Summary: Despite some signals of peak hawkishness, Fed members reiterated higher-for-longer rates, and equities remained under pressure due to fresh escalations in Russia/Ukraine conflict as well as Biden administration’s move to restrict chip sales to China. Germany’s move to join EU debt issuance supports Saxo’s base case for a European fiscal union, while UK’s confidence crisis continues despite fresh liquidity injection. Oil reversed some of the post-OPEC gains but wheat surged on supply worries. USD momentum built further, and all eyes now on US corporate earnings season kickoff and the CPI report.
Ahead of CPI data on Thursday and Fed Meeting Minutes, plus new escalations in the Russia-Ukraine war, investors are trading in a risk-off and defensive mood. The benchmark, S&P500 ended 0.75% lower after a choppy session, while the Nasdaq 100 fell 1%, closing near two-year lows with semiconductors among the worst performers after Washington’s moved to further restrict China’s access to US technology, which adds to signs of slowing global chip demand. The PHLX Semiconductor Index dropped 3.5%. So, once again, the S&P500 is in a precarious position and also has fully erased the October rally. Selling was heavy in the Casino and Gaming Sector (falling almost 7%), with stocks like Wynn Resorts, Las Vegas Sands, tumbling after data showed tourism revenue fell sharply over China’s week-long holiday. Meanwhile, the leisure Product sector fell over 2%. Conversely, investors and trades topped up the exposure in defensive sectors with the most buying in the Food and Drug Sectors; with Walgreens up 4%.
The cash treasury bond market was closed on Monday for Columbus Day. The futures market bear steeped with the long end sold off on weakness in the U.K. gilts market. The Bank of England said its emergency bond buying program would end as planned on Friday. U.S.10-year note yields opened at 3.95% this morning in Asia, 7bps higher than their Friday close in New York.
China returned from a week-long holiday yesterday. The Shanghai Composite Index traded below 3,000 for the first time since May this year and the CSI300 Index dropped 2.2% to a 2.5-year low to finish at 3,720.94. In Hong Kong, Hang Seng Index fell nearly 3% and the Hang Seng Tech Index (HSTECH.I) tumbled 4%. Last Friday, the Biden Administration rolled out new rules to restrict China’s access to semiconductor equipment and their components plus tightening the Foreign Direct Product Rule to restrict China from obtaining advanced microchips. Semiconductor names plunged in both the Hong Kong and mainland bourses, with SMIC (00981:xhkg) down 4%, and Hua Hong Semiconductor (01347:xhkg) down 9.4%. The surge in Covid-19 cases and the tightening of pandemic control restrictions took a toll on the performance of tourism during China’s National Day golden week holiday. The number of people who travelled during the holiday was 18% lower from 2021 and 39% lower than before the pandemic in 2019. The three Chinese airline stocks traded in Hong Kong dropped around 5% and other China consumption names sold off as well. Meituan (03690:xhkg) tumbled 6.7% as investors took the company’s plan to expand its food delivery business overseas starting from Hong Kong as a sign of slower growth in the domestic market. An editorial in the People’s daily reiterated the Chinese authorities’ determination to maintain the Covid Zero policy. Macao casino stocks dropped from 4% to 8%. The weakness in the EV space persisted with the leading names falling from 2% to 6%. Poultry, and pig farming stocks gained in the A-share market.
The Australian share market is expected to have a positive day of trade today if you go by the futures which indicate the market will lift by about 0.2% (or 0.18%). A focus will be on lithium stocks, with investors to perhaps sell down and make fresh profits. The reason for this is that Automakers Ford, General Motors, and Rivian are said to be facing a darkening outlook amid rising interest rates in the US. Rivian alone is recalling 13,000 vehicles after discovering a defect. So it’s worth watching Pilbara Minerals, Core Lithium, Lake Resources, and the like. On the corporate news side of town, its AGM season; Telstra holds its AGM today at 9.30am Sydney time.
With the US dollar rising against most major currencies, the US dollar index has now risen for the fourth consecutive day and in doing so moved to its highest level this month, leaving the Australian dollar under pressure. The concern is that the AUDUSD currency pair has little technical support at these levels. USDJPY rose to highs of 145.80, remaining just short of 145.90 level where authorities intervened few weeks ago. Steady gain in US yields and the dollar mean further pressure on the Japanese yen will be hard to avoid, given the Bank of Japan’s yield curve control policy.
The battle between demand and supply concerns continued in the energy markets, and oil prices dipped lower after solid gains last week. Demand concerns picked up amid higher US dollar weighing on the economic growth outlook, as OPEC+ production cut impact faded. US Columbus Day holiday also meant thin trading. With geopolitical concerns out of Russia/Ukraine taking a leg up, there is peak uneasiness and caution, and this could further squeeze the oil markets.
Wheat prices climbed to their highest levels since July amid worsening Russia/Ukraine tensions and a worsening US crop outlook output. The futures climbed as much as 7.9% in Chicago, within cents of the daily exchange limit, before ultimately settling up 6.6% after explosions rocked the Ukrainian capital Kyiv. Russia has threatened further missile attacks, suggesting further food security concerns could continue. The key crop report from the US Department of Agriculture is due on Wednesday.
The price of the key streel ingredient, Iron Ore (SOCA, SCOX2) rose 3.3% overnight to $96.95, and then promptly gave back some of those gains this morning, falling by 0.88%. The pick up in buying comes as China’s markets reopened after a week-long holiday. Yesterday’s iron ore advance was the biggest one-day jump in three weeks. The Iron Ore price remains 50% lower than its all-time high of ~$211 after China curbed imports and lockdowns continue to linger. Iron ore is finding it hard to break out of its bear market, this is despite the US steel giant, Nucor announcing two weeks ago its pushing ahead with plans to expand steel production, with its newest line to open in mid-2025. However, shares in BHP have rallied off their lows and trade 15% away from record high-territory, with the miner benefiting from rising cash flows from its other businesses (coal and oil).
Chancellor Scholz reportedly reversed German position and warmed up to the joint EU debt issuance to fund energy packages, as long as the fresh funds are disbursed to struggling member states as loans, not grants. This is single-handedly one of biggest impulses ever in Germany history to be released. This means Germany is now “guaranteeing” sovereign EU debt and we are getting close to Saxo’s base case for Europe: A fiscal union through the back-door has already happened and will progress to “minimize” Italian debt issue, as it will be drowned by EU issuance.
Lael Brainard sounded a small note of caution on Fed’s tightening, saying that it will take time for rate hikes to bring inflation down while also highlighting slowing growth, cooling labor market and financial vulnerabilities. Still, she reaffirmed that monetary policy will be restrictive for some time. Charles Evans remained in favor of front loading, saying that the Fed should quickly reach levels where policymakers feel comfortable pausing to reduce the risk of overshooting.
The Bank of England announced it remains on course to end its temporary buy-back auctions at the end of the week and is switching to liquidity support via expanded collateral repos, also for a limited period to help banks with customers that are not entirely hedged against LDI exposure. Gilts plunged as investors remain worried, with 30-year yields rising above 4.7% and 20-year touching a high of 4.9%. Meanwhile, the medium term fiscal plan is to be published on October 31, just before the next MPC rate meeting, which at the least means a more informed decision may be possible.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy