Global Market Quick Take: Europe – September 25 2023

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

Equities: S&P 500 futures closed last week at the worst closing price since June, but the index futures are attempting to rebound this morning trading around the 4,371 level. Defensive sectors continue to outperform cyclical sectors. US financial conditions also remain loose and for equity direction this week it is important to watch whether the US 10-year yield can break the 4.5% level. This week key earnings to watch are Costco (Tue), H&M (Wed), Accenture (Thu), and Nike (Thu) before the Q3 earnings season ramps up in three weeks.

FX: Dollar index closed a 10^th straight week of gains, with speculators in IMM futures now holding a net dollar long for the first time in ten months, with losses led by GBP and CHF after the BOE and SNB announced a surprise pause in their monetary policy decisions last week. USDJPY rose back higher towards 148.50 after BOJ’s announcement on Friday lacking any hints of a potential shift in policy by early 2024. EURUSD holding up above 1.0635 support and any upside in German Ifo today or hawkish Lagarde could bring it back closer to 1.07 with EURGBP testing a break above 0.87.

Commodities: Crude trades near a cycle high with speculators holding the biggest bullish position in WTI and Brent since February 2022 in anticipation of higher prices supported by tight supply more than offsetting stagflation concerns. The gross futures short collapsing to a 12-year low highlights the increasingly one-sided focus. Iron ore prices rose to USD 121/t with strong demand from steel mills and restocking ahead of the National Day holiday week. Gold continues to show resilience resilient despite Fed’s hawkish tilt.

Fixed Income. The Federal Reserve’s higher-for-longer message sets a reference point for long-term US Treasury yields. Unless there is a sign that the job market is weakening significantly, forcing the Fed to cut rates soon in the future, long term yields will continue to soar. This week our attention turns to US PCE numbers and the 2-, 5- and 7-year Treasury auctions.

Volatility: VIX Index sits at around the 17 level with forward curve still upward slopping suggesting no panic yet in equity sentiment.

Macro: European PMI figures on Friday were generally weak led by France with Germany seeing a slight improvement but remaining in contraction. US S&P Global PMIs saw manufacturing improve but services deteriorate, but its Composite reading is still just above 50 (50.1 from 50.2). Fed speakers struck a hawkish chord with Governor Michelle Bowman (voter) saying she expects “further rate hikes”. Boston Fed President Susan Collins (non-voter) and San Francisco Fed President Mary Daly (non-voter) talked about higher-for-longer. The Bank of Japan maintained a dovish rhetoric, with Governor Ueda trying to undo the hawkish interpretations from his previous remarks. For a full review, read Friday’s Macro/FX article.

In the news: Europe and the US are taking more steps to insulate their economies from China with a focus on decoupling supply chains (FT), the market is still nervous that Chinese real estate developer Evergrande could enter a major restructuring shaking market confidence (Bloomberg).

Technical analysis: US stocks in a bearish trend, S&P500 closed below 4,328 support, Nasdaq 100 is still above 14,694 support. AEX25 closed just on the 730 key support, next 716. EURUSD strong support at 1.0635, expect rebound but if closing below next support at 1.05. GBPUSD strong support at 1.2175. Crude oil likely minor correction: WTI oil expect to 87.58. Brent to 80.62. US 10-year T-yields eyeing 4.55

Macro events: Ger IFO Business Climate (Sep) exp 85.2 vs 85.7 prior (0800 GMT), Chicago Fed Nationwide Activity Index (Aug) exp. 0.05 vs 0.12 prior (1230 GMT), Dallas Fed Manf Activity (Sep), exp -13 vs –17.2 prior (Sep)

Earnings events: No important earnings releases today.

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