Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Summary: Equities kept a fairly even keel yesterday and overnight as the US dollar move took center stage yesterday, with a bid for the greenback taking EURUSD to its lowest levels in more than a year. This move unfolded despite US treasury yields consolidating slightly lower after their recent sharp run higher. End-of-month and end-of-quarter effects may be behind some of the energy in the currency market, as today marks the last day of the quarter and importantly, the US financial year, as key US votes in Congress on stimulus are set for today.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - S&P 500 futures are bouncing back as the momentum in US interest rates has stopped for now trading around the 4,385 in early European trading. The next big level is around 4,403 which would be the mid-point of the recent high to low range. However, while sentiment is better today our view is that equities are quite fragile and the higher electricity prices in Europe this morning could turn into risk-off again.
EURUSD – the US dollar rose sharply and across the board yesterday, forcefully taking out the 1.1664 range lows yesterday and even trading briefly below the lows just prior to the US election last year. The next major chart area is 1.1500 and another major chart level is 1.1290, the 61.8% retracement of the rally from the pandemic outbreak lows to the highs at the beginning of this year. The most immediate question is the degree to which the scale of this move is partially due to quarter-end today.
USDJPY and JPY crosses – USDJPY looks possibly over-extended as new highs traded above the old 111.66 high for this year and even above 112.00 briefly late yesterday, as US treasury yields actually consolidated a bit lower yesterday and the outlook for US fiscal stimulus remains very much up in the air (see below). Still, this move looks decisive for now and until/unless the move is crushed back below 110.50 or so, the bulls will set their sights on the next major area into 114.50, watching US long yields as an important coincident indicator, as rising yields would offer a further tail-wind. A break above the 1.75% cycle high for the US 10-year Treasury yield benchmark could provide additional support for the bullish case (currently 1.52%).
Precious metals dropped further yesterday as the dollar kept rising and Fed chair Powell reiterated his view that the current high level of inflation is transitory. Silver (XAGUSD) was the hardest hit, crashing to the lowest level in 14 months. With stock markets bouncing back, thereby reducing diversification demand, and with 10-year real yields trading near a three-months high, the short-term prospects for the gold and silver remains challenging. Gold (XAUUSD) managed to limit its losses thereby sending the gold-silver ratio (XAUXAG) above 80 for the first time since last November. Resistance at $22 in silver and $1745 in gold.
Cotton (CTZ1) has raced past $1 per pound for the first in almost a decade after rallying 17% during the past eight sessions. Poor weather around the world has been hurting supplies at a time of record demand from China and Mexico. Developments that have driven unrelenting demand for fiber from the US, the world's biggest exporter, with record freight rates and geopolitical developments adding another layer of concern. Cotton surged to a record high at $2.2 in March 2011, with technical analysts now focusing on $1.14 as the next area of resistance.
US yields consolidate, however the PCE index and the University of Michigan survey tomorrow might add to bearish sentiment (IEF, TLT). Sentiment in the US Treasury market improved yesterday, and yields fell from their recent highs. However, during in the afternoon, 10-year and 30-year resumed their rise breaking once again above 1.5% and 2% respectively. We expect monetary policy expectations to be the main driver of higher yields. That’s why tomorrow’s PCE deflator and the University of Michigan survey are in the spotlight: they might provide signs that inflation is less transitory than expected ultimately forcing the Federal Reserve’s hand.
Junk bonds begin to feel pressure from rising government bond yields (HYG, JNK). The spreads of high yield corporates in the United States and Europe have been widening amid the bond market selloff. Despite most junk corporates continuing to issue bonds without problems, we begin to see cracks. Yesterday, Ahern Rentals, a US construction equipment company, had to pull a deal because creditors were demanding more safeguards and a yield of 10.5%. The company was looking to refinance debt maturing in 2023. Although this might be an isolated case, it’s key to monitor if funding becomes a problem in the junk bond space, as volatility can leak to stocks. In the meantime, demand for junk remains strong as yields rise. All junk bonds are losing, however, CCC continue to outperform BBs and Bs showing that investors are still relying on junk as a source of yield to build a buffer against sustained inflation.
