The Risk Is Aggravated By The Weakness Of The Japanese Yen (JPY) |Gold And Oil Are Doing Well

The Gold Rally Is Continuing To Stall, This Could Be A Good Year For Crude Oil

Summary:  A rocky session for equity markets once again yesterday, which tried to find cheer on falling bond yields, only for a thorough thrashing after the close yesterday on Amazon issuing its weakest ever holiday sales outlook, which saw its shares knocked some 13% in the aftermarket. Elsewhere, Apple shares managed to stabilize after its earnings report in, as revenue and earnings topped estimates.

What is our trading focus?

Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I)

The recent string of US earnings have not done much to keep the recent momentum in US equities alive. Neutral earnings from Apple last night was topped with awful outlook from Amazon, the second largest stock in the US equity market, that saw its shares decline 13% in extended trading. S&P 500 futures are retreating this morning trading around the 3,790 level despite a sizeable readjustment lower in the US 10-year yield to 3.93%.

Euro STOXX 50 (EU50.I)

European equities saw more diverging price action yesterday but closed above the 3,600 level again, but this morning STOXX 50 futures are coming down 1% trading around the 3,570 level with 100-day moving average at 3,528 being the next support level to watch. There are no economic releases in Europe of importance today so it will be interest rate direction and sentiment on earnings that will drive price action into the weekend.

FX: USD pulled in two different directions as falling yields negative, weak sentiment positive

The further drop in US treasury yields fail to extend the US dollar sell-off yesterday, as a far less hawkish than expected ECB took EURUSD back below parity and the Bank of Japan sent no new signals on its terminally stuck policy mix of ongoing QE and yield-curve-control.  Weak risk sentiment seems to provide offsetting support from the greenback, but the dollar will find stronger support if US data remains resilient and the Fed is faced to stay on message with further tightening, especially now that the market has significantly downshifted expectations for peak Fed Funds rate beyond the 75 basis point move expected at next Wednesday’s FOMC meeting, with less than 100 basis points of further tightening now priced and a peak rate near 4.78% by next March.


Gold remains on track for a second week of gains although some caution has emerged ahead of next week's FOMC meeting. Yesterday, the positive sentiment received a knock as the dollar regained some ground, especially against the euro after the ECB stayed far less hawkish than expected. Countering this potential gold negative development, US bond yields continued lower with the US 10-year treasury yield benchmark falling below the important 4% level to record a +25-basis point drop on the week. While the FOMC is expected to deliver another bumper 75 basis points hike they may tilt towards slowing the pace at future meetings while assessing the impact of their rate and quantitative tightening actions. As a minimum gold needs to break above $1730 before an end to the month-long downtrend can be called.

Crude oil (CLZ2 & LCOZ2)

Crude oil remains on track for a second week of gains but for now without challenging resistance indicating a market still struggling for direction with no overriding theme being strong enough to set the agenda. Strength this week has been driven by a developing tightness in the fuel product market, US exports of crude and fuels setting a weekly record and the weaker dollar, as well as strong buying from China as refineries there plan to boost fuel exports through the end of the year. Diesel markets in Europe and the US continues to signal tightness ahead of winter with elevated refinery margins and prompt spreads signalling tight market conditions. Focus next week on the Nov 2 FOMC meeting and major OPEC producers beginning to cut their production. Additional technical upside in WTI above $89.25 while Brent’s next level of resistance is the October high at $98.75.

US treasuries (TLT, IEF)

The US 10-year treasury yield benchmark fell through the important 4.00% level yesterday, with the yield trading as low as 3.90% before treasuries found resistance. The 3.85% area is arguably a pivotal level if treasuries continue to rally. The entire yield curve dropped yesterday, in part on a less hawkish ECB continuing the trend recently of central banks delivering less than expected on guidance, as German 10-year Bunds dropped below 2.00% for the first time in weeks on the ECB meeting yesterday (more below). It looks like we’ll be heading into next week’s FOMC meeting with a fairly hard market lean for a significant downshift in the Fed’s hawkish message.

What is going on?

ECB the latest central bank to surprise dovish

The ECB hiked its key rate 75 basis points to 1.5% from 0.75%. Officials dropped a reference to hikes continuing for "several meetings," in the statement, while saying they expect further action. Christine Lagarde said in the press conference that more rate hikes were on the way: "We still have ground to cover." The bank will continue to reinvest all maturing assets in its asset purchase program (QE) and QT won’t be discussed until the December meeting. The market read the meeting as a strong dovish surprise, as another 20 basis points of tightening were removed from forward expectations for 2023 (down some 50 basis points now from peak expectations just over a week ago.)

Apple is a fortress

FY22 Q4 revenue came out at $90.2bn vs est. 88.6bn up 8% y/y keeping up with inflation and EPS at $1.29 vs est. $1.26 driven by a new all-time high of active devices. The number of paid subscriptions, which Apple has recently announced will see price hikes, have doubled in three years to 900mn. Shares were unchanged in extended trading.

