Global Market Quick Take: Europe – 8 January 2024

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

Equities: Chinese equities are off to a bad start this week down 2.2% in Hong Kong trading as sentiment remains week. Friday’s trading session was a rollercoaster with first the negative reaction to the stronger than estimated Nonfarm Payrolls before everything slipped on weaker than estimated US ISM services figures. This week is all about inflation reports from Switzerland, Norway and US (Thursday) before we end the week with the first batch of Q4 earnings from US major banks such as JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup.

FX: Dollar was higher in the first trading week of 2024 after ending the last three weeks lower as markets re-assessed the pace of easing priced in. Friday’s price action was choppy as NFP beat boosted the greenback, but ISM’s downside surprise pushed it lower only to finish almost unchanged. GBPUSD outperformed, reclaiming 1.27 to push to highs of 1.2771 only to reverse back today in the Asian session. NZDUSD was lower again from highs of 0.6278 while AUDUSD slid to the 0.67 handle. Yen remains a key focus with US CPI and Tokyo CPI up for release this week, and USDJPY is back below 145.

Commodities: Crude oil trades lower after Saudi Arabia cut its February official selling prices (OSP) for all regions, underscoring the current tug of war between a worsening global demand outlook and concerns that Red Sea tensions and the Israel-Hamas war could spill over into a regional conflict. However, while supply disruptions remain a threat only, slowing demand is real and it may bring focus back on OPEC+ and their ability to keep prices supported in the $70 to $75 area.  Copper was down 3% last week on CNY and China economic data weakness, while Gold has returned to the low $2030s after briefly spiking on Friday after weak US data supported Fed rate-cut hopes

Fixed income: Treasury yields whipsawed on Friday initially surging in response to a hotter-than-expected headline payrolls growth and average hourly earnings, before cooling after downward revisions of previous months data brought the 3-month average job growth to 165K, the slowest since January 2021. The December job report is unlikely to delay the Fed's first rate cut that may come as early as this March. Historical data compiled by Ned Davis Research indicates that the 10-year yield has fallen in the three months leading up to the first Fed rate cut every time in the last 12 rate-cut cycles since 1970.

Macro: US Nonfarm Payrolls came in hot as it added 216k jobs in December, up from the prior 173k (revised down from 199k) and expected 175k. The unemployment rate was unchanged at 3.7% despite expectations for a rise to 3.8% but the labour force participation saw a notable decline to 62.5% from 62.8%. Wage data was also hot, coming in unchanged at 0.4% MoM (exp. 0.3%), while Y/Y earnings rose 4.1%, above the 3.9% forecast and accelerating from the 4.0% prior. But looking under the hood, there were some dovish elements. Private sector job growth averaged just 115k for the last three months, the lowest levels since the reopening in 2020. Probability of a March rate cut reduced to 60% from about 70% earlier, and focus turns to CPI data due this week. US ISM Services fell to 50.6 from 52.7 and was way beneath the expected (52.5). Employment plunged into contractionary territory, printing 43.3 from 50.7, its lowest since July 2020, while new orders dropped to 52.8 from 55.5. Prices paid dipped to 57.4 (prev. 58.3), and business activity lifted to 56.6 (prev. 55.1). The data highlighted that the services sector is softening as the lagged effect of higher interest rates passes through, even as the monthly data may be too noisy to draw any conclusions.

Volatility: The VIX ended last week at $13.35 (-0.78 | -5.52%), which is about the same price as when it started the week. Although it had been slowly crawling upwards during the week, it took a sharp turn downwards on Friday. Same image with the VVIX, which ended considerably lower on Friday, at 82.87 (-4.72 | -5.39%). As did the SKEW-index which ended at 132.68 (-3.92 | -2.87%). While the stock markets had a down-week, and volatility stayed the same, the signals are a bit conflicting. Expected moves for the coming week are: +/- 55.20  (+/- 1.18%) and +/- 250.01 (+/- 1.53%) for the S&P 500 and the Nasdaq 100 respectively. Futures (VIX, S&P 500, Nasdaq 100) had a flat overnight session. Volatility this week will be influenced by a couple of economic indicators, the CPI-numbers and initial jobless claims being the most important.

Technical analysis highlights: S&P 500 correction unfolding, closed below key support at 4,697. Nasdaq 100 correction, support 16,166. DAX support at 16,470 and 16,060. EURUSD bounced from 0.618 retracement and support at 1.0882, could rebound to 1.10. USDJPY failed to close above 144.95 could slide back to 142.85. GBPUSD below rising trendline, support at 1.25, resistance at 1,28. Gold sliding lower likely to test 2,017 support, maybe 2K. 10-year Treasury yields rejected at 4.10 resistance.

In the news: US restrictions on China materials cut EV tax credit to 8 models (Nikkei Asia), Logan Says Fed Should Slow Asset Runoff as Reverse Repo Dwindles (Bloomberg), US grounds some Boeing MAX planes for safety checks (Reuters), Saudi Arabia cuts Feb Arab Light crude price to Asia to 27-month low (Reuters), Top US Congress Democrat, Republican reach spending deal, starting race to pass it (Reuters), Libya's NOC declares force majeure at Sharara oilfield (Reuters).

Macro events (all times are GMT): Germany factory orders (Nov) exp 1.1% vs -3.7% last (0600), Eurozone retail sales (Nov) exp -0.3% & -1.5% vs 0.1% & -1.2% last (0900), Eurozone Dec consumer confidence (0900), US NY Fed 1-Yr Inflation expectations (Dec) last 3.36% (1500), Japan markets closed for holiday. Atlanta Fed Bostic speaks on the economic outlook (1630)

Earnings events: The first Q4 earnings report is already today with Jefferies Financial reporting after the US market close with analysts adj. EPS at $0.26 down 55% y/y.

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