Futures Fall As Rally Fizzles, Dollar Spikes Amid Fresh Doubts Of Fed Pivot

After the best 2-day rally since April 2020, the best start to a new quarter since 2009 and the best start of a Q4 since 2002, the powerful rally fizzled and US equity-index futures fell as investors pushed back on bets for less hawkish central banks amid the latest surge in oil, and sought more evidence that inflation is moderating. In other words, unlike yesterday, stock algos finally noticed what oil was doing.

Stock algos still haven’t noticed what oil is doing. impressive

— zerohedge (@zerohedge) October 4, 2022

Futures tracking S&P 500 and Nasdaq 100 dropped 0.9% each after the underlying indexes scaled two-week highs on Tuesday. And as the dollar rebounded for the first time in three days, Treasuries slid across the curve as oil swung ahead of the OPEC+ meeting today where the cartel is expected to cut output by as much as 2mmb/d.

In premarket trading, Twitter dropped 0.4% after Tuesday’s jump. Shares remain nearly 5% below Elon Musk’s $54.20 offer price as analysts say there are still “unknowns” around the transaction, although they expect the deal to go through. Further challenges lie ahead for Musk as he will now need to fix the social-media firm’s issues, analysts say. Here are the other notable premarket movers:

• Church & Dwight shares rise 0.6% in US premarket trading, after the consumer-products maker was upgraded to buy from hold at Deutsche Bank, with the broker saying that, while the stock has taken a break, it is not “broken.”
• Emerson Electric (EMR US) shares rise as much as 2.9% in US premarket trading after the industrial-tech company was said to be in talks with buyout firm Blackstone to sell some of its commercial and residential solutions assets. Citi said a potential divestiture could give Emerson the opportunity to further simplify its portfolio.
• US- listed Macau casino stocks could be in focus after Hong Kong- listed peers surged amid optimism over a travel rebound during the seven-day Golden Week holiday period. Watch Wynn Resorts, Las Vegas Sands, Melco Resorts and MGM Resorts

Today’s reversal, which followed the biggest drop in job openings on record (outside of the covid lockdowns), comes as a growing number of money managers is cautioning (again) that expectations for a so-called Fed pivot are (again) overdone and risk ignoring the economic pain that would underpin such a dovish tilt should policymakers opt for it. With several Fed officials reiterating their focus on reducing inflation, US jobs numbers due Friday and a new earnings-reporting season may provide the next catalysts for markets.

“A dovish pivot requires more evidence of weaker growth and a decisive fall in inflation,” Emmanuel Cau, the head of European equity strategy at Barclays Plc, wrote in a note. “We doubt equities are out of the woods yet.”

Elsewhere, as noted above, OPEC+ is considering its biggest production cut since 2020, a move Washington is trying to head off with furious diplomatic efforts. The group is set to discuss a cut to its output limits of as much as 2 million barrels a day, using current targets as a starting point. While a significant move, the actual impact on global supply would be smaller as several countries pump below their quotas/

Meanwhile, investors’ attention remained focused on Friday’s nonfarm payrolls data, which is expected to show 263,000 jobs were added in September: “For the market to continue higher, the jobs data will have to be in line with, or short of expectations,” said Lindsey Bell, chief markets and money strategist at Ally.

Europe’s Stoxx 600 halted its best three-day advance since November 2020. The gauge fell 0.7%, trimming some of its 5.3% rally since Thursday. Real estate, auto-parts and retail shares slid the most. Here are some of the biggest European movers:

