Global Market Quick Take: Europe – October 24 2023
Saxo Strategy Team
Résumé: US equity futures trade firmer overnight after seeing the S&P500 close at the lowest level since May on Monday. The current nervous trading activity is being driven by the unprecedented moves currently witnessed in the US bond market with the yield on US 10-year Treasury yields hitting 5% on Monday before closing at 4.85% after big investors said they had closed their short positions. Investors are also awaiting earnings from a handful of big tech names, starting today with Microsoft and Alphabet, as well as Friday’s inflation and sentiment data. Asian stocks traded mixed overnight with the dollar softer in response to the bond yield retreat, crude oil edging higher following Monday’s drop while gold continues to stabilize after its recent surge.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures closed lower yesterday but recovered from an ugly decline intraday as the US 10-year yield came down to 4.85% after touching 5%. The key events in equities today are earnings from Microsoft and Alphabet which are both reporting after the US market close. When we look at earnings expectations across sectors it is clear that it is only the US technology sector that is seeing rising earnings expectations which naturally lifts the bar for investors going into tonight’s earnings releases.
FX: USD was sold-off as 10-year bond yields retreated after touching the 5% mark and safe-haven bid remained in check with Israel holding off on the ground invasion. EURUSD pierced through 1.06 to MTD highs of 1.0687 and PMIs will be on watch today followed by the ECB meeting on Thursday. GBPUSD pushed above 1.2250 as well, and AUDUSD also bounced higher from 0.63 handle and AU CPI tomorrow will be key. USDJPY retreated from 150 to lows of 149.56 as Treasury yields eased, before returning slightly higher.
Commodities: Oil prices saw another sharp reduction in the war premium on Monday with news flows from the Middle East dictating the short-term direction. Copper touched 11-month lows but managed to close back above key support, despite demand weakness concerns with tighter monetary policy effects being seen in forward looking indicators. Gold trade sideways around $1975, as it continues to consolidate following its two-week surge, in the process ignoring the positive input from a softer dollar amid declining yields. Cocoa futures in NY surge to a 44-year high on global shortage fears led by poor crop outlook in Ivory Coast and Ghana. Sugar meanwhile trades near 12-year high on projections for a 2023/24 deficit.
Fixed income: ten-year US Treasury yields were rejected at 5% yesterday and retreated to 4.84%, as Ackman said to be unwinding bets against long-term US Treasuries due to “too much risk in the world”. Yet, selling pressures persist, and the bond selloff might resume as PMI data are released today, US GDP on Thursday, and the PCE deflator on Friday. At the same time, the Treasury is selling 2-year notes today, 5-year notes on Wednesday and 7-year notes on Thursday. We expect the yield curve to continue to steepen, with the front part remaining anchored, while long-term yields rise. We favor quality and short duration.
Volatility: Yesterday’s session proved to be another day showing volatility in action. VIX initially went up to 22.44, to retreat to an intraday low of 19.44, ending at 20.37. S&P500 & Nasdaq followed suit, initially declining, then rising to finally end the day almost flat. While the VIX is slightly below yesterday’s levels, the implied volatility of the SPX (S&P500) remains at its highest levels of the year (IV 18.10%, IV Rank 53.03%), clearly indicating there is a lot of uncertainty in the market. Coinbase is seeing high options activity ahead of its earnings release next week, with a put/call ratio of 0.33, indicating there are approximately 3 times more calls traded over puts. Supported by the recent rally in bitcoin, the market is clearly positive about its stock price.
Technical analysis highlights: US stocks Bearish trend: S&P 500 bouncing from support at 4,195. Nasdaq 100 bouncing from support at 14,505, if broken support at 14,254. DAX key support at 15,482, expect minor correction to 15K. EURUSD has broken above 1.0635, resistance at 1.07 and strong at 1.0762. USDJPY resistance at 150.16. GBPUSD likely to test resistance at 1.23. Gold rejected at 1,985, expect correction to 1,945. US 10-year T-yields setback likely after reaching 5%
Macro: Israel is still holding off on its planned ground assault on Gaza as further diplomatic efforts were made to prevent the conflict from spreading. Bloomberg reports there are growing calls inside Israel for a rethink of the planned ground invasion, due to the uncertainty about the fate of over 200 hostages being held in Gaza, fear of Hezbollah in Lebanon invading Israel from the north, and the risk of heavy Israeli military casualties. Meanwhile, Israel continues with its aerial bombardment of Gaza and with strikes at Hezbollah forces in Lebanon.
In the news: Ackman, Gross Abandon Bearish Bond View With Yields Bouncing Off 5% (Bloomberg), Nvidia to make Arm-based PC chips in major new challenge to Intel (Reuters), Chevron to buy Hess Corp for $53 billion in all-stock deal (Reuters), China Sovereign Wealth Fund Buys ETFs in New Bid to Boost Stocks (Bloomberg), White House says Iran 'actively facilitating' some attacks on US military bases (Reuters)
Macro events (all times are GMT): Manufacturing PMIs from France (0715) and Germany (0730), Eurozone Manufacturing PMI (Oct) exp 43.7 vs 43.4 prior, Services PMI exp 48.6 vs 48.7 prior, Composite 47.4 vs 47.2 prior (0800). UK Composite PMI (Oct) exp 48.5 vs 48.5 prior (0830). US Manufacturing PMI (Oct) 48.5 vs 49.8, Services 49.9 vs 50.1 and Composite 50 vs 50.2 (1345).
Earnings events: Microsoft reports FY24 Q1 earnings (aft-mkt) with analysts expecting revenue growth of 9% y/y up from last quarter and EBITDA $28.1bn up from $25bn a year ago. Alphabet (parent of Google) reports FY23 Q3 earnings (aft-mkt) with analysts expecting gross profit of $36.2bn down from $37.9bn a year ago.
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