Global Market Quick Take: Europe – 6 February 2024

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

Equities: Massive rebound in Chinese equity futures with Hang Seng up 3.9% as traders are betting that the growing lists of initiatives by Chinese authorities will change sentiment and that the economy will eventually kick into gear again. Earnings from Caterpillar were better than feared and Palantir lifted sentiment in technology following a beat on both revenue and earnings (after the close) citing growing demand for AI technology. This morning in Europe, BP is beating earnings estimates and announcing more buybacks while Infineon is lowering its guidance on industrial semiconductor weakness and slower growth in electric vehicles. In Japan, Nintendo beat expectations again on Switch sales and lifted marginally its operating income guidance for the fiscal year.

FX: The stronger US ISM services print further added fuel to the recent narrative on a pushback to rate cut expectations, adding to the case for a dollar rally. DXY index traded to highs of 104.60, but some pullback was seen in the Asian session with RBA keeping a hawkish bias and Chinese President Xi getting more active about stopping the rout in financial markets. AUDUSD jumped higher to 0.6520 from sub-0.65 handle as RBA did not remove the “need for further tightening” clearly from the statement.  USDCNH meanwhile was seen slipping to 7.20 from highs of 7.2245 yesterday. Dollar’s pullback however did not help EUR, with EURUSD stuck around 1.0750 and ECB’s inflation expectations will be in focus today. Yen weakness has also been more measured despite rampant USD strength yesterday with USDJPY trading around 148.50 where intervention threat could pick up

Commodities: Crude oil prices registered modest gains on Monday despite a hawkish macro narrative gripping market, as geopolitical angst continued. Oil, however, remains range-bound amid no supply disruptions seen with focus today on EIA’s short-term energy outlook. Gold and silver both traded lower, but underlying demand remains with gold especially not falling to the extent that could be expected given the recent dollar and yield strength. Industrial metals were the worst performers of the day amid continued downbeat China rhetoric, but our weekly COT report highlights a cut in short copper positions. Meanwhile, the most shorted grains market since 2019 awaits Thursday’s monthly supply and demand report.

Fixed income: A strong January ISM report showing a reacceleration of prices paid, plus a speech from Goolsbee and Powell’s Sunday interview, provoked a broad sell-off across US Treasuries and a bear-steepening of the yield curve. The 10-year yields closed the day around 4.165%, up 14.5bos on the day, and Bund and Gilts followed suit, although suffering from lesser losses. The iShares 20+ Year Treasury Bond ETF (TLT), dropped by more than 2% on the day of yesterday. A big supply slate for this week is adding angst to markets with the investment-grade corporate space looking to price up to $30 billion in bonds and the US Treasury selling $54 3-year notes today, and $42bn 10- and 25bn 30-year bonds on Wednesdays and Thursday. Although we expect strong demand at today’s 3-year and tomorrow’s 10-year auctions, demand on Thursday 30-year US Treasury auction remains uncertain as it needs investors to extend their portfolio duration (for more information click here). A poor 10- or 30-year US Treasury auction has the potential to extend the bear-flattening of the yield curve witnessed yesterday.

Macro: US ISM services for January came in hot, adding fuel to the hawkish fire. Headline PMI rose to 53.4 from 50.5 (vs. 52.0 exp). Prices paid surged to 64.0 (prev. 57.4), the highest since February 2023, and could raise some concern about disinflation trends. Employment lifted back into expansionary territory, printing 50.5 (prev. 43.8), while business activity was unchanged at 55.8. The backlog of new orders and supplier deliveries both rose back above 50.0 to 55.0 (prev. 52.8) and 52.4 (prev. 49.5), respectively. Fed speakers remained balanced although Goolsbee (non-voter) said he wouldn’t rule out a March cut. Bowman (voter) said reducing the policy rate too soon could mean more rate hikes are needed in the future, and she also remains willing to raise the policy rate at a future meeting if it is needed. Japan’s wage data for December came in below expectations. Labor cash earnings rose 1% YoY, above 0.7% previous but missing expectations of 1.4%. The focus is still on wage negotiations and the market is increasingly expecting BOJ to exit its negative interest rate policy in April, but we see only modest and gradual tightening. The Reserve Bank of Australia left interest rates unchanged at a 12-year high and signaled further tightening remains possible with the central bank head Bullock saying that taming inflation was taking priority over the desire to provide relief to heavily indebted mortgage holders

