Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access all our platforms from a single account.
Financial Markets Today: Quick Take – August 3, 2022
Saxo Strategy Team
Summary: Equity markets tried to rally again, even as tensions mounted on US House Speaker Nancy Pelosi’s visit to Taiwan yesterday and the announcement of strong measures from China against Taiwan, with more likely to come in the hours and days ahead. But risk sentiment rolled over by later in the day, chiefly due to a huge sell-off in US Treasuries all along the curve as a number of Fed speakers clear disagree with the market’s assessment of Fed guidance. This took the JPY back down several notches after its recent sharp rally and tamed the gold rally as well.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)
The downward pressure extended yesterday in US equities with S&P 500 futures closing below 4,100 with US House Speaker Nancy Pelosi’s visit to Taiwan adding negative sentiment. Yesterday also saw a significant move in the US 10-year yield moving almost 20 basis points following speeches from Fed members Mester, Daly, and Evans, which is a negative for US equities as it pushes up the cost of capital. Several good earnings from Avis, Uber Technologies, and especially Caterpillar added positively to US equities and S&P 500 futures are trying to regain levels this morning trading at around 4,105.Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I)
Stocks traded in mainland bourses were mixed, with defence, auto and semiconductor stocks gained while agriculture, property and banking stocks declined. Likewise, Chinese defence related stocks traded in Hong Kong gained, AviChina Industry & Technology +8%, CSSC Offshore & Marine Engineering +7%. Semiconductor names were among the best performers, SMIC +8.6%, Hua Hong +4.6%. In the auto space, Geely stood out as the top gainer, surging 4%. Technology stocks outperformed. Hang Seng TECH (HSTECH,I) gained nearly 2% and Alibaba surged more than 3%.USD response to rising treasury yields
The USD dollar pulled back higher from its recent lows just as US yields rose sharply yesterday, in part on the Fed pushing back against the market’s interpretation of the recent FOMC meeting, which the consensus saw as a significant downshift in Fed guidance on its tightening path (more below). Key pairs to watch, besides the most rate-sensitive USDJPY, include EURUSD and whether the 1.0275+ area continues to cap the price action and AUDUSD, where the pivotal 0.7000 area has been in play until the RBA loosened its guidance at its meeting this week. The EURUSD has been caught in a tight range for more than two weeks, with a range low just below 1.0100 that looks like the trigger for a retest of parity. Next steps for traders include today’s US ISM Services survey and the July jobs report up on Friday.JPY crosses as US yields reversed hard yesterday
USDJPY lurched from lows below 131.00 to well above 133.00 yesterday on the tremendous reversal in US treasury yields on the day, a reversal seen, if with lower beta, in other JPY crosses. The hunky move that reminds traders of the extreme sensitivity of the JPY to US treasury yields, with a sustainable JPY rally either requiring that global bond yields push back to new lows for the cycle – now a dimmer prospect – or that the BoJ changes its policy mix away from capping yields out to 10 years, something Governor Kuroda has shown no signs of doing.
Gold shies away from resistance as US treasury yields pop
The recovery in US yields on Tuesday meant that Gold turned back lower from the $1780 resistance it had been toying with. The yellow metal was seen reversing back down to sub-1760 levels overnight after the USD was boosted by the Fed speakers guiding for a steady path of interest rate increases to come. Gold also likely gave back the gains it had been accumulating ahead of Pelosi’s visit to Taiwan and the upsurge in geopolitical tensions due to that, but there is further room for geopolitical rivalry as China announced military drills and missile tests, suggesting we can still have more bouts of gold strength. The 1780-1800 area will remain key to watch.
Crude oil prices gain on risk-on and supply concerns. (OILUKOCT22 & OILUSSEP22)
With the demand destruction fears somewhat at ease, the focus is shifting back on supply constraints in commodities. OPEC and its allies meet today to decide on the group’s output levels for September. With the group having under-impressed on the production roadmap for now, any increases in targets may remain underwhelming. A decision not to raise production would also disappoint, especially after President Joe Biden visited Saudi Arabia this month hoping to strike a deal on oil production.
US Treasuries (IEF, TLT)
US yields jumped sharply yesterday, particularly at the long end of the yield curve in one of the largest rises in yields in a single day this year. After nearly touching 2.50% in the Asian session before, the 10-year Treasury benchmark yield rose above 2.75% at one point before settling back slightly lower, possibly on Fed comments or on House Speaker Nancy Pelosi’s Taiwan visit. The sharp rise after posting new lows below the important 2.70% area recently suggests a low may be in place for yields for now. Further follow through higher could begin to weigh on risk sentiment.What is going on?
Cleveland Fed President Loretta Mester concerned on inflation
In an interview with the Washington Post, Mester confirmed the Fed has more work left for inflation to decrease. So far, she indicated that she hasn’t seen any evidence that inflation has even begun to level off. She also warned that unemployment will rise as the Fed progresses through this cycle. But this is unavoidable to make sure the United States gets back to price stability. There is a “narrow window to avoid a large increase of layoffs”, she said. Yesterday also saw the JOLTS report for June, which showed job openings fell more than expected to 10.7 million from 11.3 million. This is still high, but is a sign that the U.S. job market is finally cooling off.More Fed pushback on market setting Fed expectations lower
Besides Mester’s comments noted above, Chicago Fed President Charles Evans (voter next year) said a 50bps rate hike is a reasonable assessment for the September meeting, and 75bps is a possibility too if inflation does not improve. He expects 25bps from there on until Q2 2023 and said that 3.75%-4.00% would be a “sufficiently high level” for rates by end 2023. St. Louis Fed president and 2022 voter James Bullard echoed these specific levels for the rate next year and said that “a recession is not going to happen”. The Fed’s median forecast for the Fed Funds rate by the end of 2023 is 3.8%, well above the 2.9% that the market is currently pricing in. Mary Daly (2024 voter) of the San Francisco Fed stated that work on inflation is nowhere near almost done.
