Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Equity markets around the world trade lower with risk sentiment taking hit after Hamas’ surprise attack on Israel triggered fears that it may destabilise the region. Crude oil prices jumped with focus on Iran given its potential involvement while gold attracted safe haven demand. The moves in bonds and the dollar, however, have been relatively muted so far as the market also digested Friday’s mixed US job report.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Despite the geopolitical risks rising in the Middle East over the weekend, US equity futures remain relatively muted in their reaction to these events. S&P 500 futures are down 0.5% from the Friday close but risk sentiment has not accelerated to the downside in early trading hours. However, it is important to note that the risk picture is very complicated in the short-term depending on how Israel decides to respond medium-term to the weekend’s events. Our defensive stance that we have had since our stagflation lite call a couple of months ago remains.
FX: Risk sensitive trades were in focus in Asia amid the Middle East tensions. The dollar gaped higher at the open, and gains were also seen in JPY and CHF earlier in the session. USDJPY retreated from Friday’s post-NFP highs of 149.53 while USDCHF stayed close to 0.91 and EURCHF dipped closer to 0.96. NOK was the early outperformer on the G10 board as oil prices jumped 4% higher. USDNOK slid below 10.9 while USDCAD traded around 1.3660. Risk sensitive currencies AUD and NZD plunged. Speculators meanwhile doubled their dollar long versus eight IMM futures to a one-year high in the week to Oct. 3.
Commodities: Oil prices jumped, and gold found a haven bid after Hamas’ attack on Israel raised concerns about stability in the Middle East, particularly with WSJ reporting that Iran was involved. If that invokes a US response, oil prices could face more upside pressures. Saudi Arabia, however, expressed their willingness to increase production by early next year if oil prices remain high. Gold returned to $1850 on safe-haven demand and short covering from speculators holding the biggest short since November while copper continues higher as China returns from their week-long holiday.
Fixed income: Following strong nonfarm payrolls last week, the yield on Ten-year US Treasury bonds closed 23bps higher at 2.8%, and 30-year Treasuries just a few basis points away from 5%. Today the market is waking up to the news of a war in Israel, pushing safe haven demand. Although it is too soon to understand the extent of such conflict in markets, it is important to acknowledge that Treasury supply and central banks’ higher for longer stance continue to put pressure on the long part of the yield curve. This week the US Treasury is going to sell 2-, 10- and 30-year notes while the FOMC minutes and CPI numbers are released. We remain neutral on duration and risk, as we determine the extent of news coming out from Israel.
Volatility: Last week’s volatility/VIX moved quite aggressively up to upwards of 20, only to recede back below 18 on Friday. It ended where it took off on Monday (Oct. 2nd), around 17.45. Showing the week was volatile, but effectively didn’t move. Coming week, with important macro news and geopolitical tensions, shows another volatile week ahead, with an expected move for the SPX of +/- 1.62% and +/- 2.20% for the NDX (Nasdaq 100).
Macro: US nonfarm payrolls surprised by a bigger than expected 336k jobs increase in September vs. 227k prior (revised higher from 187k) and 170k expected. Wages and unemployment rate however showed that labor market may be cooling slowly under the hood. The unemployment rate remained at 3.8% while wages rose 0.2% M/M again in September, beneath the 0.3% expectation and 4.2% Y/Y, easing from the 4.3% prior and expectation. Canadian labour market data was also strong, with employment up 64k jobs in September (+20k expected). The unemployment rate was unchanged at 5.5% while hourly wages accelerated to 5.3% Y/Y.
In the news: White House planning face-to-face meeting with Xi Jinping in California (Washington Post), China’s official reserve in gold increased to over 70 million troy ounces (SAFE), Tesla's China-made EV sales volume falls 10.9% year-on-year in September (Reuters), How big is this going to get? What to watch for in the Israel-Hamas battle (Politico), Iran Helped Plot Attack on Israel Over Several Weeks (WSJ).
Macro events: Ger Industrial Production (Aug) exp. -0.1% MoM & -1.5% YoY vs –0.8% & -2.1% prior (0600 GMT), Mex CPI (Sep) exp 0.47% MoM & 4.48% YoY vs 0.55% & 4.64% prior (1200 GMT)
Earnings events: PepsiCo reports FY23 Q3 earnings (ending 30 September) tomorrow at 10:30 GMT with analysts expecting revenue growth of 7% y/y and EPS of $2.16 down 1% y/y.
For all macro, earnings, and dividend events check Saxo’s calendar.