Amazon shares plunged 13% on Q3 results

Revenue in Q3 hit $127.1bn vs est. $127.6bn up 15% y/y but operating income hit $2.5bn vs est. $3.1bn. The weaker than estimated operating income was driven by a negative revenue surprise in their cloud business AWS with revenue of $20.5bn vs est. $21bn. The free cash flow in Q3 was still negative at $5bn with the combined negative free cash flow over the past year at $26bn. The change in cash generation for Amazon indicates that the pandemic turned out to be bad for the business as it spent too much on expanding capacity that could not be maintained. The outlook for Q4 was what terrified investors with the retailer guidance operating income in the range $0-4bn vs est. $4.7bn and revenue of $140-148bn vs est. $155.5bn.

Japan announces massive fiscal stimulus

Japan’s Prime Minister Fumio Kushida announced a ¥71.6 trillion (nearly $500 billion) stimulus package overnight, in a purported bid to “ease inflation” and shore up his government’s popularity. The new spending in the package is set at ¥39 trillion and will focus on incentivizing companies to raise wages, national security/defense and subsidies to reduce the impact of energy costs, especially electricity bills. With the Bank of Japan not allowing government bond yields to adjust, this risks adding to the yen’s weakness as long as other major central banks are not in easing mode.

Caterpillar, McDonalds, and Boeing positive stories in the negative backdrop

A few positive stories to highlight amidst the massive drop in marquee megacap names include Caterpillar, which soared a massive 7.7% on impressive results. Elsewhere McDonald’s (MCD) shares rose 3.3% on reporting sales that handily beat analysts’ estimates, despite inflationary pressures. McDonald’s results were boosted by McRib sales, and the fast-food chain will offer McRib nationwide in the US from the end of this month. Meanwhile, Boeing (BA) shares jumped a day after an ugly drop on its earnings report. Yesterday, shares rose 4.5% with the company releasing a bullish 20-year forecast for China’s commercial jet market, saying China will need to double its fleet in two decades and that China will be a major driver of Boeing sales. Boeing expects China to need 8,485 new passenger and freighter planes valued at $1.5 trillion through 2041.

A tough week for coffee, cotton and sugar

The Bloomberg Commodity Softs index trades down 5% on the week led by a 6% drop in Arabica coffee (KCH3) $1.79/lb, a 14-month low as money managers continue to exit long-held bullish bets, now turning increasingly sour amid concerns a global recession will hurt demand at a time where the outlook for the 2023/24 crop in Brazil is showing signs of improving. However, a combination of exchange monitored stocks lingering at a 23-year low and oversold condition may soon drive a technical bounce ahead of support at $1.73/lb. Sugar (SBH3) meanwhile has been hurt by a weaker Brazilian Real boosting incentives to export. Cotton (CTZ2), down 52% from its May peak has plunged to near a two-year low on weak demand for supplies as consumers around the world cut back on spending. Weekly export sales from top shipper, the US, plunged from a year earlier with overall sales for the current season being well behind last year and the long-term average.

What are we watching next?

Market leaning very hard now for a dovish downshift at next Wednesday’s FOMC

After the Bank of Canada surprised with a smaller than expected hike this week and the ECB surprised with more dovish forward guidance, the market is now. But will the US data cooperate and is the maximum conceivable downshift from the Fed next week already in the price – given that the Fed itself has said that it will continue to hike even as the economy – including the labor market - weakens? After all, the market has removed nearly 25 basis points of tightening through the March FOMC of next year from the peak of just above 5.0% a bit more than a week ago to just under 4.8% now, and is more aggressively pricing the Fed to begin cutting rates by late next year (December ‘23 FOMC yield down almost 50 bps from peak). 

Earnings to watch

Today’s US earnings focus is on the two oil and gas majors Exxon Mobil and Chevron expected to report strong earnings in Q3. Exxon Mobil is expected to grow revenue 44% y/y with the operating margin expanding further. NextEra Energy is also worth watching given the recently passed US bill on renewable energy because it may lift the outlook for the industry.
  • Today: Macquarie Group, OMV, ICBC, China Merchants Bank, LONGi Green Energy Technology, Midea Group, Imperial Oil, Danske Bank, Sanofi, Airbus, Volkswagen, China Construction Bank, Agricultural Bank of China, Bank of China, BYD, China Shenhua Energy, Eni, Keyence, Hitachi, Denso, Equinor, CaixaBank, Wilmar International, Swiss Re, Exxon Mobil, Chevron, AbbVie, NextEra Energy, Colgate-Palmolive, Royal Caribbean Cruises

Earnings releases next week:

  • Monday: Daiichi Sankyo, Stryker
  • Tuesday: Toyota Motor, Sony Group, Mondelez, AMD, Airbnb, Eli Lilly, Pfizer, BP
  • Wednesday: KDDI, Novo Nordisk, GSK, Booking, Qualcomm, CVS Health, Estee Lauder, Humana
  • Thursday: Cigna, Amgen, PayPal, Starbucks, EOG Resources, ConocoPhillips, Regeneron Pharmaceuticals, Zoetis, Canadian Natural Resources, DBS Group
  • Friday: Duke Energy, Enbridge

Economic calendar highlights for today (times GMT)

0800 – Germany Q3 GDP
0900 – Eurozone Oct. Confidence Surveys
1200 – Germany Oct. Flash CPI
1230 – Canada Aug. GDP
1230 – US Sep. Personal Income/Spending
1230 – US Sep. PCE Inflation
1400 – US Oct. Final University of Michigan Sentiment



The Gold Rally Is Continuing To Stall, This Could Be A Good Year For Crude Oil

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