Global Market Quick Take: Europe – October 11 2023
Saxo Strategy Team
Résumé: Equity futures trade steady following gains on Tuesday with fallout from Israel-Hamas war still contained and as more US Federal Reserve members dialed back the need for additional rate hikes, saying higher bond yields has done the job for them. Expectations of further China stimulus helped support strong gains across Asia, US bond yields steadied following big declines on Tuesday while the dollar traded near support, potentially signaling a period of consolidation following months of strong gains. Crude oil maintained its war-risk premium with gold being supported by lower bond yields. US PPI today ahead of Thursday’s US CPI print, the main macroeconomic event of the week.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures pushed above the 4,400 level intraday in yesterday’s session but came back below the level again closing at the 4,391 level. The Birkenstock IPO was priced in the middle of the price range at $46 per share raising $1.48bn. Trading in Birkenstock shares start today under the ticker symbol BIRK:xnys. PepsiCo earnings yesterday also showed that global consumption in soft drinks and snacks remain robust despite talk about negative impact from obesity drugs.
FX: The dollar DXY index pushed below the key 106 support amid Fed rhetoric aligning on higher bond yields substituting for a Fed rate hike, and the catchup in cash Treasuries to Monday’s slide in futures as geopolitical worries ramped up. Yen however stayed weak, and USDJPY trades close to 149 despite reports that BOJ could mull a 3% inflation target for current fiscal year. EURUSD trades above 1.06 to challenge the month-long downtrend. AUDUSD saw a fresh but so far not sustained move towards 0.6440 on improved sentiment and China’s expected stimulus announcement
Commodities: Crude oil prices were in consolidation on Tuesday as oil supply concerns have not materially ramped up, but risks of escalation continue to keep oil traders on edge. Monthly oil market reports from EIA today followed by OPEC and IEA on Thursday. Gas prices pushed up further amid Israel’s gas-field halt as well as a leak in a gas pipeline connecting NATO members Finland and Estonia. Gold prices also consolidated despite the plunge in Treasury yields and a weaker USD. Metals in focus today amid speculation of stimulus announcement from China.
Fixed income: Sovereign yield curves continue to bull-flatten as the Israel-Hamas war increases safe-haven demand. Although it is too early to understand the market extent of such conflict, it’s important to note that the events are unfolding on the back of weak bond sentiment. Yesterday's T-Bills and 3-year US Treasury auction send conflicting messages. Demand at the 3- and 6-months T-Bills auctions was strong on the back of Federal Reserve speakers who hinted that the Fed is done with hiking rates. Yet, the 3-year Treasury auction saw a slump in foreign demand with indirect buyers being awarded only 56% of the issue, the lowest since October 22 and far below last month’s 66.2%. Moreover, the auction tailed by 1.7bps, the biggest tail since February. Today and tomorrow the focus is on the Treasury’s 10-year auction, and the 30-year bond sales coming after the CPI release. Overall, we remain defensive favouring the front part of the yield curve and quality.
Volatility: The VIX Index is remarkably relaxed about the tensions in the Middle East declining further yesterday to a close of 17.03, and in fact the S&P 500 three-month 25-delta skew has reached its lowest level in six months suggesting the market is positioning itself for an upside year-end rally.
Macro: Kashkari (voter) and Bostic (2024 voter) joined other Fed members in striking a less hawkish tone while Waller (voter) stayed on the message of achieving 2% inflation while Daly also said that the Fed has more work to do. Fed whisperer Timiraos, in a WSJ piece, also said higher bond yields are likely to extend the Fed rate pause and officials are signaling that a run-up in long-term interest rates might substitute for a further central bank rate hike. US NFIB survey (Small Business Optimism) slipped to 90.8 from 91.2, coming in a notch below expectations (91.0). Updated IMF global forecasts showed little revision to its global growth outlook, with GDP projected to slow from 3.5% last year to 3.0% in 2023 and 2.9% in 2024. Inflation is not expected to return to target to 2025 in most countries, underscoring the need of central banks to keep policy tight.
Technical analysis highlights: S&P 500 rebound, strong resistance at 4,400. Nasdaq 100 closed on resistance at 15.131. DAX rebound, resistance at 15,482. EURUSD correction, testing resistance at 1.0617. GBPUSD testing 1.23. Dollar Index key support 105.34. Gold rebound, resistance at 1,870. Crude oil rebounded 0.382 retracement. US 10-year yields expect correction down to 4.56%
In the news: Higher Bond Yields Likely to Extend Fed Rate Pause (WSJ), Finland says 'outside activity' likely damaged gas pipeline, telecoms cable (Reuters), Elon Musk’s vision for free speech on X tested by Israel-Hamas war misinformation (FT), China Mulls New Stimulus, Higher Deficit to Meet Growth Goal (Bloomberg).
Macro events: US PPI (Sep) exp 0.3% MoM & 2.3% YoY versus 0.7% & 1.6% prior (1230 GMT), EIA’s October Short-term Energy Outlook (1600 GMT), FOMC Minutes from Sept 20 meeting.
Earnings events: Delta Air Lines reports Q3 earnings tomorrow (bef-mkt) with estimated revenue growth at 4% y/y and est. EPS growth of 34% y/y as travel remains strong.
For all macro, earnings, and dividend events check Saxo’s calendar.