Technical analysis highlights: S&P 500 resuming uptrend likely to test 5K but uptrend stretched. Nasdaq 100 minor correction, resuming uptrend. DAX rejected at 17K, needs to close above for upside, Likely correction to 16,500. EURUSD testing 1.0730 key support. USDJPY testing key resistance at 148-80, a close above looking at +150. EURJPY key support at 158.55. GBPUSD broken bearish out of range likely to test 1.25 support. AUDUSD below key strong support at 0.6520. Gold rejected at strong resistance at 2,064, if broken move to 2,121, key support at 2K. 10-year T-yields bouncing from previous low at 3.78, key resistance at 4.20.

Volatility: Monday's session was a blend of volatility and contradiction. The VIX peaked at $14.53, fueled by a robust US ISM services PMI and hawkish Fed remarks, yet closed lower at $13.67 (-0.18 | -1.30%). This juxtaposition against Nvidia's surge and the broader market's restraint under rising yields paints a complex picture. Since mid-December, a gradual VIX uptrend amidst rallying markets and a persistently high SKEW index above 150, during the last few days, suggest growing caution towards outlier risks. Despite this, VIX futures held steady overnight at 13.950 (-0.005 | -0.04%), and S&P 500 and Nasdaq 100 futures edged up, indicating a tentative continuation of the upward trend. Yet, an undercurrent of caution persists, hinting at potentially volatile times ahead as indicators increasingly flash warning signals.

In the news: China Tightens Some Trading Restrictions for Domestic and Offshore Investors (Bloomberg), Spate of job cuts continues unabated at Big Tech, media firms (Reuters), Red Sea tensions risk significantly higher inflation, OECD warns (CNBC), BOE’s Pill Says Rate Cut Possible This Year as ‘Reward’ for Inflation Drop (Bloomberg), The World’s Chip Industry Poised to Bounce Back After Tough 2023 (Bloomberg), Novo Nordisk's parent to buy Catalent for $16.5 bln to boost Wegovy supply (Reuters), McDonald’s revenue misses estimates as Middle East conflict weighs on quarterly sales (CNBC), Estee Lauder to cut jobs on skittish China demand; shares surge 19% (Reuters), Palantir stock jumps 19% as AI demand drives revenue beat (CNBC)

Macro events (all times are GMT): ECB’s 1 and 3 year CPI expectations (Dec) last at 3.2% and 2.2% (0800), Eurozone retail sales (Dec) exp. -1% & -0.8% vs –0.3% & -1.1% prior (0900), EIA’s monthly Short-term energy outlook (1600), API’s weekly crude oil and fuel stock report (2030), US government to sell $54 bn 3-year Notes (1700), Speeches from Fed’s Mester (1600), Kashkari voter (1700) and Collins (1800)

Earnings events: Another busy week ahead on earnings with the list below highlighting the largest companies reporting earnings this week.

• Today: Toyota Motor, UBS Group, Linde, Amgen, Gilead Sciences, Eli Lilly, BP, Fiserv, KKR, Infineon Technologies, Spotify, Intesa Sanpaolo
• Wednesday: Equinor, Walt Disney, Alibaba, TotalEnergies, Uber Technologies, CVS Health, Siemens Energy, Vestas Wind Systems, Orsted, Carlsberg, ARM, PayPal
• Thursday: NTT, Siemens, AstraZeneca, Unilever, Philip Morris, S&P Global, L’Oreal, ConocoPhillips, Adyen, ArcelorMittal, Maersk
• Friday: Toyota Electron, Hermes International, PepsiCo, Coloplast

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