Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
The week kicked off with more Chinese stimulus as the PBOC shifted to a “moderately loose” policy stance. Talk of allowing the yuan to weaken in 2025 as a combat to Trump tariffs also took centre stage. Shares of market darling Nvidia fell after an anti-monopoly probe, Saxo clients remained net buyers on the week. In commodities, Arabica Coffee reached levels not seen since 1977. US CPI was inline with expectations, as was the policy rate cut from the ECB. There was also plenty of stock specific news that caught investors’ attention – more below on this week’s key stories.
China's bold policy shift
Chinese authorities surprised the market this week by signalling a shift in its monetary policy stance to “moderately loose”, the first change in 14 years, indicating the economic challenges facing the country are severe. The measures, possibly include a sizable central bank purchase of government bonds, coupled with more aggressive cuts in interest rates and reductions in banks' required reserves. Stimulus could also be key for China to offset tariff threats from the US in 2025 and the move shows determination in quest to avoid a sharp economic slowdown.
China's economic pledge
Central Bank moves
The ECB delivered a 25bps cut taking the deposit rate to 3.0%. A handful of policymakers were initially in favour of a 50bps cut arguing the ECB is overestimating growth, which could be below 1% next year under Trump tariffs. In addition to the ECB, we saw the Swiss National Bank unexpectedly cut rates by 50bps to 0.50%, sparking immediate downside in the Franc. On 11th December the Bank of Canada cut the target rate by 50bps to 3.25% as expected and will take a gradual approach as it proceeds.
Expect ECB to diverge from the Fed
Broadcom beats estimates
Broadcom quarterly revenue beat Wall Street estimates and predicted booming demand for its custom artificial intelligence chips in the next few years. Results were out Thursday night and the shares were up 21% in early Friday trading after CEO Hock Tan told investors he expects a revenue opportunity from AI in the range of $60-$90 billion in 2025. Demand for Broadcom's networking chips used by applications such as OpenAI's ChatGPT has also increased. Analysts have raised doubts about the amount of potential future business from Apple, one of Broadcom's most significant customers, as the iPhone maker works to design more of its chips in-house.
Broadcom sees 4x surge in AI chip sales
Alphabet record high - Quantum computing and AI
Alphabet (GOOGL:xnas) rose to its highest level on Wednesday to rally 10% on the week after 2 days of back-to-back positive news. Monday night the company introduced its new Willow chip, marking a milestone in the quantum computing space. Despite the “real world” impact still years away, investors were happy with the progress. Then on Wednesday Alphabet announced its Gemini 2.0 model, the new enhancement of its AI offering, again spurring the stock price on. The A-share saw a decent uptick in trading activity with Saxo clients this week, especially on Tuesday and Wednesday.
Four smaller stocks rocketing on their AI-related potential
Coffee on a grind!
On Tuesday Dec 10th Arabica coffee surged through the record high at $3.375, a record which has stood since 1977. The significant surge came as Brazil’s production outlook continues to face downgrades with some coffee traders slashing production as much as 25%. Drought and higher temperatures, combined with a global reliance on supplies from relatively few regions & countries, have been the key drivers behind the decrease in production capacities. At Saxo client’s this week have moved closer to being almost 50/50 long/short in Coffee & Robusta Coffee.
Brazil’s coffee crisis pushes Arabica to all-time high
Next week will focus on central bank rate decisions from the US FOMC, announced Wednesday, and then also from Japan and the UK which are due on Thursday. Key data includes US Preliminary Dec PMIs (Mon), US Nov Retail sales (Tues), EU and UK CPI (Weds), and US Nov PCE (Fri). Earnings highlights include US aerospace and defence contractor Heico Corp (Tues), Micron Technology, Lennar Corp, General Mills, Birkenstock (Weds), Accenture, Nike, Fedex (Thurs), and Carnival Corp (Fri).