Global Market Quick Take: Europe – October 20 2023

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

Equities: Stocks had a choppy ride around Powell’s speech, initially higher but sinking to close 0.9% down for both the S&P 500 and the Nasdaq 100.  This came after the Fed Chair stated that monetary policy wasn't causing a recession, and the 10-year Treasury yield surged toward 5%. In the realm of individual stocks, Tesla tumbled 9.3% due to disappointing Q3 results, while Netflix soared by 16.1% on the back of strong subscriber gains. AT&T also surged by 6.4% after reporting Q3 results that surpassed estimates and raising its free cash flow guidance.

FX: Dollar pushed lower on Thursday ahead of Powell’s speech, and his cautious message caused some wobbles before focus shifted back to geopolitical worries with Israeli defense chief warning of an invasion and reports of drone attacks in Iran and Syria. Safe haven CHF was the biggest gainer on the G10 board, with USDCHF below 0.8930 and EURCHF below 0.9440. EURUSD attempted another break above 1.06 but failed, and AUDUSD also still getting supported at 0.63. USDJPY very close to 150 and verbal jawboning from authorities has picked up.

Commodities: Oil prices raced higher on Thursday as deepening Middle East tensions puts market on edge, while demand concerns eased as Chair Powell did not clearly signal any more rate hikes. Gold’s impressive performance continues and with silver and platinum being left behind this rally is not only driven by a haven and speculative momentum bid, but also rising concerns the rapid rise in US Treasury yields may cause something to brake, especially as unrealised losses on “held to maturity” positions continue to explode. Focus on $1885/90 area of resistance next. Meanwhile, US agricultural futures have seen a strong week with gains being led by wheat and corn.

Fixed Income: US Treasuries are rebounding this morning; however, yields remain at a multi-decade high. Bond futures pushed back on interest rate cuts for next year and expect the Federal Reserve to cut rates only to 5% by the end of 2024. Powell speech reiterated the higher-for-longer message, but alluded to the fact that we might be already at the peak of the hiking cycle, and there might not be need for further hikes if rates continue to rise. Overall, we remain defensive, favour short-term maturities and quality.

Volatility: Powell’s speech on Thursday caused wild swings on the stock market, initially boosting the S&P 500 and Nasdaq but ultimately sending them lower to close negative on the day. VIX passed the important $20 mark, ending at 21.40. Vix Volatility (VVIX) rose to 116.47, a 7-month high, suggesting that market volatility is here to stay and could even get worse. Tesla options volume surged to 3.6 million contracts after earnings, with a put/call ratio near 1, suggesting a neutral market outlook after the sharp drop in its share price.

Technical analysis highlights: S&P 500 downtrend, support at 4,195. Nasdaq 100 downtrend support at 14,254. DAX is likely to test 14,933 support. USDJPY uptrend intact. EURUSD could test resistance at 1.0635. Gold testing resistance 1,985. WTI Crude oil resumed uptrend, could test previous peak. US 10-year yields expect setback after reaching 5%

Macro:

• Fed Chair Powell spoke at the Economic Club of New York last night. The key message was the FOMC is ‘proceeding carefully.’ His comments were supportive of the recent sentiments from other Fed members that the FOMC is likely to be on hold in November. Powell said policy was restrictive and there may still be tightening in the pipeline. Market is now pricing in a very slim chance of 25% of a rate hike by end of the year.
• US initial jobless claims were hot falling to 198k, their lowest level since January, from a revised 211k (from 209k) despite expectations of a rise to 212k. Continuing claims rose to 1.73m, the highest level since July. That pattern is consistent with more difficulty finding employment and so longer spells out of work, but still low layoffs.
• Japan’s September CPI was as expected on the headline, coming in at 3.0% YoY from 3.2% previously, but core and super core measures beat estimates. Core inflation was at 2.8% YoY in September, softer than August’s 3.1% but a notch higher than 2.7% expected, while core-core measure was at 4.2% YoY vs. 4.1% expected and 4.3% prior.

In the news:

• Nick Timiraos: Jerome Powell Signals Fed Will Extend Interest-Rate Pause (WSJ)
• Israeli defense chief says troops will soon see Gaza 'from inside' (Reuters)
• US warship shoots down missiles fired by Iranian-backed rebels (FT)
• Israel at Risk of Moody’s Debt Rating Downgrade (Bloomberg)
• China’s Home Prices Drop at Faster Pace in Blow to Sentiment (Bloomberg)
• American Airlines beats profit estimates, sees steady holiday bookings (Reuters)
• OpenAI Is in Talks to Sell Shares at $86 Billion Valuation (Bloomberg)

Macro events (all times are GMT): UK Retail Sales (Sep) exp –0.4% MoM & -0.2% YoY inc Auto Fuel vs 0.4% & -1.4% prior (0600)

Earnings events: American Express, Shlumberger

For all macro, earnings, and dividend events check Saxo’s calendar and Peter Garnry’s earnings update here