Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US and European equity futures trade higher following a mixed session on Thursday, while Asian stocks fell overnight after a 10% slump in Alibaba drove down the Hang Seng index. Meanwhile Treasuries rallied on larger-than-expected jobless claims and together with other soft economic data prints this week and crude oil slump it continues to fuel optimism that the US rate hike cycle has reached the end of the road. A prospect that has seen the dollar lose ground against its major peers while sending gold and silver higher on the week. A light economic calendar awaits today.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: In a mixed session on Thursday, the S&P500 and the Nasdaq 100 edged up 0.1%, while the Russell 2000 Index tumbled 1.5%. Information technology and communication services stocks gained, but energy and consumer names declined. Intel surged 6.8% on an analyst upgrade due to strong server product pipelines. Cisco plunged 9.8%, and Walmart dropped by 8.1% after reporting earnings with downbeat guidance. Oilfield services, oil and gas exploration and production, as well as downstream energy, experienced declines as crude oil tanked to a four-month low.
FX: The US dollar steadied on Thursday despite dovish tilt in US data but the softer Treasury yields took USDJPY lower to 150.60. EURUSD failed attempt to break above 1.09 saw it trade back down to the 1.0850-level. AUDUSD broke back below 0.65 on higher unemployment rate suggesting some cracks in the labor market, but so far 0.6460 support has held. GBPUSD still around 1.24 while NOK underperformed amid a sharp slide in oil prices with EURNOK moving above 11.85.
Commodities: Crude oil prices collapsed on Thursday, falling close to 5% with Brent dipping below $77 and while rising US inventories and demand worries were the triggers, technical selling was the driver. The $75 oil has previously sparked a response from OPEC, and the cartel meets on November 26, when they will consider how to respond to weakening oil prices and concerns that a potential stumble in global growth could hold back demand. For now, the bears are in the driving seat once again. Gold rallied to $1985+ while silver reached a two-month high above $24 as US jobless claims pointed towards weakening labor market further reinforcing that the rate hike cycle has ended.
Fixed income: US Treasury yields continued to drop yesterday as jobless claims came higher than expected, confirming that the economy is slowing, and inflation is dropping. The 3-month SOFR curve now shows expectations for the Federal Reserve to cut rates by 100bps by the end of 2024, by 50bps next July, and a 30% chance of a hike in March. While a rate cut is more probable than a rate hike during the next Fed meetings, inflation remains well above average, and the economy is still resilient. That leaves room for the market to push back on rate cut expectations for next year, giving space for the yield curve to bear-steepen again. Ten-year yields broke below 4.5% entering bearish territory. The focus shifts to next week’s 20-year auction, and whether investors are willing to increase their portfolio duration.
Volatility: VIX is looking to find a base around $14, ending yesterday’s session at $14.32 (+0.14 / +0.99%), in an uneventful trading day. VIX futures show a similar scenario: $15.15 (+0.005 / +0.03%). The VVIX (the VIX’s own volatility index) also declined to 83.23 (-1.68 or -1.98%). The Cboe SKEW index (the OTM sibling of the VIX) rose however to 154.45 (+11.47 or +8.02%), indicating that an outlier move is a bit more likely to happen in the short term. S&P 500 and Nasdaq futures are relatively flat after their nightly session: 4527.00 (+3.75 | +0.08%) and 15888.00 (-9.50 | -0.06%) respectively.
Technical analysis highlights: S&P 500 resistance at 4,540. Nasdaq 100 likely to test 16K. DAX above 15,575 resist, next 16K. EURUSD minor setback to 1.08 likely but uptrend to 1.0945. USDJPY rejected at 151.94, key support 149. GBPUSD possible setback to 1.2640 but could move to 1.26. Gold uptrend resumed, eyeing 2K. Crude oil Reversal: Brent below support at 78.20, next 70.65. WTI below support at 73.85 next 70.40. US 10-year T-yields bearish support at 4.36, future below key resistance 108 27/32
Macro: US initial jobless claims were 231k vs. 220k expected and 218k previously (and highest in 12 weeks). Continuing claims 1,865k vs. 1,843k expected and 1,833k previously. Overall, the data is consistent with some softening in labour market conditions. Cleveland Fed President Mester (2024 voter, hawkish), in a CNBC interview, said policy is in a good and balanced place, saying she hasn't decided whether a further rate hike is needed. When asked if she would pencil in another hike in the December 'Dot Plot', said she does not know yet. Governor Cook (voter) believes that a soft landing is possible, noting that risks are two-sided, and the Fed must balance the risk of not tightening policy enough against risk of doing too much. Australia’s jobs surged in October by 55k vs. 7.8k in September and 24k expected. The unemployment rate rose to 3.7% from 3.6% due to higher participation.
In the news: Biden vows not to decouple from China while deepening Indo-Pacific ties (Nikkei Asia), U.S. Executives Get No Reassurance From Xi on Tougher China Business Environment (WSJ), Finland to close four Russia border crossings to stop asylum seekers (Reuters), Intel jumps to 17-month high after Mizuho analyst upgrade (Reuters), Alibaba scraps cloud business spin-off citing US chip export ban (Reuters), Apple Plans to Make It Easier to Text Between iPhones and Androids (Bloomberg), Walmart tumbles 8% on cautious holiday outlook for consumer spending (FT), Spain PM Sánchez wins second term as amnesty uproar grows (FT)
Macro events (all times are GMT): Eurozone CPI (Oct) exp. 0.1% & 2.9% vs 0.1% & 2.9% prior (1000), US Housing Starts & Permits (Oct) exp 1350k & 1450k vs 1358k & 1473k prior (1330)
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