Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: US stocks ended last week on a high note as the dollar weakened after dovish comments from Federal Reserve officials strengthened bets that the Federal Reserve has reached the end of its aggressive rate tightening cycle. Asian stocks followed suit overnight with the Nikkei index touching a fresh 33-year high. EM currencies climbed to the highest since February with Renminbi strength supporting commodities like copper and iron ore. Crude oil saw a sharp rebound on Friday amid fresh OPEC cut speculation while bond yields have been edging higher ahead of a USD 16bn 20-year auction. A thin economic calendar today ahead of FOMC minutes Tuesday.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Mixed start to the week in Asia with Hang Seng futures up 1.5% and Nikkei 225 futures down 0.8% while both the US and European equity futures are mostly flat. In equities the key event is Nvidia earnings tomorrow after the US market close as Nvidia’s outlook will have a significant impact on sentiment in US technology stocks – read our preview of Nvidia earnings. It is also worth paying attention later today on the US Leading Index figures for October out at 15:00 GMT.
FX: The USD has extended losses through the Asian session today with the DXY touching a fresh September low and challenging the 200-day moving average at 103.62. The lingering effect of last week's Fedspeak and associated re-pricing of Fed rate cuts for 2024 has pressured the USD today. The rebound in oil prices helped NOK to be the best performer in G10 while USDJPY briefly dropped to sub-149 levels. AUDUSD broke resistance at 0.6523, and RBA minutes this week could be a key test along with China measures. EURUSD rose above 1.09 and may get a further push with Moody’s upgrading Portugal and reaffirming Italy’s rating while upgrading its outlook to Stable from Negative. EURGBP down to 0.8750 but could re-test 0.88.
Commodities: Crude oil prices have clawed back last Thursday’s sharp losses with Brent and WTI both back on safer grounds, potentially forcing some additional short covering following last week’s bout of technical selling. Prices recovered late Friday on reports OPEC members were considering additional production cuts when the group meets next weekend. Copper trades up to a nine-week high on continued Yuan strength, China stimulus and Fed peak rate speculation. Gold holds below $2k with silver also taking a breather following last week's 6.5% surge. Chicago grain and soybean futures meanwhile declined on Friday as the prospect of rain in drought-stricken Brazil eased crop concerns.
Fixed income: The 2-year Treasury notes sold off by 5bps on Friday, finishing at 4.89%, on stronger housing data and higher crude oil prices. Traders took some profits on rate-cut bets, further fueling the selling. Today, the attention turns to the 20-year US Treasury auction, a tenor that investors most dislike as it carries high duration, and it is also the most illiquid point in the US yield curve. At its peak, the 20-year US Treasury yield rose to 5.34%, while now it trades at 4.79%. If bidding metrics sensibly improve today, that could be a sign that investors are extending duration, paving the way for a deep rally across the yield curve. However, if demand remains as weak as the latest 30-year auction, it could reignite the bear-steepening of the yield curve. Overall, we continue to favor a bond barbell strategy.
Volatility: The VIX ended last week’s session at its lows, at 13.80 (-0.52 | -3.63%), well on its way to reach the lows of earlier this year (around $12.70). Expected moves for the coming week are: S&P 500 + or – 39.62 | +/- 0.88%, Nasdaq 100 + or – 221.40 | +/- 1.40%. S&P 500 and Nasdaq futures are slightly down this morning at -6.75 (-0.15%) and -51.00 (-0.32%) respectively.
Technical analysis highlights: S&P 500 resistance at 4,540. Nasdaq 100 uptrend stretched but could test 16K. DAX strong resist at 16K. EURUSD strong resist at 1.0945. USDJPY testing support at 149, a close below support at 147.30. GBPUSD uptrend resistance at 1.2564 -1.26. Gold uptrend but minor correction expected. WTI Crude oil bouncing from support at 72.65, Brent from 77.24. 10-year T-yields bearish support at 4.36
Macro: UK retail sales unexpectedly fell in October. Retail sales ex-auto fuel was down 0.1% MoM (exp +0.5%, prev -1.3%) and 2.4% YoY (exp -1.5%, prev -1.5%). While weather may have some impact, the print also emphasizes cost of living pressures plaguing the UK economy. China's Loan Prime Rate remained unchanged on Monday according to a People's Bank of China statement, in line with market expectation following the PBOC's decision to keep a key policy rate steady on November 15.
In the news: Ousted OpenAI CEO Altman discusses possible return, mulls new AI venture (Reuters), Portugal Rating Upgraded Two Levels by Moody’s (Moody’s), Argentina elects 'shock therapy' libertarian Javier Milei as president (Reuters), UK’s Hunt says won’t implement tax cuts that fuel inflation (CNBC)
Macro events (all times are GMT): Germany PPI (Oct) exp 0.0% & -11% vs –0.2% & -14.7% prior (0700), US Leading Index (Oct) exp –0.7% vs –0.7% prior (1500), US to sell $16 bln 20-year bonds (1800), Fed’s Barkin speaks on Fox Business (1700)
Earnings events: Agilent Technologies (aft-mkt), Zoom Video (aft-mkt), and Compass Group. Our focus is on Agilent Technologies which is expected deliver revenue growth of negative 10% y/y and EBITDA of $496mn down from $578mn a year ago with a muted FY24 outlook expected as the company’s exposure to China is dragging down growth.
For all macro, earnings, and dividend events check Saxo’s calendar