Global Market Quick Take: Europe – 7 October 2024

Key points:

• Equities: Focus on Chinese equity rally and earnings from PepsiCo, JPMorgan Chase, and Wells Fargo
• Currencies: US dollar in focus on strong US labour market data. RBNZ expected to cut 50 bps
• Commodities: Crude trades softer but upside risks remain
• Fixed Income: Markets brace for inflation data following Friday’s strong jobs report.
• Economic data: FOMC Minutes, US CPI, US consumer sentiment

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

Saxo’s Q4 Outlook – published on 2 October 2024

• Macro: The US rate cut cycle has begun
• Equities: Will lower rates lift all boats in equities?
• Fixed Income: Bonds hit reset. A new equilibrium emerges
• Forex: USD in limbo amid political and policy jitters
• Commodities: Gold and silver continue to shine bright

 Macro

• NFP analysis: Friday’s September Nonfarm payrolls report exceeded expectations, adding 254,000 jobs versus the estimated 150,000 (revised from 159,000). Private payrolls increased by 223,000, beating the consensus of 125,000 (revised from 114,000), while manufacturing jobs fell by 7,000, slightly more than the expected 5,000 decline (revised from a 27,000 decline). Wages rose 0.4% month-over-month, higher than the estimated 0.3%, and 4.0% year-over-year, above the expected 3.8%. The unemployment rate dropped to 4.1% from the estimated 4.2%. The average workweek was 34.2 hours, just below the consensus of 34.3 hours. The labour force participation rate remained steady at 62.7%. The market is immediately scaled back on its pricing of the number of rate cuts falling from six to five rate cuts by June next year.

Macro events (times in GMT): FOMC Minutes (Wed, 18:00), US September CPI (Thu, 12:30), US October preliminary Michigan Consumer Sentiment (Fri, 14:00)

Earnings events: The Q3 earnings season kicks off this week with PepsiCo earnings tomorrow and then important US banking earnings from JPMorgan Chase and Wells Fargo on Friday. The newly released data showing that the US obesity rate has fallen for the first time in many decades is an interesting indicator ahead of PepsiCo’s earnings tomorrow. Analysts expect only 1.5% YoY revenue growth following the three previous quarters with below 2.5% YoY growth signaling maybe that obesity drugs are beginning to have an impact on some consumer staples companies.

• Tuesday: PepsiCo
• Wednesday: Aeon, Vantage Towers
• Thursday: Seven & i, Fast Retailing, Domino’s Pizza, Delta Air Lines
• Friday: Tryg, Bank of New York Mellon, JPMorgan Chase, Wells Fargo, Fastenal, BlackRock

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

Equities: Despite higher oil markets last week due to tensions in the Middle East the US equity market ended the week on a high note due to the strong US nonfarm payrolls report showing that the US labour market is still humming along. With the current high-frequency indicators on the US economy and the latest labour market report there are not much evidence in the short-term that the US economy is rolling into a recession. With the US policy rate projected to decline by 125 bps by June next year coupled with a positive economy, the market will likely say this is close to ‘goldilocks’ scenario. This week the main questions in the equity markets are whether the Chinese equity rally can continue despite a 30% rally from the lows in September. The US inflation report on Thursday is also going to be important for the market’s pricing of future policy rates by the Fed. Lastly, the Q3 earnings season starts slowly with PepsiCo earnings tomorrow and banking earnings from JPMorgan Chase and Wells Fargo on Friday. This week we could also see a reveral of recent moves in equities with technology stocks underperforming and the utilities and real estate sectors rallying.

Fixed Income: Last week, stronger-than-expected U.S. jobs report caused U.S. Treasury yields to surge, with the 10-year Treasury yield rising to around 3.97% and 2-year yields to 3.93%, reflecting heightened expectations that the Federal Reserve might not cut rates as aggressively as previously anticipated with traders anticipating 50bps rate cuts by year-end on Friday versus 75 a week earlier. The report showed robust labor market data, with the U.S. economy adding 254,000 jobs in September, the most in six months. Looking ahead to this week, attention will be on upcoming U.S. inflation data (CPI) and producer prices, which will provide further clues on inflation trends and whether the Fed may shift its policy stance in the near term. If inflation comes in lower than expected, it could ease pressure on bond yields and create some optimism around rate cuts. However, continued strong economic data could lead to further rises in bond yields as markets price in fewer rate cuts. This week in Asia, central bank policy decisions from India, New Zealand, South Korea, and possibly Singapore, alongside key data from China, will be in focus, with expectations of rate cuts in New Zealand and South Korea, and potential easing in India amid declining inflation and economic concerns.

Commodities: The sector traded higher for a fourth week last week, with a broadly followed index hitting a four-month high, supported by surging energy prices amid worries about an Israeli attack on Iran’s energy infrastructure. Also, the industrial metal sector continued to find support from China’s stimulus announcement, while the precious metal sector suffered a setback on Friday after the strong US jobs report helped offset a geopolitical bid. On Tuesday, China will hold a press conference where officials will provide an update on the implementation of the announced measures to support the economy. The crude oil market will be watching moves from Israel on the one-year anniversary of the Hamas attack, with several outcomes having different impacts on prices, the worst being action that temporarily closes the Strait of Hormuz, while an attack on refinery infrastructure may end up being oil-negative, as it forces Iran to export more crude instead of products.

FX: This week’s key focus in currency markets will be US inflation data (Thu), FOMC minutes (Wed), and central bank decisions from New Zealand and India. The US dollar has gained strength post the strong US jobs data on Friday, with inflation reports likely to shape expectations for a potential Fed rate cut in November. The FOMC minutes, released on Wednesday, will provide further insight into the Fed's stance The Japanese yen had one of its weakest weeks since 2009 last week and volatility in the JPY has picked up causing finance minister Kato to say that these wild swings are negative for Japanese companies and households. Key focus this week is whether the JPY will continue to weaken. Diverging monetary policies between the US and Japan suggest further downside pressure for the yen and especially if US economic data dictates a slower pace for US policy rate cuts. Additionally, the New Zealand dollar may weaken due to an expected rate cut from the RBNZ on Wednesday with economists expecting a 50 bps cut.

Volatility: This week, market volatility may shift depending on key data and events. The VIX is currently at 19.21 (-6.25%), and expected moves, based on options pricing, suggest the S&P 500 could swing around 85 points (~1.48%) and the Nasdaq 100 by nearly 391 points (~1.95%) over the next five days. Thursday’s CPI report will be the primary focus, with Core CPI (MoM) forecasted at 0.2% and CPI (YoY) at 2.3%. A deviation from these expectations could lead to significant market reactions as investors reassess the Federal Reserve's next steps. Additionally, the Q3 earnings season kicks off with PepsiCo on Tuesday, followed by major banks such as JPMorgan and Wells Fargo on Friday, which could influence sentiment further. Geopolitical tensions in the Middle East remain a background risk, adding to market uncertainty. With these factors in play, volatility could go either way, depending on how the data unfolds.

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