Global Market Quick Take: Europe – 20 September 2024

Global Market Quick Take: Europe – 20 September 2024

Macro 3 minutes to read
Saxo Strategy Team

Key points:

  • Equities: Stocks soar on US ‘soft landing’ hopes. Quad witching Friday
  • Currencies: Dollar heading for second weekly loss
  • Commodities: Back-to-back weekly gain led by energy and softs
  • Fixed Income: U.S. and European bonds steepen as investors adjust rate cut expectations
  • Economic data: EC Consumer Confidence

     

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

In the news: FedEx cuts full-year guidance after big fiscal Q1 earnings miss (Investing), UK consumers take fright as new government warns of pain, survey shows (Investing), Nike names former executive Elliott Hill as CEO (Yahoo), Dollar slips in choppy trading as traders grapple with Fed's giant rate cut (Reuters), What Kamela Harris would mean for Wall Street and Main Street (Businessweek), China unexpectedly leaves benchmark lending rates unchanged after Fed’s jumbo cut (CNBC)

Macro:

  • The US Jobless Claims data for the week coinciding with the usual BLS survey window fell to 219k from the prior 231k, beneath the expected 230k. The 4wk average fell to 227.5k from 231k. Continued claims for the preceding week, fell to 1.829mln from 1.843mln (revised down from 1.85mln), and beneath the expected 1.854mln.
  • The Bank of England kept rates unchanged at 5% with an 8-1 vote split and continued to emphasize a gradual approach to policy easing. The MPC also voted unanimously to reduce the stock of Gilts by GBP 100bln between October 2024 and September 2025 (as expected). Overall, the tone of the policy statement was one of caution with the MPC very much in data-dependent mode. This prompted a hawkish repricing for the rest of the year with just a 64% chance of a cut seen in November (vs. 100% pre-release) and a total of 40bps of easing seen by year-end (vs. 52bps pre-release).
  • The Norges Bank, Norway's central bank, kept the policy rate unchanged at 4.5% as expected and said the rate would likely remain at 4.5% through year end. This reaffirmed market’s view that Norges Bank will not be quick to join the G10 rate cutting cycle.
  • Japan’s August CPI was higher than previous month as expected. Headline inflation rose to 3.0% YoY from 2.8% previously while core measure rose to 2.8% from 2.7% in July. The core-core measure (ex-fresh food and energy) also rose to the 2% target from 1.9% in July, and while the Bank of Japan kept rates unchanged it indicated its on track for another rate hike - potentially in December – a robust economic outlook.
  • The People’s Bank of China (PBOC) kept its key lending rates unchanged with the one-year loan prime rate (LPR) at 3.35%, and the five-year LPR at 3.85%. Expectations for a cut had started to build after the US Federal Reserve's 50 basis point cut helped drive the yuan to a one-year high, and after the PBOC last week indicated it was preparing additional policies to revive the economy which is in urgent need of more stimulus to achieve the government’s 5% growth target.

Macro events (times in GMT): UK Retail Sales (Aug) exp 0.4% MoM & 1.3% YoY vs 05% & 1.4% prior (0600), Eurozone Consumer Confidence (Sep P) exp –13.2 vs –13.5 prior (1400), Weekly Commitment of Traders Reports from the CFTC and ICE Europe (2000)

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

Equities: US stocks soared on Thursday with Asia following suit overnight in response to the Federal Reserve’s 50 basis point rate cut, fueling optimism for a "soft landing" of the US economy. The Dow Jones jumped over 500 points, while the S&P 500 rose by 1.7%, both reaching new record highs. The Nasdaq 100 surged 2.7%, leading the market gains as investors welcomed the Fed's efforts to stabilize growth. Tech stocks were at the forefront, with Nvidia and AMD rising 5% and 7% respectively while Tesla and Meta climbed 7.3% and 4%. Economic growth sectors like financials and industrials also saw gains; JPMorgan Chase climbed 1.8%, while Caterpillar and Home Depot advanced 4.8% and 1.5%, respectively. Today is Quad Witching Friday, when four types of financial derivatives all expire simultaneously, potentially leading to volatility due to high volume of trading activity as traders, investors and institutions close or roll over their positions.

