Global Market Quick Take: Europe – October 31 2023
Saxo Strategy Team
Résumé: US equity futures trade lower after the biggest gain in the S&P 500 since August following overnight action which saw the Bank of Japan leave its yield-curve control unchanged while China’s factory activity slid back into contraction in October. The dollar trades higher against its G10 peers, not least against the JPY which trades back above 150, while the US bond market trades steady with US 10-year yields near 5% ahead of Wednesday’s FOMC meeting. Crude oil’s war premium has been erased on growing hopes the Israel-Hamas war will remain contained.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures bounced back yesterday touching almost the 4,200 level intraday and this morning they trade a bit lower down at the 4,178 level. Hang Seng futures are down 2% today as October PMI figures show that China’s manufacturing sector slipped back into contraction. McDonald’s reported better-than-expected Q3 earnings with comparative sales beating estimates and said traffic grew internationally. Tesla shares were down 5% as Panasonic reported quarterly operating loss in its automotive batteries division on sluggish sales of high-end Tesla models, and the CFO said that factory will not run close to full capacity any time soon.
FX: Dollar was weaker on Monday amid improved strong risk sentiment before making a strong recovery in Asia after the BOJ remained dovish. USDJPY shot up above 150 after an earlier slide below 149 on speculation that BOJ may fasten policy normalization. AUDUSD reversed the gains to 0.6380 but gains could return with RBA rate hike still in play. AUDNZD returned back below 1.09. EURUSD rose above 1.06 yesterday despite both Spanish and German CPI coming in cooler than expected but returned just below 1.06 as focus will be on GDP and CPI data out today.
Commodities: Crude oil’s war premium has been erased after Monday’s sharp drop on growing hopes the Israel-Hamas will remain contained, and not spread to Iran, the markets biggest worry throughout this conflict. Also weighing on prices is the short-term demand outlook which is showing signs of softening. Gold holds above $1990 ahead of Wednesday’s FOMC meeting despite an improvement in risk appetite and a stronger dollar while copper’s recent rally was halted by a weak China manufacturing PMI print.
Fixed income: The Bank of Japan revised inflation forecasts upwards for 2023 and 2024 and made the 1% level just a reference point rather than a purchase pledged. At the same time, the US Treasury released its financing estimates indicating that it needs to borrow $776 billion, $76 billion less than announced in July. Both news is bearish for long-term sovereigns on both sides of the Atlantic. A BOJ normalizing monetary policy means allowing JGB (Japanese government bonds) yields higher, luring Japanese investors from abroad. The amount the US treasury needs to borrow is still a record high for the last quarter of the year, and coupon issuance might need to be increased. Overall, we expect yield curves to continue their bear steepening. Hence, we favour quality and a barbell strategy involving short-term bonds up to 3 years and the 10-year tenor for bonds on both sides of the Atlantic.
Volatility: VIX retreated to below 20, ending yesterday’s session at 19.75 (-1.52). VIX futures had a similar image and their overnight session shows no change (or slightly positive) after the stock market’s positive trading day. The VIX volatility index (VVIX) dropped below 100, to 95.23 showing some easing in market sentiment. S&P 500 E-mini futures and Nasdaq 100 E-mini futures moved both slightly negative overnight (-0.25% and -0.47% respectively), indicating a wait-and-see for the upcoming macro-events and earnings following later this week. The CBOE Skew index (VIX is calculated using ATM options, SKEW uses OTM options) also dropped to 130.13 (-2.61), pointing to less risk for big outlier moves.
Technical analysis highlights: S&P 500 support at 4,100-4,050. Nasdaq 100 downtrend, likely to drop below 14K, support at 13,590. DAX sliding lower, testing support at 14,675, next at 14,500. EURUSD could test 1.0635 resistance, but strong resistance at 1.07. Gold above 1,985 resistance, likely move to 2,025. WTI key support at 81.50. US 10-year T-yields range bound 4.80-5.02
Macro: Germany slipped into contraction in Q3 with preliminary GDP data showing a decline of 0.1% q/q, but better than -0.2% expected. October HICP slowed to 3.0% y/y from 4.3% a month earlier and the 3.3% expected. Euro area Q3 prelim GDP and October CPI on watch today. Bank of Japan surprised dovish yet again, despite a Nikkei report last night suggesting that 10-year yield target could be revised higher. The central bank introduced flexibility in its YCC program, saying that the 1% cap will be reference rather than a strict ceiling. The inflation outlook was raised, but fiscal 2025 core inflation expectations are still below 2% suggesting BOJ is still of the view that inflation is transitory. China manufacturing PMI back in contraction. Following a brief visit above 50 last month the October print showed a drop to 49.5. Non-manufacturing PMI also decelerated to 50.6 from 51.7, below the Bloomberg consensus of 52.0.
In the news: UK shop price inflation at lowest since August 2022 –BRC (Reuters), Netanyahu Rules Out Cease-Fire (Bloomberg), Treasury to borrow $776 billion in the final three months of the year (CNBC), Oil prices could hit $150 if Israel-Hamas conflict intensifies, World Bank warns (FT), US carworkers suspend strike after reaching tentative deal with GM (FT), Tesla shares drop 5% on Panasonic battery warning, down 18% since Q3 earnings report (CNBC), McDonald's gets lift from diners turning to cheaper menu, new launches (Reuters), ON Semiconductor Stock Plummets After Offering Bleak Fourth-Quarter Outlook (WSJ).
Macro events (all times are GMT): EZ Flash CPI (Sep) Core exp. 4.2% YoY vs. 4.5% prior (1000), GDP (Q3) exp 0.2% YoY vs. 0.5% prior (1000), US Employment Cost Index (Q3) exp. 1.0% vs. 1.0% prior (1230), US Consumer Confidence (Oct) exp 100.5 vs 103 prior (1400).
Earnings events: Key earnings reports today from Anheuser-Busch InBev, BP, Caterpillar, AMD, Pfizer, Amgen, Eaton, Cameco, BASF, Uniper, BP, BBVA, First Solara. Caterpillar is the most important one expected to report Q3 earnings at 10:30 GMT with analysts expecting revenue growth of 7% y/y and EBITDA $3.6bn up from $3bn a year ago.
For all macro, earnings, and dividend events check Saxo’s calendar