What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
US equities continued their rebound yesterday with S&P 500 futures hitting the big 3,800 level, but the index futures are coming down a bit this morning trading around the 3,785 level. The significant declines in US bond yields and chatter about a Fed pivot, this still has a low probability at this point, have been the catalyst behind the rebound and the fact that markets were very stretched added to size of the rebound as short covering have been taking place. In today’s session the ADP employment change and ISM Services Index are the key macro events that could add some fresh energy to the downside. Yesterday’s biggest negative change on record in the JOLTS Report suggests that the labour market is beginning to cool down.
Hong Kong’s Hang Seng (HSIU2) and China’s CSI300 (03188:xhkg)
The Hong Seng Index soared over 5% to catch up with the S&P 500 Index’s 5.7% rally over the past two days after Hong Kong returned from a public holiday. Weaker U.S. economic data recently have helped fuel the notion of peak tightening from the Fed and contributed to the turnaround in global stocks this week. Index heavy-weights jumped, HSBC (00005:xhkg) up 6.3%, AIA (01299:xhkg) up 6.7%, Tencent (000700:xhkg) up 5.8%, Meituan (03690:xhkg) up 7.6%, and Alibaba (09988:xhkg) up 8.2%. BYD (01211:xhkg) soared nearly 10% after the Chinese automaker reported record sales of over 200,000 electric and hybrid vehicles in September, a growth of 183% from last year, and the seventh consecutive month of sales growth. The mainland exchanges remain closed for the rest of the week for the National Day golden week holiday.
USD and US yields/risk sentiment
The US dollar continued to weaken yesterday, particularly against European currencies as EURUSD touched parity briefly and as GBPUSD rose close to 1.1500 on a further change of tune from UK Chancellor Kwarteng, who is making noises about plans to bring forward debt-cutting measures in the new budget he will present later this month. An important test for the greenback lies ahead through the end of this week on macro data and its impact on US treasury yields, as noted below, as well as on risk sentiment.
Gold (XAUUSD) and silver (XAGUSD) rise further
Hopes that central banks will begin to ease away from the tightening of the last many months after a deceleration from the ECB and at least one weak US data point this week, saw yields a bit lower and precious metals surging, with Gold rushing higher yesterday after the break above the key 1,680-1,700 from Monday was solidified with a move above 1,725 at one point yesterday. Silver’s enormous jump on Monday was only followed up with a much smaller move yesterday. Next area of focus in gold will be the 1,734 area and then the major 1,800 zone. The strength in US macro data and direction of US yields key through Friday’s US jobs report (weak data and lower yields most gold supportive.)
Crude oil (CLX2 & LCOX2) higher on larger OPEC cut expectations
Crude oil prices rose further amid speculation that OPEC is considering an even larger cut to production than first thought. The group is said to be considering a cut of up to 2mb/d, according to media reports. It is also being reported that the cuts will be made from current production levels and not the quotas as most members are already producing below their quota. That, if true, will likely tighten the market especially as European sanctions will kick in from December and US is also pausing the release from its strategic reserves. This tightness could be exacerbated by a rebound in Chinese demand if it can contain outbreaks of COVID-19. WTI futures rose above $86/barrel while Brent crossed the key $90-mark. A significant draw was also reported in API inventories, with crude stocks down 1.77mn.
US treasuries (TLT, IEF)
US treasury yields recovered slightly after a further drop yesterday that took the 10-year benchmark to 3.56% at the lows, just ahead of the key 3.50% area former cycle high from June. Key data this week, including the ISM Services (far more important for the current status of the US economy than the ISM Manufacturing that garnered such a strong reaction on Monday) and the US September jobs report are likely to set the tone.
What is going on?
