-scale orders, without which the gauge would have dropped 0.4%, the German statistics office said

Macro events (times in GMT): UK Construction PMI (Aug) exp 54.5 vs 55.3 prior (0830), Eurozone Retail Sales (July) exp 0.2% YoY vs –0.3% prior (0900), US ADP Employment Change (Aug) exp 145k vs 122k prior (1215), US Initial Jobless Claims exp 230k vs 231k prior (1230), US ISM Services Index (Aug) exp 51.2 vs 51.4 prior (1400), EIA’s Natural Gas Storage Change (1430), EIA’s Weekly Crude and Fuel Stocks Report (1500)

Earnings events: Dollar Tree, one of the stocks we mentioned yesterday to watch, saw its shares down 22.2% following worse-than-expected earnings showing margin pressure due to fierce competition and missed top line growth on weaker spending. Today’s focus is Broadcom earnings out after the US market close with analysts expecting a strong quarter with revenue growth of 47% YoY.

• Thursday: Sun Hung Kai Properties, CVC Capital Partners, BNP Paribas Fortis, Sekisui House, Broadcom, Samsara, Guidewire Software, DocuSign, BioMerieux
• Friday: Puig Brands

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: US equities declined another 0.2% yesterday after attempting a rebound. The weaker than estimated JOLTS job openings eased US labour market tightness to levels not seen since early 2018 suggesting a quicker than expected cooling. The most traded US stock yesterday relative to normal volume was Mondelez up 4% as the CFO said management “felt good” about the numbers coming in for the second half of the year. Futures are pointing to a slightly lower open in Europe and the US today.

Fixed income: U.S. Treasury yields dropped after weaker-than-expected job openings data (JOLTS) reinforced expectations of upcoming Federal Reserve rate cuts. The 10-year Treasury yield fell by 7 basis points to 3.76%. Traders increased bets on a significant rate reduction soon, with markets pricing in a possible 50bps cut in September. The drop in yields followed renewed concerns about a slowing labor market, further stoking fears of economic cooling. This bond rally was also supported by a stock market decline, particularly in tech shares like Nvidia. European sovereign bonds also rallied, on the back of weaker U.S. job data. Traders now anticipate 61bps of ECB cuts by year-end and 166bps by 2025. Gilts also advanced, with bets on BOE cuts increasing to 43bps by year-end and 136bps by the end of 2024. Bund yields fell 5bps to 2.22%, while Italian and French 10-year yields dropped 8bps and 7bps, respectively. Traders are now focused on upcoming key events, including jobless claims, ADP employment data, ISM services index, Eurozone GDP, and the critical U.S. nonfarm payrolls report, which could determine the Fed's next move on rate cuts.

Commodities: Crude oil’s weak demand-driven slump has paused, with OPEC+ said to be close to delaying an October supply increase after the API reported a 7.4mn barrel stockpile decrease. Support-turned-resistance levels now hold the key, with a focus on USD 75 in Brent and USD 71.70 in WTI. Iron ore futures in Singapore, down 33% this year, fell to their lowest level since 2022, trading near USD 90 a ton, as China’s steel industry group warned mills against quickly boosting output, with steel prices hitting their lowest level since 2017. Weak manufacturing data also keeps copper under pressure, leading to analysts’ price downgrades. Wheat traded higher for a sixth session on Wednesday after recently hitting four-year lows, supported by the outlook for a poor harvest in Western Europe, driving short covering in US wheat futures, where 70% of the harvest is now completed. Gold rallied back to USD 2,500 after holding support at USD 2,470 following the weak US JOLTS report, which strengthened calls for a 50-basis-point cut.

FX: With risk aversion remaining in play, it was another positive day for Japanese yen. The currency rose 1.2% against the US dollar, and 1% against the Kiwi dollar and Australian dollar each. Gains of another 1.9% also came against the Mexican peso. We wrote about the yen in the FX note yesterday and discussed how it might stand to benefit both from haven flows and risks of carry unwind ahead of the key US jobs data on Friday. Safe-haven Swiss franc was also higher which activity currencies like Australian dollar and kiwi dollar, and the British pound, lagged in the G10 FX leaderboard as markets are starting to worry about risks of a hard landing. Despite a softer US dollar, the euro has not moved above 1.10 and the Canadian dollar hold above 1.35 as the Bank of Canada cut rates for a third time.

Volatility: Volatility started the day high, with the VIX jumping by 2.90% to close at 21.32, signalling elevated caution in the market. The VIX1D and VIX9D (measuring 1-day and 9-day volatility, respectively) also saw increases of 5.81% and 1.79%, reflecting continued uncertainty in the short term. Despite a slight dip in volatility throughout the day, the VIX remains above 20, indicating that traders should remain cautious. VIX futures followed a similar pattern, down 1.76% to 19.20, but still holding at levels that suggest further potential market swings. Today's expected moves (based on options pricing) show the S&P 500 could shift up or down 42 points (~0.76%), and the Nasdaq 100 may move around 202 points (~1.07%). With multiple economic reports today—including ADP Nonfarm Employment, Initial Jobless Claims, and ISM Non-Manufacturing PMI—there's a good chance of increased volatility. Broadcom (AVGO), considered as a notable market participant, is also reporting earnings today. Yesterday’s most active stock options were Nvidia, Tesla, Apple, AMD, Intel, Amazon, United States Steel, NIO, Dollar Tree, and Palantir.

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