Global Market Quick Take: Europe – 14 February 2024

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

Equities: Equities took a beating yesterday as the US January inflation report showed an upside surprise taking the market off guard. Core services inflation (ex. energy) rose 0.66% MoM and the 6-month average annualized rate hit 5.6% With global manufacturing coming back to life and base effects diminishing on energy there is a scope for more entrenched inflation upending the market’s previous bet on multiple rate cuts. Nasdaq 100 futures were leading the declines down 1.6% although rebounding 0.3% this morning. Both Airbnb and Shopify also disappointed investors with their Q4 results with Shopify shares down 13% yesterday. The next couple of trading sessions will be a key test of market sentiment and how the market sets its mind on Fed rate cuts.

FX: The dollar surged sharply in response to the hot CPI report overnight, with the DXY index breaking past 100DMA to touch its highest levels in three months. The pushback on Fed easing expectations could again give rise to the debate around “who cuts first”, which could prove to make dollar strength more durable in H1. Scandies were the underperformers, while Swiss franc also slid below its 200DMA after Swiss CPI came in softer-than-expected yesterday. USDCHF rose to 0.8880 and next resistance seen at 0.89. USDJPY rallied past 150.50, and Japanese currency official Kanda was on the wires this morning warning about the move and stoking concerns of intervention which brought the pair back closer to 150.50. EURUSD tested 1.07 but bounced off while GBPUSD slid below 1.26 but still holding up after UK wages proved sticky yesterday and came in above expectations, with focus now shifting to UK CPI today and GDP tomorrow.

Commodities: Gold slumped below the key $2,000 mark as yields and dollar jumped higher. The precious metal has held above this key psychological level since mid-December on the hope of Fed rate cuts, which are being re-assessed now. Crude oil gained as concerns over demand were soothed by a bullish outlook from OPEC. IEA however hinted at “comfortable” markets this year as increasing production from non-OPEC countries underpins, and inventory data was also mixed, keeping oil range-bound.

Fixed income: the January US CPI print sparked a sharp bear-flattening of the US yield curve, with 2- and 5-year tenors ending the day cheaper around 17 basis points, and 10-year yields rising by 12bps, confirming their double bottom pattern. Bond futures went from pricing nearly seven rate cuts for 2024 in January to three and a half yesterday. Tomorrow’s US retail sales and import price index and Friday's PPI data will be in focus. In the UK, economists were expecting a rebound in CPI data for January, but numbers came in line with December levels. Although such a move could warrant a bull-steepening of the UK yield curve, the downfall in yields will be limited by the higher-than-expected wage data released yesterday. GDP data for Europe today, and the UK tomorrow, will be a focus. Overall, we see scope to extend duration up to 10-year tenors but remain wary of ultra-long duration (for more information click here).

Macro: US inflation came in hotter than expected, both on the headline and core, disrupting the disinflation narrative and reaffirming the last mile of the inflation move to 2% could be bumpy. Headline rose 3.1% YoY and 0.3% MoM, vs. 2.9% and 0.2% expected respectively. Core meanwhile was steady at 3.9% YoY vs. 3.7% expected, and rose on a MoM basis to 0.4% from 0.3% previously. Prices of most staples increased, including food, shelter, car insurance were higher. Focus now turns to PPI report on Friday which could help to gauge what Fed’s preferred inflation measure PCE could come at. The hot CPI report has priced out a March rate cut, now seen with only 10% odds. May rate cut probability has also dropped to less than 40% from ~70% previously and the first rate cut is only seen in June. Germany ZEW expectations improved for a seventh consecutive month, suggesting a more stable outlook for Europe’s sick man. The index for current conditions slipped to -81.7 in February from -77.3 the prior month amid manufacturing sector struggles. Still, the ZEW institute’s gauge of expectations rose to 19.9 from 15.2 in January. That is above the 10-year average of about 13.

Technical analysis highlights: S&P 500 uptrend stretched correction likely unfolding, support at 4,845. Nasdaq 100 correction could be unfolding key support at 17,128. DAX testing support at 16,821, a close below potential to 16,500. EURUSD below key support at 1.0730 potential to 1.0660. USDJPY above resistance at 149.75 likely move to 152. EURJPY above 161 resistance potential to 163-164. USDCHF broken above 0.8820 resistance, likely testing 0.89, eyeing 0.90. AUDUSD likely bearish move to 0.64. Gold below 2K, support at 1,973 and 1,931. 10-year T-yields double bottom pattern confirmed, strong resist at 4.38    

Volatility: Yesterday's CPI data release, coming in above expectations, significantly jolted the markets, propelling the VIX to an intraday peak of $17.94 before settling at $15.85 (+1.92 | +13.78%). This marked the highest VIX level since the onset of the last rally in early November. Accompanying this surge, the VVIX and SKEW indices also experienced substantial increases, up 10.11% and 11.60%, showing that nervousness is far from gone. Despite the initial sharp reaction to the inflation news, the market's overall response was measured, without descending into outright panic. A slight rebound early in the day was followed by a gradual decline, only for the markets to recuperate to opening levels in the final trading hour—a pattern not indicative of a full-blown crisis. Overnight, VIX futures have ticked down to $15.750 (-0.265 | -1.65%), with S&P 500 and Nasdaq 100 futures showing modest gains. The day's single stock option trading volume was led by TSLA, NVDA, AAPL, PLTR, and MSFT. VIX options volume was about 3 times higher than usual (2.2M).

In the news: Early adopters of Microsoft’s Copilot AI system tell of limited use in potential warnings sign for the AI boom (WSJ). Yesterday’s US January CPI report is pushing back rate cut timing (WSJ). Airbnb is entering a multiyear reinventing period while planning $6bn buyback program (FT). Japanese officials are warning about secular decline of the JPY (Reuters). Indonesia is counting the votes of the world’s largest single-day election (Reuters).

Macro events (all times are GMT): Eurozone preliminary Q4 GDP YoY est. 0.1% vs prior 0.1% (10:00), Japan preliminary Q4 GDP YoY est. 1.1% vs prior -2.9% (23:50).

Earnings events: Today’s key European earnings focus is Heineken and Genmab while the US earnings focus is Kraft Heinz. Analysts expect Kraft Heinz to report revenue growth of -5.5% and EPS of $0.77 down 10% from last year.

• Today: CBA, Sony, Heineken, Tokio, CME, EssilorLuxottica, Cisco, Occidental Petroleum, Barrick Gold, Genmab, Norsk Hydro, Kraft Heinz
• Thursday: Schneider Electric, Stellantis, Southern Co, Applied Materials, Airbus, Deere, Safran, RELX, Pernod Ricard, Renault, Commerzbank
• Friday: Eni, Sika, Swiss Re

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