Global Market Quick Take: Europe – 22 October 2024

Key points:

• Equities: Dow -344 points, Nvidia +4.1% to record high, Japan’s Nikkei -1.7%, Chinese stocks +0.7% after PBOC rate cut.
• Currencies: USD near its recent peak on hefty rise in US yields yesterday as market second guesses Fed plans
• Commodities: Precious metals stay bid despite yield and dollar strength
• Fixed Income: Sovereign bond selloff deepens as aggressive rate cut hopes fade
• Economic data today: Activity reports from Philly and Richmond Feds

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

Macro:

• Fed’s Logan, Kashkari and Daly were on the wires. Dallas Fed President Logan reiterated she expects gradual rate cuts if the economy meets forecasts, noting the Fed will need to be nimble with monetary policy choices. Minneapolis Fed President Kahskari said that a rise in the budget deficit would mean that on the margin interest rates would be higher. He noted the Fed wants to avoid a recession, adding the Fed saw signs of labour market weakening, which is why they cut by 50bps. Going forward, the Fed will look at all the data to decide on rate policy.
• Kansas City President Jeffrey Schmid was more outspoken with markets taking note of his comment that he favors a slower pace of interest-rate reductions given uncertainty about how low the US central bank should ultimately cut rates

Macro events (times in GMT):  Philadelphia Fed non-manufacturing activity (Oct) exp. 4.1 vs –6.1 prior (1230), Bank of England Governor Bailey (1325), Richmond Fed Manufacturing index (Oct) exp. -17 vs –21 prior (1400), APIs weekly crude and fuel stock report (2030)

Earnings events: Today, GE Aerospace, Danaher, Lockheed Martin and Verizon report earnings before the open, with Texas Instruments reporting after the close. Tomorrow sees Tesla, Coco-Cola, IBM, ServiceNow and NextEra Energy all reporting

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

Equities: U.S. markets saw mixed results on Monday, as the longest weekly rally of the year paused ahead of a busy earnings week and rising Treasury yields pressured consumer and homebuilder stocks. The S&P 500 slipped 0.2%, the Dow dropped 344 points, while the Nasdaq 100 edged up 0.2%. The 10-year Treasury yield surged to 4.18%, raising inflation concerns and fiscal pressure fears, particularly as Donald Trump leads in U.S. election betting polls. Nvidia outperformed, gaining 4.1% to a record high, while Tesla declined 0.8% ahead of its earnings report, due tomorrow after the close. Boeing rose 3.1% on news of a tentative union agreement. In Asia, most markets were down due to rate uncertainty and U.S. election concerns. Japan’s Nikkei led losses, down 1.7%, despite yen weakness. However, Chinese stocks edged higher following another interest rate cut from the PBOC.

Volatility: Volatility remains elevated, with the VIX up 1.89% to 18.37 as investors prepare for Tesla’s earnings report tomorrow and monitor rising Treasury yields. The VIX9D, reflecting short-term (9-day) volatility expectations, rose significantly by 16.24%, indicating heightened caution in the immediate term. Notable options activity was seen in Tesla and Nvidia, while Super Micro Computer (SMCI) and Palantir Technologies (PLTR) also registered high volumes. For today, based on options pricing, the expected move for the S&P 500 is 0.36%, while the Nasdaq 100 shows a 0.56% swing, reflecting potential fluctuations up or down. Earnings season and election uncertainty continue to influence market sentiment.

Fixed Income: European sovereign bonds fell yesterday as expectations for interest rate cuts diminished. Italian bonds led the declines, with the 10-year yield rising 15 basis points to 3.51%, one of the largest daily increases this year. Germany's 10-year yield increased by 10 basis points to 2.28%, and the two-year yield rose 7 basis points to 2.18%. The spread between Italian and German 10-year bonds widened by 6 basis points to 123. UK Gilts also weakened, with the 10-year yield up 8 basis points to 4.14%. US Treasuries followed, with the 10-year yield rising 10 basis points to 4.19%. Kashkari noted “more modest cuts” ahead, fueling the selloff.

Commodities: The rally in precious metals continues to puzzle, with gold and silver hitting new highs despite an 11-basis point rise in 10-year Treasury yields and a stronger USD as traders adjust to fewer US rate cuts. However, these non-gold friendly developments are being offset by haven bids and the ‘risk’ of a Republican win in the upcoming elections, stoking concerns about looser fiscal policy, which may deepen the deficit and rekindle inflation. Crude oil trades lower on broader risk of across financial markets after Monday’s Middle East focused bounce ran out of steam, but overall, the market remains nervous while Israel plans next Iran move. Arabica coffee retreated the most in two weeks as key production areas in Brazil may finally see some rain following a prolonged drought.

FX: The US dollar rose sharply again, with the greenback matching its recent high versus the Euro and the USDJPY exchange rate rising north of 151.00 at one point overnight as US yields ripped higher yesterday, taking global counterpoints higher as well. The Mexican person weakened to more than 20 pesos to the US dollar yesterday as the options market in peso suggest investors are very nervous about the impact on the peso if Trump should become president.

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