Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Yields declined broadly, with a 10bps drop in the 2-year yield to 4.14%, influenced by weak PPI components affecting the PCE compilation. Bank shares mostly fell as financial institutions warned of lower net interest income due to the Fed's interest rate cuts. Crude oil markets experienced volatility due to geopolitical factors and demand worries, likely remaining a key theme. China's deflation and import issues impacted industrial metals. In Taiwan, Lai of the DPP won the presidential election, but a hung legislature weakened his presidency.
Saxo’s Q1 2024 Outlook titled “What happened to the future” is now out. You can read it here.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: The S&P 500 Index and the Nasdaq 100 index edged up 0.1% each to 4,784 and 16,833 respectively, just shy of their all-time highs. Energy stocks were the best performers as crude oil prices climbed. Airlines got hammered after Delta Air Lines cut the year’s guidance, blaming geopolitical tension, supply chain issues and energy prices. Bank shares mostly declined, with the KBW Bank Index falling by 1.1%. Wells Fargo plunged 3.3% after reporting higher loan loss provision and warned about net interest income trend in 2024. JPMorgan said lower interest rates this year would impact net interest income. Bank of America and JP Morgan Chase dropped by 1.1% and 0.7% respectively after reporting results below consensus forecasts. The US market is closed on Monday for holiday.
Fixed income: Yields fell across the curve, led by a 10bps drop in the 2-year yield to 4.14% after components in the PPI report that were input to the PCE compilation showed weakness. Traders positioned for downside surprises in the December PCE data that may bring the 3-month and 6-month annualised rates of PCE inflation below the Fed’s 2% target. The 10-year yield fell 3bps to 3.94%. The 2-10-year yield curve steepened by 7bps to 21bps.
China/HK Equities: As China remained in deflation with negative prints in CPI and PPI growth, both the Hang Seng Index and the CSI300 dropped by 0.4% to 16,245 and 3,284 respectively. Energy stocks bucked the market decline and outperformed.
FX: Dollar was choppy on Friday amid risk on from Yemen strikes but downside pressures coming off sharply lower 2-year Treasury yields, and ended the week broadly unchanged after starting the year with some gains. Overall FX market moves remained subdued on Friday. Japanese yen was stronger as yields fell, but USDJPY remains pinned around the 145 mark although EURJPY slid below 159 as EURUSD continues to find sellers ahead of 1.10. EURNOK also pushed lower amid the moves in oil, printing lows of 11.25 and December lows of 11.18 remain in focus. US markets are closed today, so moves in FX could be subdued. Watch for the reaction from TWD or CNH to the Taiwan election results, as well as the expected MLF cut from China today.
Commodities: Crude oil markets continue to see wild swings amid geopolitical developments and demand concerns, and that could well remain the key theme going into this week as well. China’s deflation and import weakness weighed on the industrial metals, with iron ore down 3.5% on Friday. Strong imports of steel from China despite weak demand has resulted in inventory build, and stockpiles have risen for a 6th straight week ahead of China Lunar New Year holiday. Gold surged with the decline in yields, as well as a pickup in haven demand amid US-led strikes in Yemen.
Macro:
Macro events: Davos WEF (15th-19th); China MLF, India WPI (Dec), Germany Wholesale Price Index (Dec), Sweden CPIF (Dec), EZ Trade (Nov)
In the news:
For all macro, earnings, and dividend events check Saxo’s calendar.
For a global look at markets – go to Inspiration.