Global Market Quick Take: Europe – 5 August 2024

Key points:

• Equities: Japanese equities plunge 15% in perfect storm. US technology stocks indicated 5.6% down in pre-market.
• Currencies: Dollar drops further as yen rout continues
• Commodities: Crude slumps while geo-risks supports EU gas
• Fixed Income: Bond Market Rallies Amid Fears of Economic Slowdown, Traders Anticipate Aggressive Fed Rate Cuts
• Economic data: US ISM Services

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

In the news: Global Rout Deepens With US Stock Futures, Asia Stocks Plunging (Bloomberg), Israel Braces for Attack by Iran as US Urges Gaza Cease-Fire (Bloomberg), EU capitals set to back tariffs on Chinese electric cars, trade chief says (FT), Warren Buffett's Berkshire sold nearly half of its Apple stake (Yahoo), Exxon earnings beat as production in Guyana and Permian sets a record (CNBC)

Macro: Sentiment has dramatically changed in just one month. We have gone from high confidence, a record equity index concentration and almost no rate cuts expected in the US, to a market that is now pricing in five rate cuts by year-end in the US and equity markets tumbling in Japan. The short-term outlook is right now driven by risk management policies kicking into gear across many institutional investors. When CVaR (conditional value at risk – key risk measure used in portfolio management) measures increases significantly funds must cut exposure. Adding to the overall moves are factors such as AI profit taking, stronger JPY (making funding more expensive), 1-day options exacerbating moves, and finally the equity market index concentration which was the highest in 90 years just three weeks ago. The medium-term outlook will be determined by incoming macro figures. We remain cautiously optimistic on the economy and still think the recession probability is not higher than 33% at this point. There are still many high frequency macro indicators that are not aligned with the narrative of the economy plunging into a recession.

• US jobs report for July sent shivers to the market about a possible recession and the Fed being behind the curve, sparking a massive risk off sentiment. Headline payrolls fell to 114k from 179k, beneath the expected 175k, with BLS noting Hurricane Beryl had no discernible impact for the July data, and response rates were within normal ranges. Unemployment unexpectedly rose to 4.3% from 4.1% (exp. 4.1%), invoking the Sahm rule, which historically indicates the economy is in recession. Average earnings for both M/M and Y/Y declined to 0.2% (exp. & prev. 0.3%) and 3.6% (exp. 3.7%, prev. 3.8%), respectively. Markets have now priced in nearly 45 bps of easing at the Fed’s September meeting, and over a 100bps of rate cuts by December. Fed’s Barkin and Goolsbee spoke after the jobs report on Friday discounting the data but not ruling out multiple Fed rate cuts in the coming months. Focus turns to ISM services today.
• The Caixin China services PMI rose to 52.1 in July, beating expectations of 51.5, with the fastest pace of expansion since May, pointing to resilience that may alleviate concerns over the economy’s outlook after last week’s weak official figures. The survey also showed an employment indicator rising to the highest reading since August last year as service providers hired more to respond to growing market demand.
• Behind the curve: Last week's weak US data and dovish FOMC message has significantly changed the market sentiment with traders now seeing a major risk the Fed and other central banks are repeating the errors of history by waiting too long to cut interest rates, and then being too slow when they finally start. As a result, the market is now pricing in five 25 bps cut by the FOMC before yearend and a 50 bps cut at the September meeting.

Macro events (times in GMT): Sweden July services PMI est. 52.0 vs 51.8 prior (06:30), US July ISM Services est. 51.0 vs 48.8 prior (14:00)

Earnings events: Another busy earnings week ahead. This morning Infineon Technologies has reported slightly disappointing Q3 results, the semiconductor company is not changing its outlook. In the US session, investors will watch Palantir earnings (out after the market close) with analysts expecting revenue growth of 22% YoY and another quarter of expanding operating margin.

• Today: Itochu, Infineon Technologies, CSX, Palantir
• Tuesday: Caterpillar, Duke Energy, Amgen, Airbnb, Uber, Zoetis, TransDigm, Suncor Energy, Bayer, Fortinet, Super Micro Computer, Coupang, Globalfoundries, Illumina
• Wednesday: DBS Group, NTT, Novo Nordisk, Sony, SoftBank Group, McKesson, Walt Disney, CVS Health, Shopify, Nutrien, Maersk, Sampo, Siemens Energy, Glencore, Ahold Delhaize, Rockwell Automation, Monster Beverage
• Thursday: Kweichow Moutai, China Mobile, China Telecom, Zurich Insurance, Siemens, Allianz, Recruit, Tokyo Electron, Brookfield, Gilead Sciences, Eli Lilly, Deutsche Telekom, Parker-Hannifin, Genmab, Rheinmetall, Datadog
• Friday: Constellation Software, Generali

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

Equities: Investors are waking up to a momentum crash this morning with stocks in Taiwan limit down and Japanese equity futures down 15% at one point. US technology stocks are indicated down 5.6% in futures markets as risk reduction is setting in. European equities are right now the bright spot only indicated down 2%. The short-term outlook is driven by risk reduction and will likely continue throughout the week. AI profit taking, worsening funding conditions with a stronger JPY, big 1-day option markets and record high index concentration in equities are all turbocharging the market event we observe today. It is all a stark reminder that financial markets are not following a normal distribution and can be violent in the tails with big 1-day losses. It feels like the perfect storm triggered by the FOMC rate decision of no rate cut last week followed by a US jobs report that recalibrated the market’s assessment of a recession. This was the trigger. The rest is mechanical trading decisions based on risk. The turmoil will give the long-term investor some excellent opportunities which we will write about this week.