What is going on?
UK Chancellor of the Exchequer Rishi Sunak announces new grants for low income Britons - with some GBP 500 million for the neediest struggling to cope with cost of living expenses. The end of the UK furlough scheme rolled out during the pandemic is today, with last-minute calls for extension of the programme for some sectors.
Crude oil futures rose again yesterday despite the first US stock build in eight weeks and a surging dollar making purchases in local currencies even more expensive. It highlights the impact of the natural gas induced global energy crunch which is boosting the demand outlook for fuel substitution into the northern hemisphere winter. While US gas prices are down 12% from Monday’s multi-year peak, a relentless rally continues in EU and Asian gas with both now trading around $30/MMBtu with tight supplies and the bidding war for LNG shipments continuing to drive prices higher.
H&M reports better than expected Q3 earnings. Pretax profit is SEK 6.09bn vs est. SEK 5.07bn driven by a better gross margin at 53.2% vs est. 51.5%. Online sales were up 22% in local currencies which some investors will be perceived as a negative as competitors in online fashion clothing are growing faster. On a positive note, the Swedish fashion company is lifting its net new stores in the fiscal year to +215 from previously –250.
Warby Parker direct listing is a big success. The US based manufacturer and seller of eyeglasses which has been a quite popular brand among young people priced its shares at $40 on 28 September. However, shares were also popular in yesterday’s session ending the first day of trading at $54.49.
What are we watching next?
Germany Sep. CPI release today - with expectations for a headline reading of 4.2% year-on-year, which would represent a new multi-decade high after the August level reached 3.9%, the highest since the early 1990’s.
Chinese markets are closed from tomorrow and through Thursday for Golden week which comes at an interesting time, given that some portion of the recent market volatility has been driven by the shift in policy priorities in China. The near total lack of volatility in the USDCNH pair is also interesting and suggests significant intervention as the greenback has traded sharply stronger this week in particular.
US Congress to avoid a shutdown for now, what about stimulus prospects? - Overnight, US Senate majority leader, Democrat Chuck Schumer announced that the Senate had reached a deal to keep the US government funded through December 3 after US Treasury Secretary Yellen said the US government would be forced to default on October 18 if funding was not ensured. Today, a vote is meant to take place in the House on the infrastructure deal passed by the US Senate. Some progressive Democrats have vowed to spike the deal if the larger $3.5 trillion social- and climate spending bill is not attached, leaving uncertain whether any new fiscal stimulus will be on offer in the US next year.
Today, the USDA will publish its quarterly grain inventory report. For corn, the expectation is for lower stocks than earlier forecast, while soybeans are likely to be little changed and wheat stocks are expected to be slashed following severe drought in some regions of the US this past summer. Also, some focus on the global gas crunch which has led to soaring fertilizer prices, and if continued it could cause farmers to switch from wheat to other less fertilizer-intensive crops.
Economic calendar highlights for today (times GMT)
0755 – Germany Sep. Unemployment Change
1200 – Poland Central Bank meeting minutes
1200 – Germany Sep. Flash CPI
1230 – US Weekly Initial Jobless Claims and Continuing Claims
1230 - Czech Central Bank Announcement
1345 – US Sep. Chicago PMI
1400 – US Fed Chair Powell and Treasury Secretary Yellen before House panel
1400 - US Fed’s Williams (voter) to speak
1430 – DOE’s Weekly Natural Gas Storage Change
1500 – US Fed’s Bostic (voter) to speak
1530 – US Fed’s Harker (non-voter) to speak
1600 – USDA’s Grains Quarterly Stock Report & Wheat production
1630 – US Fed’s Evans (voter) to speak
1800 – Mexico Central Bank Rate Decision
2100 – New Zealand Sep. ANZ Consumer Confidence
2350 – Japan Q3 Tankan Survey
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