The freight costs correction continues
The Y/Y change in cost to ship a 40ft container from Shanghai to Los Angeles has dropped to minus 32 %. This is the lowest level since the start of the Covid pandemic. There might be many reasons for this impressive fall. But the most straightforward one is certainly “a global recession is coming” (this is actually the view of an increasing number of analysts), at least in terms of trade volumes.Strong results from BMW and Infineon
While a raging energy crisis is putting immense pressure on Germany’s industry, BMW drove home a strong Q2 result with automotive revenue at €30bn vs est. €28.5bn and EBIT at €3.4bn vs est. €3.2bn, but the German carmaker still sees 2022 deliveries below 2021 and difficult business conditions in the second half. Infineon, which is one of the largest suppliers of chips to the car industry, also delivered this morning much stronger than expected result with revenue at €3.6bn vs est. €3.4bn and better than expected operating profit; the chipmaker is also issuing a better-than-expected guidance on revenue and operating margin.What are we watching next?
Follow on response from China in reaction to US House Speaker Pelosi’s Taiwan visit
China has already reacted strongly to Pelosi’s visit: launching live military drills in areas all around the island, and some very close to land, banning imports of citrus fruits and the exports of sand to the island. China is Taiwan’s largest trading partner, with a bilateral trade relationship worth more than $300 billion annually. Other measures could escalate after Pelosi’s departure and could include measures directed at the US as well as “gray-zone” tactics that raise the risk of intensifying confrontation. It remains to be seen how transportation and supply chain from and to Taiwan will be affected. Logistics may not be affected much as wide gaps open outside the drill areas in the sea and airspaces, but risks are real for some disruptions. China’s rhetoric so far has been carefully worded to focus on House speaker Pelosi and less reference to criticizing the US global strategy or the Biden administration. How the situation will develop is still fluid as of writing. It is however almost for sure that there will be more frictions between the U.S. and China on many fronts. Both sides will be testing the reaction functions of each other and fine-tune their grand scheme of strategies accordingly. Chinese equities are likely to be volatile in the weeks to come.
US ISM Services Survey for July on tap today
After the decline in US ISM manufacturing index earlier in the week, the focus is now on the services index set for release today, arguably far more important as 70% of the US economy is in services. The market may be leaning for a downside surprise to Bloomberg consensus expectations of 53.5 (vs. 55.3 in June) as the flash S&P Global Services PMI plunged to 47.0, suggesting a services sector in outright contraction. A reading below 50 might administer a strong shock to markets – challenging yesterday’s jump in US Treasury yields and sharp fall in the Japanese yen.
Three reasons investors should consider being defensive in August
1) US Fed speakers have affirmed that more rate hikes are coming. The RBA also affirmed it too will continue to raise rates over the coming months. 2) Job cuts have been observed across countries and global companies. From New Zealand’s jobless rate unexpectedly rising today, to a trading company, Robinhood, overnight announcing cut its workforce by 23%. These new themes are likely to for the rest of 2022. Australia’s RBA thinks unemployment will rise from 3.5% to 4%. 3) US-China tensions are increasing after the US house speaker visited Taiwan when China asked her not to, and this could be a positive for defence stocks going forward. The USD will also likely gain traction as the safe-haven currency.
Earnings to watch
Today’s key focus in Europe is German earnings and Societe Generale in France as the continent is facing significant macro headwinds. In the US, earnings from Booking comes with downside risks due to Airbnb’s disappointing outlook yesterday and Fortinet is important for the cyber security theme.
- Today: Nutrien, AXA, Societe Generale, Siemens Healthineers, BMW, Infineon Technologies, Vonovia, Nintendo, JDE Peet’s, CVS Health, Booking, Moderna, Regeneron Pharmaceuticals, Fortinet, Albemarle, eBay, MercadoLibre
- Thursday: Novo Nordisk, Credit Agricole, Merck, Bayer, Adidas, Beiersdorf, Toyota, SoftBank, Glencore, ING Groep, Eli Lilly, Alibaba, Amgen, ConocoPhillips, EOG Resources, Air Products and Chemicals, Block, DoorDash, Twilio
- Friday: Canadian Natural Resources, Suncor Energy, Allianz, Deutsche Post, Naturgy Energy Group
Economic calendar highlights for today (times GMT)
- 0715-0800 – Eurozone Jul. Final Services and Composite PMI
- 0900 – Eurozone Jun. PPI
- 0900 – Eurozone Jun. Retail Sales
- 1130 – US Fed’s Bullard (voter) interview on TV
- 1345 – US Final Jul. S&P Global Services and Composite PMI
- 1400 – US Jun. Factory Orders
- 1400 – US Jul. ISM Services
- 1430 – US Weekly Crude Oil and Product Inventories
- 1430 – US Fed’s Harker (non-voter) to speak
- 1515 – US Fed’s Daly (non-voter) to speak
- 1545 – US Fed’s Barkin (non-voter) to speak
- 1830 – US Fed’s Kashkari (non-voter) to speak
- 2130 – Brazil Selic Rate announcement
- 0130 – Australia Jun. Trade Balance
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app:
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...