Macro: Sandcastle economics
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Video: US equities find strength, Powell says 'it's probably going to be bumpy', Oil charges
Jessica Amir
Market Strategist
Summary: Watch our video in under five minutes or read the text for what’s happening in markets, what to watch; plus potential trading and investing ideas to consider.
US equities (US500.I and USNAS100.I): Short-term strength is still intact; but ‘it’s probably going to be bumpy’
On Tuesday the S&P 500 closed at one of its highest levels since August 2022 closing above the 4,162 points, which is a signal of short-term strength. Traders absorbed Powell's remarks, reiterating the ‘disinflationary process has begun’ in a quarter of the economy (the goods sector). So, we’re seeing the technical indicators (the MACD and RSI) behaving - supporting short term strength as the VIX Index is too. But bond traders and investors are taking heed in Jerome Powell’s remarks, which suggest a higher peak in rates is possible, more than the market is pricing in. Powell’s comments that the services sector is ‘not showing any disinflation yet’, pushed the US 10-year yield to its highest level since January 5, - which indicates a bumpy path is ahead for equites, particularly as Powell said policy will need to be restrictive for some time.Australian equites (ASXSP200.I); short term pressure as RBA hikes by 25bps to 3.35% guiding for more hikes in “months ahead”
ASX200 futures suggest the market will rally on Wednesday, and erase yesterday’s 0.5% fall. But short-term pressure has built up by the RBA indicating more hikes are needed. Coal prices are down 36% and picked up this week almost 7% after the Australia Energy Market Operator said coal supply and gas supply in Australia is short and will stay short till 2026, so we think the RBA could make upward revisions to underlying inflation forecasts on Friday, despite the Bank keeping its headline CPI, unemployment and activity forecasts broadly unchanged. For investors, this means volatility in the ASX200 could pick up on Friday - financials and insurers could be supported with the RBA seeing more hikes ahead. The services sector is already in contraction, yet the RBA sees GDP slowing to around 1.5% this and next year, expecting household spending to pull back amid tightening financial conditions, as the post-pandemic spending rush has eased. This means, consumer discretionary stocks likely face headwinds. On the flip side, the energy sector is being supported.
Crude oil (CLH3 & LCOJ3) supported by supply concerns, OPEC+ not raising output
Oil jumped 4.3% to $77.31 as investors grew more confident in China's demand outlook, while there are expectations OPEC+ won't raise crude output in 2023 amid uncertainty over Russian supply. The Bank of America also sees US shale oil production peaking in the next three to four years. For Saxo’s view, read out Quarterly Outlook.
Saxo launches in Q1 2023 quarterly outlook: The Models are Broken
Saxo’s quarterly outlook released argues that the economic models and assumptions of how market cycles are supposed to work are broken. We explore how this may affect both equities and commodities, as well inflation being higher-for-longer and how could it impact forex and crypto. Read the outlook here.
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Quarterly Outlook 2024 Q3
Sandcastle economics
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