• Shop Apotheke shares gain as much as 11%, the most since early July, after preliminary third-quarter results beat expectations. Analysts say it was a strong quarter, with adjusted Ebitda remaining in positive territory.
• Infineon rises as much as 4.8%, leading semiconductor peers higher, with analysts from Citi and Jefferies bullish on the chipmaker’s near-term demand and longer-term growth following a conference call with the company.
• Anima Holding rises as much as 7.3%, the most intraday since April 8, and is among the day’s top performers on the FTSE Italia All-Share Index; Reuters reported on Tuesday that Italy favors keeping the company in domestic hands and could raise the stake it holds through Poste Italiane.
• Tesco drops as much as 3.9% after the UK grocer provided guidance that Jefferies analysts say is “more cautiously nuanced,” while Bernstein analysts flagged possible margin pressure.
• Credit Suisse declines as much as 3.9% as Societe Generale analysts say the firm needs to aggressively deleverage its investment banking operations.
• The Stoxx 600 Automobiles & Parts Index declines, the worst- performing subgroup on Wednesday, led by parts suppliers and tiremakers. Continental AG drops as much as 7.2%, Valeo -6.4%
• Shares in Avanza and Nordnet slide as much as 9.8% and 8.5%, respectively, after the Swedish retail trading and savings platforms presented their latest monthly statistics, which both showed negative net savings in September.
• Vallourec drops as much as 8.9%, falling below the price at which stockholders sold 14.4m shares after the close Tuesday.

Earlier in the session, equity markets gained ground across Asia, catching up with overnight moves in the US. Hong Kong stocks posted their best rally since March after a one-day break amid optimism that the global monetary policy tightening cycle will ease. The MSCI Asia Pacific Index climbed as much as 2.1% on Wednesday, led by a surge in consumer discretionary and tech stocks such as TSMC and Alibaba. That brings the measure’s two-day rally to about 4.6%, the best since March. Stocks in Hong Kong were the region’s top performers, with the benchmark Hang Seng Index jumping almost 6% as trading resumed following a holiday. A gauge of Chinese technology stocks listed in the city rallied more than 7%. Thin trading with the onshore market closed for the Golden Week holiday likely amplified price gains. Anticipation has grown that the Federal Reserve may be less aggressive in hiking interest rates following a decline in US job openings. Such expectations had sent global equities surging, with some strategists forecasting a near-term trough in the battered Asia market. 

“There’s a high probability that a bottom can form in emerging market and Asian equities from current levels as “signs of capitulation are abundant,” Morgan Stanley strategists including Jonathan Garner said in a note. “Valuations are now at or approaching prior cycle trough” after a major bear market in both regions, they added. Traders have plenty to digest this week from US payrolls to China’s Golden Week spending to reassess their wagers. While any weakness in US jobs data may further fuel bets for a slower pace of Fed tightening, Asian markets may continue to face headwinds should China spending disappoint. India markets are closed Wednesday for a national holiday.

Japanese equities climbed for a third day, as a decline in US job openings further boosted investor hopes for slower Fed rate hikes.  The Topix Index rose 0.3% to 1,912.92 as of market close Tokyo time, while the Nikkei advanced 0.5% to 27,120.53. Keyence Corp. contributed the most to the Topix Index gain, increasing 2.7%. Out of 2,168 stocks in the index, 1,047 rose and 1,009 fell, while 112 were unchanged. “The rise in the Japanese stocks is largely due to the decline in the US interest rates,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The economy and exchange rate is at the right temperature for stocks at the moment with a lack of strength in the US economy which has pushed the interest rate down.” 

Australian stocks rose to near a three-week high: the S&P/ASX 200 index rose 1.7% to close at 6,815.70, extending gains into a second day, spurred by the central bank’s smaller-than-expected hike. The rally, which puts the benchmark at the highest since Sept. 15, tracks the best two-day run for US equities in over two years, as investors start to anticipate that the Fed will also slow its aggressive tightening path. In New Zealand, the S&P/NZX 50 index rose 0.8% to 11,180.01. The nation’s central bank hiked rates by a half-percentage point for a fifth consecutive meeting, signaling more to come. 

In rates, Treasuries remained near lows of the day after selling off during European morning, following bigger losses across gilt curve as BOE hike premium is added. S&P 500 futures are down, paring a portion of Tuesday’s 3% advance. Treasury yields are cheaper by 2.5bp to 6bp across the curve, the 10Y yield is up to 3.67%, with losses led by intermediates, knocking 5s30s spread slightly flatter after a strong two-day steepening move; UK yields, higher by as much as 10bp, lead selloff in core European rates.

