Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Equity markets rolled over yesterday suffering in the headwinds of a fresh strong rise in US treasury yields, as the entire US yield curve lifted to new highs for the cycle. After the close, the heavily traded Tesla reported disappointing revenue and margins and traded some 6% lower in late trading. Elsewhere, the rise in yields is pushing hard on the JPY to weaken further, but the USDJPY rate of 150.00 it’s clearly a psychological barrier for official intervention-wary traders.
The S&P 500 index closed the day –0.7% lower and the Nasdaq 100 index was down –0.4% (although far lower from the overnight highs posted after the Netflix earnings late Tuesday) Still, this was not that weak a performance, given the fresh strong lift in treasury yields, with the price action holding up relatively well after the close of trading yesterday despite the disappointing Tesla results that took that heavily traded stock down sharply after the close. The further outlook for treasury yields on incoming data, as well as the heavy earnings calendar of next week, are likely to set the tone for equity markets from here.
Hong Kong stocks tumbled with Hang Seng Index down 2.4% hitting 13-year lows. Higher U.S. bond yields and the Chinese Yuan weakening to new lows weighed on the markets. To add to the woes, investors have become increasingly concerned about the potential policy implications of the concept of “regulating the means of accumulating wealth” and US-Taiwan discussions on joint manufacturing of defensive capabilities (more below) China Internet names sold off 5% to 9%. CSI 300 declined 0.7%. Semiconductor stocks are the notable outperformers in both the Hong Kong and mainland bourses. SMIC (00981:xhkg) gained 0.9% and Hua Hong Semiconductor (01347:xhkg) climbed 3.2%.
The US dollar is getting about as much support as it conceivably can from a fresh rise in US treasury yields, but the impact on the currency has been minimal, as it feels as if a large finger has pressed the paus button – could this be a widespread nervousness as traders look at the USDJPY level perched near 150.00, with pressure from rising global yields for the JPY to weaken further, but with market participants knowing that a large bout of official Japanese intervention will be forthcoming at some point above that level? Relatively stable sentiment despite the fresh surge in treasury yields may also be behind the lackluster price action in USD pairs here, with USDCNH correcting back lower after its burst higher yesterday on a strong CNY fixing overnight another source of resistance for the greenback.
November WTI extended gains rising above $86/barrel overnight after the EIA yesterday reported US crude stockpiles dropped by 1.73 million barrels last week. Four-week seasonal demand for distillate fuels soared to the highest since 2007 while inventories remained at the lowest point on record for this time of year. Oil stocks charged higher with Baker Hughes, Valero Energy and Halliburton up over 5% each.
Gold prices heading lower to test the support at $1620/oz amid risk aversion and higher Fed bets propelling US yields higher and a rebound in the US dollar. Hawkish Fed speak yesterday, together with fresh highs in UK CPI, suggested higher-for-longer inflation and interest rates, while demand for the yellow metal also remains depressed due to ongoing lockdowns in China.
James Bullard and Neel Kashkari kept up their hawkish Fed rhetoric, in light of the burgeoning global price pressures. Bullard warned that inflation continues to surprise to the upside and the Fed needs to continue to act, also emphasising higher-for-longer rates even if inflation starts to decline in 2023, though he also suggested that “front-loading” of hikes is likely to end early next year (market pricing this anyway). Kashkari (2023 voter) added that there is no reason to think that key price measures have peaked, and he sees little evidence of a labor market softening. He also reiterated the Saxo view that “risk of under shooting on rate hikes bigger than overdoing it”. He also said his best guess is the Fed can pause hikes sometime next year but he favours rate hikes until core inflation starts to cool, noting the Fed's rate changes take a year or so to work through the economy. Chicago Fed President Evans was also on the wires this morning, and given that he’s retiring next year, he was accepting of the fact that “beginning rate hikes six months earlier would have made sense.”
Investors are used to Tesla beating estimates but last night the EV-maker surprised investors missing revenue and automotive gross margin estimates as the EV-maker faced battery constraints during the quarter and delivery transportation capacity during peak deliveries at the end of the quarter. While the company disappointed against estimates revenue growth was still impressive 56% y/y and the company is reiterating its 50% average growth target over the coming years, something analysts are not agreeing with seeing revenue growth declining to 14% in 2025. Shares were down 6% in late trading after the report.
According to Nikkei Asia, the Biden administration and Taiwan are in talks for American defense companies to provide Taiwan technology to manufacture weapons in Taiwan or to ship Taiwan-made parts to make weapons in the U.S. This, reading together with U.S. Secretary of State Blinken’s warning this Monday that “a fundamental decision that the status quo was no longer acceptable and that Beijing was determined to pursue reunification on a much faster timeline” and President Biden’s remarks of deploying U.S. forces to defend Taiwan in a CBS 60 Minutes interview last month, stirred up some unease among investors. Separately on Wednesday, Taiwan conducted live-fire military drills on Penghu Island, an archipelago in the Taiwan Strait.
Market chatters indicate that some investors are feeling unease about the potential policy implications of the phrase “we will improve the personal income tax system and keep income distribution and the means of accumulating wealth well-regulated” in the Work Report delivered by General Secretary Xi at the Chinese Communist Party’s National Congress last Sunday. The concept of regulating the means of accumulating wealth shows up in an official document for the first time.
Today’s earnings focus is on Swedish power and automation equipment maker ABB, diversified and medical equipment maker Danaher, miner Freeport McMoRan and mobile network equipment maker Ericsson.
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