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Global Market Quick Take: Europe – August 29, 2023
Saxo Strategy Team
Résumé: Risk-on sentiment continued yesterday and has extended in today’s Asian session with Chinese equities significantly higher. The dollar is retreating from recent resistance levels and oil markets look tight with Chinese demand for jet fuel now above pre-Covid levels. US Treasury auctions look solid, and we still see scope for higher yields.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Equity futures continue to bounce back post last Thursday’s ugly session led by cyclical sectors such as technology (semiconductors) and industrials (capital goods). Hang Seng futures are up additionally 2% this morning increasing the likelihood of a tactical turnaround in China, but risks remain elevated due to ongoing troubles in the shadow banking system.
FX: After six weeks of gains, there is some scope for consolidation or retracement in the dollar index as highlighted in yesterday’s FX Watch. GBPUSD was seen climbing above 1.26 as it extended its bounce from Friday’s low of 1.2548. SEK was the G10 outperformer on Monday with Riksbank Floden’s estimation that the currency is 20% undervalued.
Commodities: Crude oil, currently stuck around $85 in Brent and $80 in WTI continues to look to a tight product market for support, not least jet fuel with China flights having surged 13% above pre-COVID levels in the week ending 20 August. Overall, the demand outlook in the coming months remains clouded with uncertainty and will in our opinion cap the upside potential. Precious and platinum group metals trade higher, with the focus on short covering after Powell’s ‘higher for longer’ message failed to hurt an ongoing price recovery.
Fixed-income: 2- and 5-year US Treasury auctions draw good demand with highest yields since 2006 and 2007, respectively. Today, a 7-year US Treasury auction will give a better glimpse in investors’ appetite for US Treasuries. We still see the US yield curve steepening by the end of the year without the 2s10s spread turning positive. The yield curve might return to flatten between September and October as it becomes clear that the fight against inflation is not over. We still see scope for long-term yields to move higher with 10-year US Treasury yields rising to test 4.5% amid stagflation.
Macro: UK food inflation declines to lowest level in a year but is still at 6.9% y/y in August highlighting the need for BoE to remain hawkish on its policy rate. China is still in focus and its troubled real estate developer Country Garden has proposed a grace period of 40 days on a maturing yuan bond highlighting the distressed situation in China credit markets.
In the news: Chinese equities have slumped this year relative to other equity markets making them relative cheaper on valuation attracting value investors seeing opportunities - Full story in the WSJ.
Technical analysis: Shoulder-Head-Shoulder Top & reversal pattern could be unfolding in S&P 500. Key support at 4,340. Cancelled above 4,459. Hang Seng testing resistance at 18,562. A close above could lead to 19K, but is likely to resume downtrend. US 10-y Treasury yields top and reversal pattern could correct to 4.10-4.00
Macro events: US Conference Board Aug Consumer Confidence est. 116.0 vs prior 117.0 (1400 GMT)
Earnings events: Bank of Montreal Q3 2023 results (no time given)
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