In FX, the Bloomberg Dollar Spot Index bounced from nearly a two-week low in early European trading and the greenback was steady or higher against all of its Group-of-10 peers.

• The euro retreated by as much as 0.6% to 0.9923 after trading just below parity against the dollar on Tuesday. The German bond curve bear steepened. Italian bonds underperformed euro-area peers, ahead of the ECB’s non-monetary policy meeting, where officials are expected to discuss reducing the central bank’s balance sheet, according to people quoted by Bloomberg. Money markets were also raising ECB tightening wagers
• The pound fell as much as 0.8% to $1.1380, snapping six days of gains. Gilts fell
• The New Zealand dollar was steady versus the US dollar; it earlier jumped after the RBNZ increased its official cash rate to 3.5%, by delivering a fifth straight half percentage point hike
• The yen and the Swiss franc also held up reasonably well amid a demand for havens

In commodities, WTI trades within Tuesday’s range, falling 0.4% to near $86.20; OPEC+ expected to cut oil output. Spot gold drops roughly $12 to trade near $1,715/oz. Oil demand in top importer China may pick up after Beijing released trade allowances enabling its vast refining industry to ship in more crude and export more fuel. Local refiners and traders have been handed two separate batches of crude-import quotas for the remainder of this year and early 2023, as well as a 15 million ton fuel-export quota, according to JLC. Consensus heading into OPEC is that there will be a sizeable production cut announced, the magnitude of which is unknown but source updates are becoming increasingly skewed towards the top-end of a 0.5-2.0mln range.

Bitcoin is under modest pressure in very slim ranges just above the USD 20k mark, parameters which are well within yesterday’s/recent sessions levels.

To the day ahead now, and data releases include the final services and composite PMIs for September, as well as the ISM services index from the US. Otherwise, there’s French industrial production for August, the ADP’s report of private payrolls from the US for September, and the US trade balance for August. Finally from central banks, we’ll hear from the Fed’s Bostic.

Market Snapshot

• S&P 500 futures down 0.9% to 3,768.75
• STOXX Europe 600 down 0.9% to 399.21
• MXAP up 1.8% to 144.75
• MXAPJ up 2.5% to 470.65
• Nikkei up 0.5% to 27,120.53
• Topix up 0.3% to 1,912.92
• Hang Seng Index up 5.9% to 18,087.97
• Shanghai Composite down 0.6% to 3,024.39
• Sensex up 2.2% to 58,065.47
• Australia S&P/ASX 200 up 1.7% to 6,815.68
• Kospi up 0.3% to 2,215.22
• German 10Y yield little changed at 1.95%
• Euro down 0.5% to $0.9936
• Brent Futures down 0.2% to $91.63/bbl
• Gold spot down 0.8% to $1,711.81
• U.S. Dollar Index up 0.60% to 110.72

Top Overnight News from Bloomberg

• The president of the European Commission, Ursula von der Leyen, called for boosting common funding for the European Union’s strategy to shift away from Russian fossil fuels and signaled she’s open to discussing a temporary broad price cap on gas
• The European Union backed a new package of Russia sanctions that includes support for a price cap on oil sales to third countries, according to people familiar with the issue
• Russian gas supplies to Italy via Austria resumed, bringing some temporary relief to gas prices in Europe
• France plans to recoup part of windfall profits made by electricity producers to bolster aid to companies and local governments struggling to pay rising bills
• Saudi Arabia’s sovereign wealth fund started taking orders for its inaugural dollar green bond as the oil-rich state looks to burnish its environmental credentials
• OPEC+ is considering its biggest production cut since 2020, a move Washington is trying to head off with furious diplomatic efforts. The group is set to discuss a cut to its output limits of as much as 2 million barrels a day, using current targets as a starting point
• The world is careening toward recession and buying old haven reliables Treasuries and the yen still offers the best protection, according to Fidelity International

