Global Market Quick Take: Europe – 16 April 2024

Key points:

• Equities: All markets are tumbling 1.5-2% as Israel vows retaliate Iran attack
• FX: Fresh five-month dollar high; yen on intervention watch
• Commodities: Gold stands out on Iran/Israel tit-for-tat worries, new cycle highs in cocoa, coffee and copper
• Fixed Income: Powell speech in focus as yields soar and the RRP drops to the lowest since May 2021
• Economic data: Germany ZEW survey, Canada CPI

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

Equities: Asian equity markets are lower across the board with Nikkei 225 futures down 1.7% and ASX 200 down 1.8% and European equities are indicated 1.5% lower ahead of trading catching up to yesterday’s decline in US equities. The reason is nervousness over Israel’s announcement that it seeks to retaliate Iran’s attack despite G7 countries are urging restraint. Geopolitical dynamics and the Q1 earnings season are by far the two biggest factors driving equity markets in the coming weeks. Tesla is reporting a 10% cut to its global workforce as slowing demand for EVs is beginning to hurt the industry that has grown a lot in recent years. Ericsson, the European network equipment company, is reporting significantly better than expected Q1 profit margins, but overall earnings are still down 27% YoY as demand is subdued. Microsoft is also reporting a $1.5bn investment in the Abu Dhabi AI company G42 as the leading US software company is expanding its presence in all areas of AI and maybe preparing to reduce reliance on OpenAI over time.

FX: The dollar extended its run of gains after US retail sales beat estimates, and while Fed’s Williams was dovish on the margin, geopolitical escalation risks remain amid risks of an Israel response to the Iran attack. USDJPY rose above 154 to fresh highs of 154.45 amid higher US yields, raising the threat of intervention as yen weakness was seen across the FX board rather than just against USD. USDCNH rallied sharply to 7.28+ levels as PBoC fixed onshore yuan midpoint weaker but reversed back to 7.27 on intervention. EURUSD testing the 76.4% fibo retracement from the October low at 1.0611 while GBPUSD has broken below 200DMA and could test 1.24 with inflation and labor data due in the week ahead. Focus today, however, on USDCAD which risks breaking firmly above 1.38 with Canada CPI due today, and a June rate cut priced only 60%. South Korean policymakers have said this morning that “excessive one-sided FX moves” are not desirable indicating that we are getting closer to a key decision point in FX markets.

Commodities: Crude oil reversed higher on Monday after a muted response to Iran’s weekend attack was replaced by concerns about what Israel may do next after military officials said the country had no choice but to respond. Once again, silver and especially gold stood out, resuming their rallies despite seeing strong US retail sales lifting the dollar and Treasury yields, highlighting the current safe haven focus across investment metals. Meanwhile, aluminum led the base metals sector higher with copper reaching a June 2022 high at $4.40, as the market digested bans on Russian metal being delivered onto the London Metal Exchange. Cocoa and coffee both hit fresh cycle highs on continued supply woes in key production regions.

Fixed income: Stronger-than-expected retail sales and upward revisions to February’s numbers propelled 10-year US Treasury yields to touch 4.66%, the highest since November, before retreating and closing at 4.6%. Similarly, ten-year Bunds also rose by 10 bps, ending the day at 2.45%. Markets are now anticipating that the Fed will cut rates by 44 bps by year-end, while the ECB is expected to cut rates by 84 bps. Meanwhile, the Reverse Repurchase Facility (RRP) dropped to $327 billion, the lowest since May 2021, showing that the facility is likely to be depleted by summer. We expect policymakers’ concerns of a liquidity squeeze to prompt them to taper quantitative tightening (QT) by June, as detailed here. Hence, Powell's speech today will be closely watched as investors seek clarity on rate cuts and QT tapering expectations. In the UK, unemployment jumped to 4.2% for the first time since July last year, however average weekly earnings surprised expectations on the upside showing that inflation pressures remain a concern. UK data will likely benefit Gilts today, leading them to pare yesterday’s losses.