Twitter (TWTR:xnas) shares rose more than 20% as Elon Musk agrees to original takeover terms
The shares of Tesla (TSLA:xnas) were down sharply on one point on the news before these in turn recovered to positive territory in a torrid rally for US equities yesterday. With Twitter’s closing price yesterday being close to the takeover price at $54.20 the downside risk remains now for Tesla shares in the event that Elon Musk is forced to sell more Tesla shares to finance the deal.
US JOLTS job openings surveys signals that the tightness in the labor market may be moderating
US JOLTs data was out with a weaker than expected number, declining to 10.1 million in August, the lowest since June 2021, and below expectations of 11.1 million and after 11.2 million in July. The job openings rate was down to 6.2% from 6.9% in July, and puts the focus on the ADP data due today in the run up to the nonfarm payrolls change data on Friday.
New Zealand’s RBNZ hikes 50 basis points as expected
This was the fifth consecutive meeting to bring a half-point hike and took the official cash rate to 3.5%. The bank signaled more tightening to come in its statement, as it noted that “core consumer price inflation is too high and labor resources are scarce. Still, short NZ rates continue to trade lower, if not falling as rapidly as for Australia after the RBA surprised with only a 25 basis point hike yesterday. The AUDNZD rate dropped below 1.1250 at one point overnight from the 1.1350 range before the announcement.
Tesco 1H revenue beats estimate
The largest Uk grocery retailer reports like-for-like UK revenue of +0.7% vs est. -0.1% but the company says that cost inflation is still significant. Tesco has also decided to lock over 1,000 everyday items at low prices until 2023 which could be negative for operating margin in the short-term.
What are we watching next?
Risk sentiment brightens – how far can it extend?
Quite a short squeeze on bearish risk sentiment as global equities have backed up sharply, in many cases after touching new bear market lows – is this a bullish reversal with legs or will it fade quickly? Two prior bear market rallies in March and especially June-August impressed. For now, the tactical focus higher in the US equity market would be on the 3,800-3,900 zone, the next hurdle for establishing whether this squeeze will develop into something more, with the most immediate sentiment test likely the ISM Services survey today (more below) in the US and especially the jobs (and earnings) data on Friday, as it appears this rally was kicked off by a soft September ISM Manufacturing survey on Monday.
UK Prime Minister Truss to deliver address at Tory conference today
This is an important speech after the recent volatility in UK gilt markets, mostly attributable to policymaking from the Truss government, including generous caps on energy prices and tax cuts, that suggest little interest in maintaining long term credibility in government debt.
US ISM services will be key to watch today
With chatter on a Fed pivot gaining momentum out of a miss in one ISM manufacturing print, possibly also underpinned by the turmoil in the financial system on contagion from the wipeout and recovery in UK gilt markets over the last ten days, it will become more key to watch the services sector data out today. Consensus expects the number to be 56, down from 56.9, as higher interest rates and high inflation begin to eat into services spending after a solid post-pandemic rebound.
Earnings to watch
We had highlighted that Biogen would report earnings yesterday, but our earnings date data was incorrect, and the date is now set for the 18 October. Tesco has already reported earnings (see review above), so today’s remaining earnings focus is Lamb Weston which is a large US food company with analyst expecting FY23 Q1 (ending 31 August) revenue growth of 16% y/y and stable operating margin.
- Today: Lamb Weston, Tesco, RPM International
- Thursday: Seven & I, Conagra Brands, Constellation Brands, McCormick & Co
Economic calendar highlights for today (times GMT)
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- 0715-0800 – Eurozone final Sep. Services PMI
- 0830 – UK final Sep. Services PMI
- Poland Central Bank Rate Announcement
- 1215 – US Sep. ADP Employment Change
- 1230 – US Aug. Trade Balance
- 1230 – Canada Aug. Building Permits
- 1230 – Canada Aug. International Merchandise Trade
- 1400 – US Sep. ISM Services
- 1430 – US Weekly DoE Crude Oil and Product Inventories
- 2000 – US Fed’s Bostic (non-voter) to speak
- 0030 – Australia Aug. Trade Balance