Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Mixed session in Asia while European and US equity futures are pointing a bit lower this morning. The big news today is ASML Q1 results with bookings disappointing at €3.6bn vs est. €4.6bn causing shares to trade 8% lower in pre-market. ASML is maintaining its mid-term goals presented at the 2022 capital markets day pointing to a stronger second half of this year compared to the first half. The results are likely to negatively impact the entire semiconductor industry in today’s session. UK inflation figures for March show an upside surprise adding question marks to whether disinflationary dynamics are as strong as the ECB believes.
FX: The dollar hit a fresh five-month high on Tuesday as Treasury yields spiked after Fed chair Powell signaled policymakers are in no rush to cut interest rates, remarks that represented a shift in his message after a third straight month where inflation exceeded forecasts. The firmer tone held during the Asian session although no fresh highs were recorded with USDJPY holding just below Tuesday’s peak at 154.80 and the EURUSD and AUDUSD just above 1.0600 and 0.6390 respectively. A weak yen is becoming a key concern for the Chinese yuan, and PBoC is loosening its grip with two consecutive days of onshore midpoint fixing above 7.10 paving the way for USDCNH to get closer to 7.30 from 7.26 currently. Read more on our views on Chinese yuan in this article.
Commodities: A stronger dollar amid surging Treasury yields created some headwinds for the sector on Tuesday, but with crude and gold being cushioned by heightened tensions in the Middle East where traders are monitoring Israel's response to Iran's weekend attack. An unlikely disruption to trade via the Strait of Hormuz could have a big impact. Some focus on EIA’s weekly report with the API reporting a 4m bbl stock build last week. EU gas prices jumped 6.4% to EUR 33/MWh on Tuesday, driven by renewed focus and concerns about the vulnerability of global trade flows. Base metals edged lower, surrendering some of Monday’s strong Russia sanctions-led gains, while gold’s exceptionalism was on clear display once again, edging higher despite continued dollar and yield strength
Fixed income: Treasuries ended the day lower due to policymakers’ remarks indicating a "high-for-longer" stance. Fed Chair Powell reinforced this message, stating that recent economic data haven't instilled confidence in the Fed to cut rates, potentially leading to a prolonged period of unchanged rates. Ten-year yields rose by 6 basis points to 4.66%, and 2-year yields closed 6 basis points higher at 4.98%. Real rates drove the yield increase, with 10-year TIPS yields rising 8 basis points to close at 2.25%. In Europe, Lagarde noted that the ECB would monitor changes in exchange rates, indirectly highlighting the central bank’s reliance on the Fed's rate-cutting cycle. European sovereign yields broadly increased, with BTPs underperforming peers. However, the most notable move occurred in the UK, where Gilt yields rose despite a rise in unemployment to 4.2%, marking the largest monthly increase since the Covid pandemic. Markets prioritized UK wage data, which remained steady at 6% YoY, highlighting how inflation outweighs even recessionary data in bond markets. The selloff in Gilts is expected to persist today, following higher-than-expected UK headline and core CPI figures. Today’s focus shifts to Eurozone and UK CPI, the Fed Beige Book, and the $13 billion 20-year US Treasury auction, which will gauge duration appetite in a bear bond market (for a preview click here).
Macro: Fed Chair Jerome Powell said on Tuesday that “the recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence”. His remarks echoed messages from other Fed officials about the shift of the Fed’s stance towards postponing the start of the easing cycle to later than July, setting up the stage for just two cuts this year. US housing starts and building permits came in weaker than expected at 1,321k and 1,458k respectively. However, industrial production rose 0.4% month-on-month in March, and the prior month’s figure was revised up to 0.4% from the previously reported 0.1%. China’s March real estate investment contracted 16.8% Y/Y, softer than the 13.4% Y/Y decline in the prior two months. Property sales value dropped by 28.5% Y/Y and volume decreased by 23.7% Y/Y. Overall, the property sector remains weak.
Technical analysis highlights: Correction unfolding in Equities. S&P500 trading around key support at 5,057, next at 4,953. Nasdaq 100 below key support at 17,808. Next support at 17,478. DAX top and reversal, below key support 17,900, next 17,620.
EURUSD downtrend no strong support until 1.05 but expect minor bounce before. GBPUSD strong support 1.2410-1.2375. USDJPY uptrend potential to 155.30. USDCHF above resist at 0.9108, no resist until 0.9245. EURCHF correction likely to 0.9640-0.9620. EURJPY a break 164.70 likely move to 166.30. USDCAD uptrend, potential to 1.39. AUDUSD support at 0.6400 expect rebound. Gold top and reversal, correction likely to 2,322 possibly to 2,255. Cocoa top and reversal pattern could sell off to 9,000. US 10-year T-yield uptrend, no resist until 4.70
Volatility: Yesterday's volatility reflected a calmer market sentiment as the VIX decreased to $18.40 (-0.83 | -4.32%). VIX options trading volumes remained above 1.5 million contracts, signaling sustained vigilance despite a decline from Friday’s multi-year high (>2.6M). The VVIX and SKEW indices mirrored this cooling, yet geopolitical concerns in the Middle East persisted as a backdrop of uncertainty. No major economic announcements are slated for today. Investors may shift focus to ASML's earnings report for insights into the semiconductor industry, which could influence broader market volatility. VIX futures dipped to $17.350 (-0.105 | -0.61%) in a muted overnight session. S&P 500 and Nasdaq 100 futures reflect the same sentiment, at 5098.25 (+5.75 | +0.10%) and 17894.00 (+12.75 | +0.10%), respectively. Tuesday’s top 10 traded stock options, in order: TSLA, AAPL, NVDA, AMD, BAC, AMZN, WBD, COIN, AMC, and DJT.
In the news: Powell Dials Back Expectations on Rate Cuts (WSJ), Japan's exports grew for fourth straight month in March (Nikkei), IMF Lifts Growth Forecast for Global Economy, Warns of Risks (Bloomberg), Israeli war cabinet puts off third meeting on Iran's attack to Wednesday (Reuters)
Macro events (all times are GMT): UK CPI (Mar) exp 0.4% & 3.1% vs 0.6% & 3.4% prior (0600), EIA’s weekly crude and fuel stock report (1430), Fed’s Beige Book (1800)
Earnings events: Today’s key earnings releases is semiconductor equipment maker ASML (has already reported) and later in the US session the key earnings release to watch is Abbott Laboratories which is expected to report revenue growth of 1% YoY and EPS growth of 22% YoY.
For all macro, earnings, and dividend events check Saxo’s calendar