Global Market Quick Take: Europe – 18 September 2024

Key points:

• Equities: Flat futures ahead of key FOMC rate decision
• Currencies: Modest dollar gains
• Commodities: Gold lower on profit-taking; crude focus on stocks and Mideast tensions
• Fixed Income: Treasury Yields Rise After solid Retail Sales and Weaker 20-Year Auction
• Economic data: FOMC Rate Decision

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

In the news: Japan trade balance shrinks less than expected in Aug; Imports, exports lag (Investing), Microsoft, Blackrock plan $30 bln fund for AI infrastructure (Investing), US economy on solid ground as retail sales surprise on the upside (Reuters), Fed to go big on first rate cut, traders bet (Reuters), US dollar strengthens ahead of expected Fed rate cut (Reuters), Canada's 2% inflation rate in August raises hopes for large rate cut (http://Reuters), Israel planted explosives in 5,000 Hezbollah's pagers, say sources (Reuters)

Macro:

• US retail sales beat expectations with headline up 0.1% in August vs exp. -0.2% and the prior revised up to 1.1% from 1.0% initially. Core measures were, however, below expectations. Ex-autos rose by 0.1%, missing the 0.2% forecast and down from the prior 0.4%. The super core, ex gas and autos, rose 0.2%, down from the prior 0.4%.Atlanta Fed GDPNow (Q3) was revised upwards to 3% (prev. 2.5%). The report highlighted continued US exceptionalism, but it did not shift the odds which remained at 65% chance of a 50bps rate cut from the Fed later today.
• Germany’s investor confidence plunged to its lowest levels in a nearly one year signaling hard landing risks for the German economy as the manufacturing sector is struggling. The ZEW institute’s gauge of expectations plunged to 3.6 in September from 19.2 the prior month (consensus 17.0). That is below the 10-year average of about 13. The index for current conditions fell to -84.5 from -77.3 in August. The 10-year average is about 3.8.
• Canada’s inflation plunged into negative territory in August, making a clear case for a 50bps rate cut from the Bank of Canada in October. Headline CPI fell 0.2% MoM and the YoY print was back to the 2% target. Core measures also continued to signal a strong pace of disinflation.

Macro events (times in GMT): UK Aug CPI, PPI & RPI (0600), EZ CPI (Aug final) exp 2.2% vs 2.2% prior (0900), US Housing Starts (Aug) exp 1318k vs 1238k prior  (1230), FOMC Rate Decision (1800), Fed’s Powell’s holds Press Conference (1830)

Earnings events: US home products company Ferguson Enterprises rose 5% yesterday on better-than-expected earnings, but the outlook was a bit muted. Today’s earnings focus is General Mills which will report FY25 Q1 earnings (ending 31 August) before US trading hours. Analysts expect revenue down 2% YoY but maintaining stable margins. The key concern is still the company’s debt level relative to operating income.

• Tuesday: Ferguson Enterprises
• Wednesday: Vantage Towers, General Mills
• Thursday: FedEx, Lennar, Darden Restaurants, Next, FactSet Research Systems

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

Equities: Futures are flat ahead of the FOMC rate decision later tonight which is the biggest event of the week. The market is pricing around 2/3 probability of the Fed lowering its policy rate by 50 bps and 1/3 probability of cutting 25 bps. Whether the Fed cuts by 25 or 50 bps makes less sense compared to their forward guidance and assessment of the economy. There has been around 20 rate cut cycles since 1957 in which only three cycles (1963, 2000, and 2007) ended up with negative equity returns in the subsequent 24 months. In other words, the outlook is not necessarily bad in a rate cut cycle, so for the long-term investors the question is more about thinking about whether you have the right things in the portfolio when interest rates are falling. Yesterday, the ZEW survey was weak highlighting the struggles in the German economy. Some the most traded US stocks yesterday was Accenture (-4.8%) and Schlumberger (+2.7%) with the latter announcing a new AI-powered platform called Lumi to support its clients' workflows on premises. The most active stocks in Europe yesterday were SKF (+5.1%) and Kongsberg Gruppen (-8%) as investors took profits in Kongsberg Gruppen and SKF announcing to spin off its automotive division in the first half of 2026.

Fixed Income: U.S. Treasury yields moved higher on the back of stronger retail sales, and a weak 20-year bond auction, which tailed WI by 2 basis points. The auction also saw reduced demand from indirect bidders to 65.1% from 71% at the prior auction. Rising oil prices added pressure on Treasury prices. By the end of the session, the 10-year yield had climbed to around 3.64%, and two-year yields rose by 5bps to 3.6% flattening the U.S. yield curve. Despite these movements, markets expectations for rate cuts remained relatively steady ahead of the Federal Reserve's rate decision. European sovereign yield curves flattened as traders reduced expectations for aggressive rate cuts from the ECB and BOE. Traders pared back rate-cut expectations for 2024 by 7 basis points for the ECB and trimmed BOE rate cuts ahead of UK inflation data. Bund yields and 10-year BTP yield rose by 2 basis points to 2.14%, and 3.50% respectively, keeping the BTP-bund spread stable at 136 basis points.

Commodities: Gold trades lower after reaching a fresh record high on Monday, with traders booking some profit amid uncertainty about the outcome of today’s FOMC meeting and after US retail sales beat expectations. The size of today’s expected rate cut, and the subsequent comments should provide the market with more insights, as it has the potential to ramp up or cool down recession fears. Note that bond markets are pricing in an aggressive 250 basis points (bps) of cuts during the cycle, which only a full-scale recession would necessitate. Crude traded softer after a weekly build in US crude and fuel stocks, reported by the API, helped offset sustained tensions in the Middle East. Crude has recovered from last week’s slump, on short covering after funds held the first-ever net short position in Brent, but the prospect of breaking key resistance in the 75-dollar area remains challenged by weak refinery margins across the world, signalling sluggish demand.

FX: The US dollar saw modest gains on Tuesday, supported by retail sales strength and short covering ahead of today’s US rate decision, while economic data from Germany and Canada signaled recession concerns. Markets are still split on 25 or 50bps of rate cuts from the Fed today, with odds of a bigger cut sitting at 65%. The Japanese yen was the underperformer among the major currencies amid rising US yields and focus is on the Fed decision today. British pound and Kiwi dollar also plunged lower, and both have key data to watch for in the day ahead. UK’s inflation print is on the wires today and stickiness of the services inflation will be key input for the pace of easing from the Bank of England, and New Zealand’s Q4 GDP risks sending recession signals. Australian dollar closed in small gains despite the strength of the greenback.

Volatility: Volatility is creeping back up with the VIX rising by 2.74%, currently sitting at 17.61. Reflecting even more short-term uncertainty, the VIX1D is considerably higher than the VIX itself, up by a staggering 75.76% today, signaling high anticipation and uncertainty around the Fed's decision. The market is closely watching whether the rate cut will be 25 basis points or more, as this could significantly impact investor sentiment. Expected moves, based on options pricing, show potential up-or-down movement of around 58 points (1.03%) for the S&P 500 and nearly 266 points (1.37%) for the Nasdaq 100. This suggests the possibility of significant market swings, depending on how the Fed’s announcement is received. The most traded stock options yesterday were Nvidia, Tesla, Intel, Apple, Palantir, Advanced Micro Devices (AMD), Amazon, Microsoft, Meta Platforms, and SoFi Technologies. All eyes are on the Fed's statement and press conference later today. Will the markets continue their recent upward trend, or will volatility spike further following the news?

For a global look at markets – go to Inspiration.