Financial Markets Today: Quick Take – October 28, 2022

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

The recent string of US earnings have not done much to keep the recent momentum in US equities alive. Neutral earnings from Apple last night was topped with awful outlook from Amazon, the second largest stock in the US equity market, that saw its shares decline 13% in extended trading. S&P 500 futures are retreating this morning trading around the 3,790 level despite a sizeable readjustment lower in the US 10-year yield to 3.93%.

Euro STOXX 50 (EU50.I)

European equities saw more diverging price action yesterday but closed above the 3,600 level again, but this morning STOXX 50 futures are coming down 1% trading around the 3,570 level with 100-day moving average at 3,528 being the next support level to watch. There are no economic releases in Europe of importance today so it will be interest rate direction and sentiment on earnings that will drive price action into the weekend.

FX: USD pulled in two different directions as falling yields negative, weak sentiment positive

Gold (XAUUSD)

Gold remains on track for a second week of gains although some caution has emerged ahead of next week's FOMC meeting. Yesterday, the positive sentiment received a knock as the dollar regained some ground, especially against the euro after the ECB stayed far less hawkish than expected. Countering this potential gold negative development, US bond yields continued lower with the US 10-year treasury yield benchmark falling below the important 4% level to record a +25-basis point drop on the week. While the FOMC is expected to deliver another bumper 75 basis points hike they may tilt towards slowing the pace at future meetings while assessing the impact of their rate and quantitative tightening actions. As a minimum gold needs to break above $1730 before an end to the month-long downtrend can be called.

Crude oil (CLZ2 & LCOZ2)

Crude oil remains on track for a second week of gains but for now without challenging resistance indicating a market still struggling for direction with no overriding theme being strong enough to set the agenda. Strength this week has been driven by a developing tightness in the fuel product market, US exports of crude and fuels setting a weekly record and the weaker dollar, as well as strong buying from China as refineries there plan to boost fuel exports through the end of the year. Diesel markets in Europe and the US continues to signal tightness ahead of winter with elevated refinery margins and prompt spreads signalling tight market conditions. Focus next week on the Nov 2 FOMC meeting and major OPEC producers beginning to cut their production. Additional technical upside in WTI above $89.25 while Brent’s next level of resistance is the October high at $98.75.

US treasuries (TLT, IEF)

The US 10-year treasury yield benchmark fell through the important 4.00% level yesterday, with the yield trading as low as 3.90% before treasuries found resistance. The 3.85% area is arguably a pivotal level if treasuries continue to rally. The entire yield curve dropped yesterday, in part on a less hawkish ECB continuing the trend recently of central banks delivering less than expected on guidance, as German 10-year Bunds dropped below 2.00% for the first time in weeks on the ECB meeting yesterday (more below). It looks like we’ll be heading into next week’s FOMC meeting with a fairly hard market lean for a significant downshift in the Fed’s hawkish message.

What is going on?

ECB the latest central bank to surprise dovish

The ECB hiked its key rate 75 basis points to 1.5% from 0.75%. Officials dropped a reference to hikes continuing for "several meetings," in the statement, while saying they expect further action. Christine Lagarde said in the press conference that more rate hikes were on the way: "We still have ground to cover." The bank will continue to reinvest all maturing assets in its asset purchase program (QE) and QT won’t be discussed until the December meeting. The market read the meeting as a strong dovish surprise, as another 20 basis points of tightening were removed from forward expectations for 2023 (down some 50 basis points now from peak expectations just over a week ago.)

Apple is a fortress

FY22 Q4 revenue came out at $90.2bn vs est. 88.6bn up 8% y/y keeping up with inflation and EPS at $1.29 vs est. $1.26 driven by a new all-time high of active devices. The number of paid subscriptions, which Apple has recently announced will see price hikes, have doubled in three years to 900mn. Shares were unchanged in extended trading.

Amazon shares plunged 13% on Q3 results

Japan announces massive fiscal stimulus

Caterpillar, McDonalds, and Boeing positive stories in the negative backdrop

A tough week for coffee, cotton and sugar

What are we watching next?

Market leaning very hard now for a dovish downshift at next Wednesday’s FOMC

Earnings to watch

• Today: Macquarie Group, OMV, ICBC, China Merchants Bank, LONGi Green Energy Technology, Midea Group, Imperial Oil, Danske Bank, Sanofi, Airbus, Volkswagen, China Construction Bank, Agricultural Bank of China, Bank of China, BYD, China Shenhua Energy, Eni, Keyence, Hitachi, Denso, Equinor, CaixaBank, Wilmar International, Swiss Re, Exxon Mobil, Chevron, AbbVie, NextEra Energy, Colgate-Palmolive, Royal Caribbean Cruises

Earnings releases next week:

• Monday: Daiichi Sankyo, Stryker
• Tuesday: Toyota Motor, Sony Group, Mondelez, AMD, Airbnb, Eli Lilly, Pfizer, BP
• Wednesday: KDDI, Novo Nordisk, GSK, Booking, Qualcomm, CVS Health, Estee Lauder, Humana
• Thursday: Cigna, Amgen, PayPal, Starbucks, EOG Resources, ConocoPhillips, Regeneron Pharmaceuticals, Zoetis, Canadian Natural Resources, DBS Group
• Friday: Duke Energy, Enbridge

Economic calendar highlights for today (times GMT)

0800 – Germany Q3 GDP
0900 – Eurozone Oct. Confidence Surveys
1200 – Germany Oct. Flash CPI
1230 – Canada Aug. GDP
1230 – US Sep. Personal Income/Spending
1230 – US Sep. PCE Inflation
1400 – US Oct. Final University of Michigan Sentiment