Fixed Income: Short-term U.S. Treasuries outperformed long-term maturities yesterday, leading to a steepening of the yield curve. The 10-year yield rose to 3.7%, while the 2-year yield climbed to 3.55%, as investor sentiment shifted and expectations for further Fed rate cuts this year diminished. Bond futures ended the day pricing in 73 basis points of rate cuts by year-end and 200 basis points over the next 12 months. In Europe, German Bunds neared the end of their inversion as traders increased bets on ECB rate cuts, with markets now pricing a cut at every meeting from December through July 2025, bringing the deposit rate down to 2%. In the UK, gilts steepened after the Bank of England held rates steady at 5%, signaling a gradual approach to future cuts. Meanwhile, both Bund and Italian yields remained mostly stable, with the spread between Italian and German bonds tightening slightly. In Japan, the BOJ maintained its policy rate despite rising inflation in August and stronger-than-expected retail sales. We remain positive on short-term duration but cautious about the longer end of the yield curve. Here explained why I believe the 10-year yields trading too rich compared to the expected neutral long-term rate of 3%.

Commodities: The sector is heading for a second weekly gain, supported by lower funding costs and easing US recession risks following the Federal Reserve’s 50 basis point rate cut. All sectors, except grains, traded higher, led by the softs sector where sugar and cotton recorded significant gains, followed by the energy sector as wrong-footed short sellers reduced bets on lower prices. At the other end of the spectrum, wheat, corn, and platinum suffered setbacks. Crude oil is heading for its biggest weekly gain since February as hedge funds were forced to cover net short positions in Brent and fuel products, with Middle East tensions once again attracting attention. Gold trades near USD 2,600 and a fresh record high, supported by rate cuts, Middle East tensions, and a softer dollar, while silver is climbing towards key resistance in the USD 32 area. The risk-on tone across markets, together with the yuan hitting a one-year high, helped lift base metals, with copper leading the gains as the cut to the US interest rate and falling inventories have eased concerns of weaker demand.

FX: The dollar is heading for a third consecutive weekly loss as Fed’s 50bps rate cut supported a broad risk-on environment. The US dollar was choppy but ended the day lower, and the Norwegian krone (NOK) led the gains as the Norges Bank continued to highlight postponement of rate cuts to 2025. NOK was up 0.9% against the USD and over 1% against the Japanese yen and Swiss franc, which tumbled due to the risk-on environment. The Australian dollar and British pound also gained, the formed aided by Australia’s strong employment data and the latter helped by Bank of England’s hold decision and a cautious approach to cutting rates. The Japanese yen briefly traded below 142 against the dollar after the BOJ left rates unchanged with the focus turning to Ueda’s press conference later in for clues about the timing of the next hike.

Volatility: Volatility pulled back sharply ahead of today’s session, with the VIX falling by over 10% to 16.33, as markets appear to be stabilizing following the Fed's rate cut announcement earlier this week. Despite this, today could still see some elevated volatility as it's triple witching day—the expiration of options and futures on indexes and equities—which often leads to increased trading volume and erratic market moves. Futures are slightly in the red this morning, with the S&P 500 down 0.19%, Nasdaq 100 off by 0.28%, and Russell 2000 losing 0.22%. Nonetheless, the overall market is showing resilience, with the S&P 500, Nasdaq, and Russell 2000 up significantly on the week, indicating strength and a potential recovery. Expected moves, based on options pricing, show the S&P 500 could shift around 35 points (~0.61%) today. While there are no major economic releases or earnings reports scheduled, today’s triple witching event could lead to some unexpected swings. Yesterday's most active stock options included Nvidia, Tesla, Apple, Intel, and Advanced Micro Devices.

For a global look at markets – go to Inspiration.


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