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Global Market Quick Take: Europe – October 3 2023
Saxo Strategy Team
Résumé: Equities are declining across the board as US bond yields surged to a new high yesterday. USDJPY extended its rally on stronger than expected US ISM Manufacturing figures and EURUSD sled to a fresh low for the year. The lift in bond yields came on the back of several hawkish Fed speakers highlighting the need for another rate hike before the end of the year. Oil prices are a bit under pressure from the stronger USD and Turkey resuming its oil pipeline deliveries from Iraqi oil fields.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: S&P 500 futures are trading inside the new trading range from 4,313 to 4,349 level, but are still finding themselves in a downward trend weighed by higher US bond yields. The US 10-year yield closed at a new high yesterday at 4.68%. Equities are digesting Fed speakers call for another rate hike and the recent pickup in economic activity which could keep bond yields higher for longer and thus compressing equity valuations. Next major equity event is the upcoming Q3 earnings season that starts next week. Chinese equities were down as much as 3% as trading resumed after a holiday.
FX: The surge in Treasury yields brought another bid to the USD, and the DXY index rose above 107. Risk sentiment waned with US data remaining strong and AUDUSD plunged to YTD lows and approaching 0.63 with RBA signalling an end to its tightening cycle. USDJPY rose above 149.80 and 10-year JGB auction lacked nay fireworks given the BOJ pre-announced an unscheduled bond buying operation for tomorrow. EURUSD extended its slide to fresh YTD lows of 1.0460 and GBPUSD also failed to get a boost from Mann’s hawkish comments and slid to sub-1.21.
Commodities: Oil prices slid further with WTI and Brent both below $90/barrel, with risk off and higher dollar underpinning. Supply concerns also got a pushback with Turkey resuming a key pipeline flow from Iraq. Gold plunged further to lows below $1820 and the big $1800 figure remains in focus. Silver was down over 5% to plunge below $21 and gold/silver ratio climbed above 86. Wheat and corn futures jumped after a plunge lower following Friday’s USDA report that showed significant supplies.
Fixed income: US Treasuries continue to tumble amid hawkish central bank speakers, with bond future increasing chances for another Federal Reserve rate hike in November or December. Rising yields in the long part of the yield curve show that markets are discounting a higher permanent terminal rate. Despite we expect 10-year yields to rise to 5% as selling pressure mounts, we recognize that the higher the yield the better protection the safe haven provides in case of a crisis, making its risk-reward profile appealing.
Volatility: The VIX Index remains well below the structural level (around 22) for when the market is in a negative territory. In commodities there has recently been activity in WTI put spreads.
Macro: Headline US ISM manufacturing rose to 49.0 vs. 47.9 expected and 47.6 previously. The key new orders (49.2 from 46.8) and employment (51.2 from 48.5) indexes rose strongly. Interestingly the prices paid index fell to 43.8 from 48.4, despite the recent rise in energy prices. US Fed speakers remained mixed. Michelle Bowman re-iterated it will likely be appropriate to raise rates further and hold them at restrictive level for some time. RBA stayed pat, keeping cash rate unchanged at 4.10%, and signalled inflation could fall back in the 2-3% target in late 2025.
In the news: Meta is considering a $14/month subscription on Facebook or Instagram as a response to EU’s digital laws preventing personalized advertising (Reuters). Evergrande resumes trading in China jumping as much as 42% (Reuters). Taiwanese technology companies are shown to aid Huawei in their effort to circumvent US sanctions (Bloomberg).
Technical analysis: US and EU stocks Bearish trend: S&P500 rejected at 4,328 resistance. Could drop to 4,200. DAX rejected at 15,483, likely to test 14,933. EURUSD resuming downtrend minor support at 1,0438. GBPUSD resuming downtrend, support at 1.20. USDJPY uptrend, eyeing 152. Crude correction. Brent likely down to 88.10. Gold likely to test 1,800. US 10-year yields towards 5%.
Macro events: US August JOLTS Job Openings (1400 GMT) with est. 8815K vs prior 8827K.
Earnings events: McCormick reports FY23 Q3 earnings (ending 31 August) before the market opens with analysts expecting revenue growth of 6.5% y/y and EBITDA of $313mn up from $239mn a year ago.
For all macro, earnings, and dividend events check Saxo’s calendar.