Macro: US retail sales topped estimates and suggested US economic resilience yet again. Headline retail sales rose by 0.7%, above the 0.3% forecast but down from the prior (upwardly revised) 0.9%, the ex-autos measure surged 1.1% from the prior 0.6%, above the 0.3% forecast, while ex-gas and autos rose by 1.0% from the prior 0.5% - showing widespread gains across consumer spending. The control group, which feeds into US GDP, rose by 1.1%, accelerating sharply from the prior 0.3% and above the 0.4% forecast. The Atlanta Fed GDPNow growth estimate for Q1 rises to 2.8% from 2.4% after stronger-than-expected retail sales. Fed member Williams said he does not want to speculate on rate moves but in his own view, rate cuts will likely start this year if inflation continues to come down. He said that he does not see the March CPI report as a turning point, nor a game changer. China’s home prices continued to fall in March, adding pressure on authorities to step up efforts to support the embattled real estate market. Meanwhile, Q1 GDP climbed 5.3%, up slightly from the previous quarter, but with retail sales and industrial production both weakening in March, the outlook for the rest of the year remains challenging.

Technical analysis highlights: Correction unfolding in Equities. S&P500 sold off to the key support at 5,057, next at 4,953. Nasdaq 100 below key support at 17,808. Next support at 17,478. DAX top and reversal, testing key support 17,900, next 17,620. 
EURUSD downtrend no strong support until 1.05 but expect minor bounce before. GBPUSD strong support 1.2410-1.2375. USDJPY uptrend potential to 155.30. USDCHF above resist at 0.9108, no resist until 0.9245. EURCHF below support at 0.97, could it drop to 0.9621? EURJPY rebounding from 162.50 support.  USDCAD uptrend, potential to 1.39. AUDUSD below support at 0.6485 support, support at 0.64. Gold top and reversal, correction likely to 2,322 possibly to 2,255, but upside momentum is strong US 10-year T-yield uptrend, no resist until 4.70

Volatility: VIX rose to  $19.23 (+1.92 | +11.09%), levels we haven't seen since before November last year. VVIX, the VIX's own volatility indicator also rose, to 109.64 (+6.92 | +6.74%), indicating trouble might not be over just yet. Volatility was of course pushed higher by geopolitical tensions, but also the 10-year yields pushing higher caught the attention and caused price-action. Today we have more earnings with more financials in the spotlight: Johnson & Johnson, Bank of America and Morgan Stanley are some of the big names which could move the markets with their earnings before the bell. VIX futures are up this morning, at 18.400 (+0.335 | +1.87%), indicating more volatility is unfolding. S&P 500 and Nasdaq 100 futures were relatively unchanged overnight: 5097.75 (-6.25 | -0.12%) and 17864.00 (-12.25 | -0.06%) respectively. Monday's top 10 trade stock options, in order: TSLA, NVDA, AAPL, AMD, AMZN, RIVN, BAC, PLTR, MSFT and META. A lot of these names have IV Ranks higher than 80%, showing volatility is elevated across the board.

In the news: Israel-Gaza live updates: Iran will respond in 'seconds' if Israel strikes back, Iranian official says (ABC News), ECB’s Lane Says Current Disinflation Is ‘Necessarily Bumpy’ (Bloomberg), Tesla to cut 10% of global workforce (FT), BOJ's new policy approach takes shine off its inflation forecasts (Reuters), Goldman Sachs tops first-quarter estimates fueled by trading, investment banking (CNBC), EU Set to Launch China Probe on Medical Device Procurement (Bloomberg).

Macro events (all times are GMT):  Germany April ZEW survey expectations, exp 35.5 vs 31.7 prior (0900), US housing starts (Mar) exp 1485 vs 1521 prior (1230), US industrial production (Mar) exp 0.4% vs 0.1% (1315), Canada CPI (Mar) exp 0.7% & 2.9% vs 0.3% & 2.8% prior (1230), API’s weekly crude and fuel stock report (2030).

Earnings events: Today’s key earnings releases is health care company Johnson & Johnson reporting Q1 earnings at 10:45 GMT (before the open) with analysts expecting revenue growth of just 2.4% YoY.

• Today: BNY Mellon, Johnson & Johnson, Bank of America, PNC Financial Services, Morgan Stanley, Interactive Brokers, UnitedHealth, Ericsson
• Wednesday: ASML, Volvo, CSX, Kinder Morgan, Abbott Laboratories, US Bancorp, Travelers, Tryg
• Thursday: Nordea, ABB, Investor, Elevance Health, Netflix, Intuitive Surgical, Blackstone, Marsh & McLennan, DR Horton, Nokia, Schindler
• Friday: American Express, Schlumberger, Procter & Gamble

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