Global Market Quick Take: Europe – October 30 2023

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

Equities: S&P 500 futures declined 2.6% last week on mixed outlooks in several earnings results, increased geopolitical risks as Israel has begun second phase of its attack on Hamas, and finally the big move higher in the US 10-year yield. This week a lot of Q3 earnings results are on tap including McDonald’s (today), Caterpillar (Tue), Toyota (Wed), Apple, (Thu), Novo Nordisk (Thu), Eli Lilly (Thu), and Shell (Thu). On top of many Q3 earnings, the market will also get central bank rate decisions from BoJ (tomorrow), FOMC (Wed), and Bank of England (Thu), reinforcing that this is a key week for equity sentiment with many potential catalysts from earnings, geopolitical events and central bank decisions.

FX: Dollar closed unchanged on Friday as focus turned to geopolitical risks over the weekend and the FOMC meeting this week. The safety bid has so far been evading from the US dollar despite Israel expanding ground operations in Gaza. USDJPY returned to sub-150 levels as traders hedged positions ahead of BOJ risks this week after strong Tokyo CPI on Friday. AUDUSD continued to be lifted as RBA rate hike remains in play, and pair trades around 0.6340 from lows of 0.6270 earlier in the week. EURUSD stuck around 1.0570 despite dismal PMIs and dovish ECB last week, and EURCHF is back above 0.95.

Commodities: Brent crude trades back below $90 and gold below $2000 after Israel’s weekend ground offensive into Gaza proved more cautiously than initially feared, thereby for now keeping a lid on the contagion risks. Markets however remain on edge with US seeing an elevated risk of regional spillover from the war and will keep responding to any attacks on its troops by Iranian proxies. Gold reached a five-month high at $2009 on Friday as traders sought safety ahead of weekend geo-risks. Focus this week on FOMC, bond market volatility and Gaza. Copper trades near resistance at $3.675 amid fresh optimism that China’s latest moves will support economic growth

Fixed income: it’s a busy week for the bond market with the Federal Reserve, the Bank of England, and the Bank of Japan meeting on Wednesday, Thursday, and Friday, respectively. Yet, the Treasury disclosing its financing needs today and the quarterly refunding announcement on Wednesday might get most of the attention as the supply and demand of US Treasuries remains unbalanced. Overall, we expect the FED and the BOE to deliver a hawkish pause, but the risk is that the BOJ revises upward its inflation forecasts for this fiscal year, while tweaking yield curve control allowing JGB yields higher. The move could cause distress in bond markets as Japanese investors would have even less reasons to hold foreign securities. Overall, we see yield curves continuing their bear steepening. Hence, we favor quality and a barbell strategy involving short term bonds up to 3 years and the 10-year area for fixed income securities on both sides of the Atlantic.

Volatility: A lot of important events; macro-events as well as earnings of the biggest S&P single stock (AAPL), all the ingredients for another volatile week. The VIX ended Friday’s session at 21.27, firmly staying above the $20 mark. The VIX volatility index still stays above 100 (102.04) indicating that uncertainty remains king, even though VIX futures declined -2.2% in the overnight session. S&P500 E-mini-Futures & Nasdaq 100 E-mini futures rose 0.45% and 0.63% respectively overnight, which could point to a green opening. Expected moves for this week: S&P 500 +/- 89.46 (2.17%), Nasdaq 100 +/– 398.07 (2.80%). Third week in a row that the expected moves, based on options pricing, are rising, another sign of many, that the market is expecting stormy weather ahead.

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. Expect minor rebound. EURUSD range bound 1.05-1.07. USDJPY back below resistance at 150.16,  could slide back to 147.30. Gold above 1,985 resistance, likely move to 2,025. US 10-year T-yields range bound 4.80-5.02

Macro: Last week’s US Sep PCE was as expected, with headline up 3.4% y/y and 0.4% m/m (vs. 3.4% y/y and 0.3% expected). Core was in-line with expectations at 3.7% y/y and 0.3% m/m. Personal Income rose by 0.3% in September, slightly beneath the 0.4% expectation but consumption beat, rising 0.7% (exp. 0.5%). University of Michigan 1-year inflation expectations jumped 100bps to 4.2% in October (vs. 3.8% prelim) while the longer-term 5-10yr was unchanged at 3.0%.

In the news: Why Treasury’s quarterly refunding has market’s attention (Bloomberg), Israel pounds Gaza from air and land; Biden presses for more aid (Washington Post), ECB Is finished with rate hikes ‘for now,’ Vujcic Says (Bloomberg). A lot of focus on BoJ’s rate meeting tonight as the weak currency is putting pressure on central bank’s yield-curve-control (Bloomberg).

Macro events (all times are GMT): German Prelim CPI (Oct) exp 4.0% YoY vs. 4.5% prior (1300), EZ Oct Sentiment Survey (1000)

Earnings events: McDonald’s reports Q3 earnings results (bef-mkt) with analysts expecting revenue growth of 11% y/y and EBITDA $3.6bn up from $3.4bn a year ago.

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