Global Market Quick Take: Europe – 8 November 2023

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

Equities: Momentum in US equities extended yesterday with S&P 500 futures closing just below the 4,400 level driven by gains in cyclical sectors such as consumer discretionary and information technology. The US 10-year yield remains well balanced around the 4.6% level, but indicators out of South Korea suggesting economic growth might be accelerating the long-end bond yields could suddenly come back up. Nintendo shares are up 6% on yesterday’s better-than-expected guidance on strong Switch console sales. In Europe, Vestas is narrowing its guidance to the upside on FY23 revenue and adjusted EBIT margin citing strong commercial activity in Q3.

FX: The US dollar continued to unwound the decline seen after FOMC and jobs data last week, with Fed speakers sounding notably hawkish. Sharp fall in crude oil prices pushed NOK lower to be the underperformer in the G10 space and USDNOK rose to 11.200. AUDUSD tested the 0.64 handle after RBA’s dovish rate hike disappointed, and support at 0.6395/0.6370 could be tested. EURUSD also lost momentum and broke below 1.0680 support before rising back higher and will be on watch today as Chair Powell speaks. GBPUSD broke below 1.23 after dovish remarks from BOE’s Chief Economist Huw Pill who said he expects UK inflation to fall below 5% in October and hinted that he expects rates could be cut by middle of next year. BOE Governor Bailey will be on the wires today.

Commodities: Oil prices slumped over 4% on Tuesday, falling to their lowest levels in over three months, as the EIA forecast US gasoline demand on a per-capita basis will drop to a 20-year low next year, weak China trade data underscoring a sluggish demand outlook driving down prompt spreads. In addition, the API saw a 12-million-barrel rise in US crude stockpiles last week. Copper was down over 1% despite China’s appetite for commodities remaining strong. Gold trades below $1970 on continued profit taking, cocoa near a 45-year high amid the prospect of a poor crop in West Africa, while too wet conditions in Brazil supports soybeans.

Fixed income: yield curves bull-flattened on both sides of the Atlantic as real yields dropped following disappointing European economic data. Federal Reserve speakers’ remarks pointed to the willingness to continue to fight inflation, but some recognized that financial conditions are tightened enough. The 3-year US Treasury auction received good demand and stopped through despite offering a lower yield than last month. Today, the US Treasury is selling $40 billion in 10-year notes, the highest since 2021 and almost double the auction size for this tenor for the decade preceding COVID. It will be interesting to see if investors are willing to extend the duration despite lower yields. While yield curves are now  flattening, we remain constructive on steepeners in the mid and long-term.

Volatility: The VIX remains at its lower ranges and ended yesterday’s session at $14.81 (-0.08), clearly showing the market is fearless and is eager to reach certain levels in the stock market, even while several Fed speakers mentioned rate hikes might not be over yet. Will Powell add some volatility to the markets later today remains to be seen. VIX futures are at $16.380, up 0.88 or +5.67% after their nightly session. S&P 500 and Nasdaq futures are down $7 (0.15%) and $7.50 (0.17%) respectively.

Technical analysis highlights: S&P 500 strong resistance at 4,400 if closing above uptrend. Nasdaq 100 above falling trendline and resistance i.e., uptrend, resistance at 15,561. DAX downtrend, resistance at 15,280 support 14,933. EURUSD resistance at 1.0765. GBPUSD rejected at 1.2445. USDJPY correction strong support at 148.80, likely to be range bound 148.80-152.00. Gold correction likely down to 1,950-1,935. Brent oil downtrend below support at 81.75. US 10-year T-yields key support at 4.50

Macro: Fed’s Kashkari (voter) said he would err on the side of overtightening policy than not doing enough to bring inflation down, noting he is not convinced rate hikes are over. He added that some prices and wages data indicate that inflation could be settling somewhere north of 2%. He said the Fed has more work to do to get inflation under control. Bowman also said that she continues to expect the Fed will need to increase the FFR further and Logan said inflation remains too high and the core question is if financial conditions today are sufficiently restrictive. Chair Powell will be speaking today and expected to also maintain a hawkish posture to avoid markets to price in more rate cuts.

In the news: UBS Shares Rise as Lender Wins Back Credit Suisse Clients (Bloomberg), U.S. Banks are selling complex debt instruments to private-fund managers to reduce regulatory capital charges on the loans they make (WSJ), Rivian raises full-year production forecast, shares rise (Reuters), IMF upgrades China's 2023, 2024 GDP growth forecasts (Reuters), SoftBank's WeWork, once most valuable US startup, succumbs to bankruptcy (Reuters), BOJ Ueda signals chance of exit from easy policy before real wages rise (Reuters)

Macro events (all times are GMT): US Wholesales trade (Sep) exp 0.9% vs 1.8% prior, EIA’s weekly crude and fuel stock report (1530)

Fed speakers (all time are GMT): Powell participates in panel on monetary policy challenges (1415), Williams (1840), Barr (1900), Jefferson (2145)

Earnings events: Key earnings today from Airbus, Munich Re, SoftBank, Walt Disney, Arm, and Siemens Healthineers. Our key focus today is Arm reporting FY24 Q2 (ending 30 September) earnings tonight after the US market close with analyst expecting revenue at $747mn up from $675mn in the previous quarter reflecting expected pickup in the wider semiconductor industry and growth related to AI chips.