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Breakfast Bites - Oil slips as rates dip

Commodities crumble, led by oil; Peak Fedspeak of the week; Markets digest recent gains and look for direction

Rise and shine, everyone!

Recapping the markets as we prepare for the US open:

  • S&P futures are little changed in Wednesday morning trading after US equities finished mostly higher on Tuesday. S&P was up for a seventh straight session and Nasdaq was up for an eighth straight day on tech strength. Treasuries narrowly mixed though yields higher on the week. Dollar index up nearly 0.2%. Gold off 0.2%. Bitcoin futures down 1.6%.

    Source: FinViz

  • WTI crude is down 0.8% after losing nearly 4.5% on Tuesday and falling to lowest level since July. The uptrend seems to be violated, with sellers firmly in control. Geopolitical tensions are no longer the focal point of price discovery. Long positioning is now the lowest in years in the WTI contract.

Asia and Australia

  • Asian stock markets experienced declines, with notable losses in Singapore due to a significant drop in SingTel shares. Japan's Topix index also underperformed, while South Korea's Kospi index saw losses but remained higher week-to-date (WTD).

  • Initial gains in markets such as India were reduced, while Australia and Taiwan saw modest increases. Mainland China's markets performed relatively better, though they still ended lower, and Hong Kong's Hang Seng index reversed early gains.

  • Recession concerns lingered due to tightening financial conditions and weaker US economic data. Japan's market felt the impact of a more cautious investor sentiment, with some profit-taking observed, whereas South Korea's market volatility continued after the recent ban on short selling.

  • Hong Kong's market dipped but property stocks gained on news that Ping An might increase its stake in Country Garden.

  • The Reuters Tankan survey indicated that Japanese manufacturers' confidence improved for the first time since August, and the services sector sentiment also saw enhancement. However, the future outlook remained tepid.

  • China's central bank governor showed optimism about achieving the GDP growth target for 2023. South Korea plans to invest nearly $60 billion to bolster trade financing as exports show signs of recovery, with plans to open its onshore forex market by July.

  • US Treasury Secretary Yellen is scheduled to meet with Chinese officials, and President Xi is set to engage with US business leaders ahead of a meeting with President Biden, signaling potential developments in US-China relations.

Europe, Middle East, Africa

  • European stock markets showed a mixed performance, reflecting a continuation of the mostly negative trend from Tuesday. In contrast, Australia and Taiwan's markets traded higher.

  • There was a dampened risk appetite among investors following the previous week's market rebound. The bond market recovered as recent comments from Federal Reserve officials suggested a dovish stance, leading to speculation that further rate hikes might be unlikely.

  • The European Union is set to evaluate Ukraine's reforms necessary for accession talks. ECB's Nagel emphasized the need for caution despite a downward inflation trend, while other ECB officials commented on interest rates and inflation management. BOE Governor Bailey highlighted risks of market fragmentation.

  • Eurozone finance ministers are scheduled to meet to discuss inflation and policy coordination, amid signs of easing German inflation and increased consumer inflation expectations according to an ECB survey. Eurozone retail sales continued to decline in September.

The Americas

  • The market’s focus is now on Federal Reserve Chair Powell's upcoming comments to evaluate the probability of the end of rate hikes in the US.

  • Powell will be the main highlight at 09:15, though comments coming at Fed's Division of Research and Statistics Centennial Conference and no Q&A expected. Cook, Barr and Jefferson also scheduled to speak today.

  • Some indicators suggest bullish market conditions are back, such as the breadth thrust we saw last week, though analysts warn that expectations for rate cuts in 2024 are overly optimistic. At MacroVisor we agree, and think 100 bps of cuts next year is a bit much unless something really does break.

  • Bulls focused on peak Fed policy, “Goldilocks” econometrics, contrarian signaling from some key positioning/sentiment indicators, positive seasonality trends, and corporate buybacks and stable 2024 earnings estimates.

  • Bears instead focused on the recent history of premature dovish policy expectations, recession fears from weakening global economic data, and lagged effects of financial conditions tightening and Fed rate hikes, the pickup in softer demand and macro uncertainty messaging from earnings transcripts, significant reductions to Q4 earnings estimates, diminishing earnings revisions breadth, and risks to 2024 earnings from disinflation compressing margins.

  • In addition, a $40B 10-year note auction with results due after 1:00 pm EST should get some outsized attention following the better takeaways from last week's refunding details. Setting the tone for the market’s appetite for US sovereign duration.

Chart of the Day

In a move that may bring a small bit of respite to home buyers, the US 30-year mortgage rate fell to 7.61% last week, after nearly hitting 8%. This led to a small increase in mortgage applications, but they remain at very low levels.


(News from Reuters, FT, Bloomberg; Calendars from Trading Economics and US Treasury)

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