A more detailed look at global markets courtesy of Newsquawk

Asia-Pacific stocks traded higher across the board as the region sustained the momentum from Wall St where the major indices extended their rally after soft data releases stoked hopes of a Fed pivot. ASX 200 continued to benefit following RBA’s recent rate hike slowdown with tech, consumer discretionary and financials leading the advances, while M&A prospects added to the optimism with Link Administration Holdings boosted after it received further proposals from Dye & Durham to acquire some of its businesses. Nikkei 225 reclaimed the 27k level although gains were capped by the lack of fresh catalysts and amid lingering geopolitical tensions after the US, Japan and South Korea responded to North Korea’s recent missile launch with military drills and even the test firing of four surface-to-surface missiles by the US and South Korea. Hang Seng outperformed as it played catch up to yesterday’s advances on return from its holiday closure and with HSBC among the biggest gainers as it explores a multibillion-dollar sale of its Canadian business.

Top Asian News

• RBNZ hiked the OCR by 50bps to 3.50%, as expected. RBNZ stated that the Committee agreed it is appropriate to continue to tighten policy and members agreed that monetary conditions needed to continue to tighten until inflation was back in target range. RBNZ also stated that core consumer inflation is too high and labour resources are scarce, while they considered whether to increase the OCR by 50bps or 75bps and some members highlighted that a larger increase in the OCR now would reduce the likelihood of a higher peak in the OCR being required.
• Mizuho to Acquire About 20% of Rakuten Securities: Nikkei
• Malaysia Palm Oil Stockpiles May Surge to Largest in Three Years
• Morgan Stanley Says Bottom Near for Emerging-Market Equities
• Gold Falls After Two-Day Surge With Fed Rate Stance in Focus
• SK E&S Removes LNG Claim Amid Greenwashing Crackdown

European bourses are under pressure following the strong gains seen in Tuesday’s session with fresh newsflow fairly limited heading into key US data, Euro Stoxx 50 -1.1%. In Europe, sectors are lower across the board with underperformance in Autos, Telecoms and Banking names. Stateside, ahead of those metrics which will be eyed for further clues around a ‘pivot’, futures are under similar pressure though magnitudes are a touch more contained, ES -0.9%. TSMC (2330 TW) has reportedly begun negotiating prices with its suppliers of equipment and materials for 2023, considering price reductions of at least 10%, according to sources via DigiTimes.

Top European News

• Votes to implement the UK government’s “mini-budget” will not take place until next spring in an attempt to put off potential rebellions until 2023, according to the understanding of the Telegraph.
• EU ambassadors have now approved all details of the Russian sanctions package and a so-called written procedure launched that will finish at 09:00BST; publication will be in the EU official journal some time tomorrow, according to Radio Free Europe.
• Russia says it does not intend to use additional budget revenues to purchase FX or gold, via Reuters.
• U.K. Sept. Composite PMI 49.1 vs Flash Reading 48.4
• European Gas Slides as Russia Resumes Flow to Italy Via Austria
• EU Chief Urges Funds for Energy Pivot, Floats Gas Price Cap
• Even Deutsche Bank Sees Paris as a Rising Hub for Traders
• Gold Falls After Two-Day Surge With Fed Rate Stance in Focus

FX

• USD has benefited from a rebound in yields and perhaps on phycological/technical grounds, DXY at a 110.84 high.
• Action which has come to the modest detriment of peers across the board, with GBP lagging into a speech from PM Truss after brief PMI-induced upside.
• EUR/USD got within touch of parity, but failed to convincingly test the mark and has since faded back to 0.99.
• NZD the relative outperformer after the RBNZ stuck with consensus for a 75bp hike in contrast to the RBA’s slower approach earlier in the week.

Fixed Income

• Core debt is pressured across the board with Gilts lagging despite upside from a well-received DMO outing as the benchmark struggles to get a foothold above 98.00.
• Action which has lifted yields across the board, brining the UK 10yr back in reach of 4.0% while the US curve is a touch more mixed.
• On this, USTs are slightly more contained than peers with downside of around 20 ticks as participants await key data readings.

