Global Market Quick Take: Europe – 9 September 2024

Key points:

• Equities: Small bounceback after steep weekly declines
• Currencies: USDJPY bounce back adds strength to an undecided dollar
• Commodities: Global growth worries weighing on energy and metals
• Fixed Income: Fed Rate Cut Speculation Fuels Market Volatility
• Economic data: US Wholesale Inventories

The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.

In the news: Dell and Palantir to join S&P 500; shares of both jump (CNBC), Wall St Week Ahead Economic worries back on Wall Street's radar after jobs data (Reuters), The Yield Curve Finally Closed Normal (Barron’s), US equity funds see major outflows on growth concerns (Reuters), UK labour market loses steam in August, recruiters say (Reuters), China, price cuts and costs: the fuel driving Volkswagen's crisis (Reuters), ECB’s Economic Hopes at Risk as Consumers Put Spending on Ice (Bloomberg)

Macro:

• The US jobs report for August came in mixed with headline jobs growth coming in below expectations at 142k (vs. 160 expected) but unemployment rate also lower at 4.2% from 4.3% previously while the participation rate held at 62.7%. Downward revisions to last two months’ of payrolls prints however sent a dovish signal with July’s payroll growth now at 89k and June’s at 142k. The debate between a 25bps cut or 50bps cut the Fed’s next meeting remained unresolved, and the market is still pricing in 34bps of rate cut for next week’s meeting. Focus now turns to the CPI print due this week for further clarity.
• Fed Governor Waller’s comments on Friday after the jobs report were noteworthy. He is a key voice within the Fed committee and said that he will be an advocate for front-loading rate cuts if that is appropriate, but balanced this out by noting data in the past three days indicates the labour market is softening but not deteriorating, and this judgment is important to the upcoming policy decision. However, he noted that if future data shows significant deterioration in the labour market, the Fed can act quickly and forcefully which suggests he is reserving the optionality for the Fed to move by 50bps at one of the future meetings this year. NY Fed President Williams also highlighted data dependency.
• Japan’s Q2 GDP final print came in softer than expected at 2.9% annualized QoQ vs. 3.2% expected. Private consumption was revised lower to 0.9% from 1%, but overall growth still remains above BOJ’s 0.6% estimate. GDP deflator was revised higher to 3.2% from 3.0% signalling that the report may not dampen expectations of further normalization from the Bank of Japan.
• China’s broader CPI increased 0.6% last month from a year earlier, missing expectations even though it was buoyed by higher food costs due to bad weather last month, while ore inflation cooled 0.3% to the weakest in more than three years. Weak consumption and investment demand have led to intense price wars in sectors including electric vehicles and solar

Macro events (times in GMT): Mexico CPI (Aug) exp 5.05% YoY vs 5.57% prior (1200), US Wholesale Inventories (Jul Final) exp no change at 0.3% MoM (1400)

Earnings events:

• Monday: Oracle, D’ieteren Group, Vantage Towers
• Wednesday: Dollarama, Inditex

For all macro, earnings, and dividend events check Saxo’s calendar.

Equities: European and U.S. equity futures signalling a modest rebound following last week’s selloff that was triggered by cooling U.S. jobs data, leading to broad weakness in Asia overnight as the markets caught up with Friday’s weakness, that was driven by concerns over a slowing labor market and a tech selloff. Major tech companies, including Amazon (-3.6%), Alphabet (-4%), and Meta (-3.2%), experienced significant losses, while chipmakers like Broadcom (-10.3%) and Nvidia (-4.1%) also saw sharp declines. Broadcom shares fell despite strong Q3 results due to lower FQ4 margin guidance. It projected Q4 revenue of $14.0B, below the $14.13B consensus, causing the SOX index to drop over 4.5%.

Fixed income: In the U.S. Treasury market, uncertainty remains about the size of the Federal Reserve's potential rate cut at the upcoming meeting. On Friday, Treasuries initially sold off after the payroll report showed higher-than-expected hourly earnings, driving yields higher. However, comments from Fed officials John Williams, Christopher Waller, and Austan Goolsbee, who signalled support for rate cuts, fuelled speculation. Waller stated he is open-minded about the size of the cuts, depending on further data, leading to lower yields. Traders are now pricing in 30 basis points of cuts for the September meeting, 70 basis points by November, and 112 basis points by year-end. The 10-year yield closed the week at 3.715%, with the yield curve steepening as short-term yields rose while long-term yields remained stable. European sovereign bonds gained, following trading momentum in the U.S., with Bunds ending the week at 2.17%, down 4 basis points on the day and 15 basis points for the week. Key events this week include the European Central Bank's anticipated 25 basis point rate cut to 3.5%, with Christine Lagarde's press conference being closely watched for insights into future monetary policy. In the UK, July earnings and employment data will influence the Bank of England's interest rate decision next week.

Commodities: Crude oil trades firmer after closing at a June 2023 low on Friday, amid ongoing worries about global demand and a potential resumption of Libyan exports more than offset OPEC+ postponing a planned production increase until December. In the week to September 3, speculators cut their net long in WTI and Brent futures to a 12-year low, potentially leaving the market exposed to a bounce on price-friendly news. Key support in Brent is at USD 70, with firm resistance at USD 75. Gold traded lower on Friday after failing to reach a fresh record after the US jobs report turned out not to be weak enough to warrant a 50-bps cut on September 18, potentially signalling some downside risks to 2-year government bonds that may weigh on gold prices in the short term. Iron ore slumped below USD 90 for the first time since 2022, amid sustained pressure from tepid Chinese demand and increased worries about global growth. Copper, meanwhile, has stabilised near support after exchange-monitored stockpiles showed signs of rolling over from current elevated levels.

FX: The US dollar ended last week in a choppy fashion with the jobs report unable to break the debate about the pace of Fed’s easing, with AUD weakness on the back of lower commodity prices, especially iron ore’s continued decline being offset by further gains in the Japanese yen as short-end yield spreads to the US continued to narrow.  Overnight, however, the greenback traded a tad firmer on broad gains, especially against the Japanese yen after USDJPY managed to hold 142 support. Other commodity currencies such as New Zealand dollar, Norwegian krone and Canadian dollar also underperformed, while other safe havens such as Swiss franc closed in gains for the week. The Loonie was also weighed down by underwhelming Canadian jobs data where unemployment rose more than expected. The euro closed the week higher despite losses on Friday, and ECB meeting will be the key event to watch this week.

Volatility: The week kicks off with some lingering volatility after last week’s action. The VIX closed at 22.38 on Friday, up 12.46%, reflecting elevated market uncertainty. However, overnight, VIX futures have pulled back by 3.49%, and stock futures are trading higher, suggesting a calmer start today. While this takes some fear off the table, it’s no guarantee for a green opening—or a green day, for that matter—but we’re at least not starting the day in a panic. For the week, the expected moves based on options pricing are up or down 111 points (~2.11%) for the S&P 500 and up or down 525 points (~2.85%) for the Nasdaq 100. This suggests the markets are bracing for continued volatility, likely driven by key data releases throughout the week. With earnings season nearly over, only two major companies remain on the schedule: Oracle (ORCL) reporting today and Adobe (ADBE) on Thursday. The focus now shifts to macroeconomic data, with CPI numbers on Wednesday being the key driver of market sentiment. Last week’s data left the Fed in a difficult position regarding the size of the next rate cut (25 or 50 bps), making this week's reports even more crucial. Friday’s most active stock options were Nvidia, Tesla, Apple, Broadcom, AMD, Amazon, GameStop, Palantir, Meta Platforms, and Nio.

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