Fixed income: Following Friday’s job report, traders anticipate a sharp slowdown in the US economy, prompting speculation that the Federal Reserve will need to reduce interest rates aggressively to stave off a recession. Concerns about inflation have diminished, giving way to fears that economic growth will stall without rate cuts. This shift in sentiment has fuelled a major bond-market rally, with the two-year Treasury yield dropping below 3.9%, creating a divergence of approximately 140 basis points from the Fed Funds rate—the largest gap since the global financial crisis. Market participants are increasingly worried that the Fed is behind the curve, potentially leading to a hard landing for the economy. Recent economic data, including a weaker-than-expected job market report for July, has reinforced these fears, driving the benchmark 10-year Treasury yield down to about 3.8%. The bond market rally has also been accompanied by a sharp selloff in US stocks, exacerbated by Berkshire Hathaway's substantial reduction in its Apple stake. This week, bond market attention shifts towards Fed speakers and other economic data, with the PMI and ISM services data being released today and Fed President Daly speaking. Also in focus this week are the 3-year and 10-year U.S. Treasury auctions.

Commodities: The commodities sector fell on Friday as US economic data weakness raised concerns about weaker demand in the world’s biggest economy. Rising volatility forces investors to cut exposure across the board, hence the spillover to commodities from the current rout in equities. Crude oil led the slump on Friday and overnight as the sell-off in wider financial markets countered Middle East tensions, where traders are watching for a potential retaliatory strike on Israel by Iran. Brent’s slump to the mid-70s may force OPEC+ to abandon their planned October production increase. For now, the geopolitical risk premium is primarily being priced into EU gas prices, which rose 13% last week amid supply concerns and robust summer LNG demand in Asia. Copper holds above key support after China’s Caixin services PMI beat estimates, helping to alleviate fears about China’s economic outlook, while some gold selling due to current yen strength continues to be offset by collapsing yields, rising rate cut expectations, and geopolitical tensions

FX: The US dollar continued lower overnight following Friday’s slump that saw the Bloomberg Dollar index end the week down 0.6% led by JPY and CHF strength. This after the Federal Reserve keept the door to a September rate cut open as US economic data continued to weaken. Gains were led by the Japanese yen which was up 4.7% in the week on the back of a hawkish BOJ pivot complementing the Fed’s dovish tilt. Other safe-havens such as Swiss franc and Gold also gained. Meanwhile, activity currencies Australian dollar and British pound were the weakest in the G10 FX space, with the latter also impacted by the Bank of England’s rate cut which was not fully priced in by the markets. US ISM services data out today will be in focus after the manufacturing PMI and jobs data last week resulted in risk-off moves.

Volatility: Last Friday saw a significant spike in market volatility, with the VIX reaching intraday highs just below 30 before closing at $23.39 (+4.80 | +25.82%), a value not seen since March ‘23. The intraday spike of nearly $10 is the highest since January 2022. The VIX1D closed at $26.67 (+2.24 | +9.17%) and the VIX9D at $23.31 (+3.77 | +19.29%). VVIX rose to 136.81 (+25.63 | +23.05%), while the SKEW index increased to 139.65 (+7.42 | +5.61%). Additionally, the SPX Put/Call Ratio spiked to 1.96, indicating that the number of puts traded was nearly double the amount of calls, suggesting market expectations for further downward movement. VIX futures surged overnight to $33.200 (+11.345 | +51.93%) reflecting unusual high market anxiety. Expected moves for the week, derived from options pricing, are considerably higher than usual, indicating continued high volatility: S&P 500 at 125.54 points (+/- 2.35%) and Nasdaq 100 at 619.15 points (+/- 3.36%). S&P 500 and Nasdaq 100 futures continued the downward trend overnight, with S&P 500 futures at 5,277.50 (-98.50 | -1.83%) and Nasdaq 100 futures at 17,870.00 (-686.25 | -3.70%). Markets closed Friday with significant losses: S&P 500 at 5,346.56 (-100.12 | -1.84%) and Nasdaq 100 at 18,440.85 (-449.54 | -2.38%). Today's economic events include the S&P Global Services PMI at 15:45 and ISM Non-Manufacturing PMI and Prices at 16:00. These reports may further influence market sentiment and volatility.

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