Commodities

• Crude benchmarks are currently dictated by broader risk and are modestly softer as such, though attention will turn to the OPEC gathering shortly.
• As it stands, consensus heading into it is that there will be a sizeable production cut announced, the magnitude of which is unknown but source updates are becoming increasingly skewed towards the top-end of a 0.5-2.0mln range.
• US Private Inventory (bbls): Crude -1.8mln (exp. +2.1mln), Cushing +0.9mln, Distillates -4.0mln (exp. -1.4mln), Gasoline -3.5mln (exp. -1.3mln)
• US is reportedly pushing OPEC+ nations not to proceed with an output cut and is arguing to OPEC+ that economic fundamentals do not support an output cut, according to a source familiar with the matter cited by Reuters.
• UN official may visit Moscow, Russia next week to discuss a grain deal, via Ria citing the Russian foreign ministry.
• Spot gold is once again moving at the whim of the USD which has continued to firm throughout the morning and thus the yellow metal has been pushed back to the USD 1710/oz mark and away from the 50-DMA

US Event Calendar

• 7am: U.S. MBA Mortgage Applications -14.2%, prior -3.7%
• 8:15am: U.S. ADP Employment Change, Sept., est. 200k, prior 132k
• 8:30am: U.S. Trade Balance, Aug., est. -$67.7b, prior -$70.7b
• 9:45am: U.S. S&P Global US Services PMI, Sept. F, est. 49.2, prior 49.2
• 9:45am: U.S. S&P Global US Composite PMI, Sept. F, est. 49.3, prior 49.3
• 10am: U.S. ISM Services Index, Sept., est. 56.0, prior 56.9

Central Banks

• 9:15am: Fed’s Kashkari Takes Part in Moderated Q&A
• 4pm: Fed’s Bostic Discusses Inflation

DB’s Jim Reid concludes the overnight wrap

Another reminder that we’ve recently published our long-term asset study. Yesterday, we updated some of the bond and risk parity charts in the presentation version to account for month-end prices. You can find the link to that in the executive summary of the main report, which you can find here.

One more plug, we’re hosting a call on the US mid-terms next Tuesday with perspectives from our public affairs group, US economics, and markets. This event will quickly come at us over the coming weeks. Register here.

The rip-roaring start to Q4 has continued over the last 24 hours, with a significant cross-asset rally occurring thanks to speculation that central banks could soon ease up on their campaign of rate hikes. This positive mood music was evident from the start of the session, having had a significant boost from the Reserve Bank of Australia’s decision, which we covered yesterday, to only hike by 25bps rather than the 50bps expected. We’ll have to see if that proves to be the first in a trend, but investor risk appetite showed no sign of abating as the day went on. Australia probably shouldn’t be a template for the US or Europe but the move perfectly fitted and encouraged the current narrative. Indeed, the rally gained further steam after US data showed an unexpectedly large decline in job openings, thus raising additional hopes that inflationary pressures could be easing.

Against that backdrop, there were substantial gains for equities, credit, bonds and commodities, with the S&P 500’s gains now at +5.73% over the last two trading sessions, which is the first time that’s happened since April 2020.

Although the Fed and other central banks have done little to validate this idea we’ll get a dovish pivot, it’s clear that markets are pre-empting the possibility again, in a similar manner to what happened in July. This is mostly manifesting itself in markets moving to take out the rate hikes they’d previously been expecting for next year. For instance, the rate priced in by Fed funds futures for December 2023 came down another -3.8bps yesterday to 4.10%, moving even further away from its 4.50% peak just over a week ago. That drove real 10yr Treasury yields -5.2bps lower as additional tightening got priced out, but that decline was more or less offset by the subsequent increase in breakevens that left nominal 10yr yields just -0.6bps lower. They are flat in Asia.

We’ll have to see if this narrative shift survives Friday’s payroll data and next week’s CPI print, but in the meantime the JOLTS report for August helped fuel the idea that the labour market is cooling off. In particular, the number of job openings fell to 10.053m (vs. 11.088m expected), which is their lowest level since July 2021, and the ratio of job openings to unemployed workers fell back to 1.67, which is the lowest since November 2021. For reference though the pre-covid levels for these two were around 7.2m and 1.2 respectively so the labour market is still tight but getting less so. The hope is that if these trends continue, that would mean that it might be possible to cool off the labour market with a fall in job openings, but without a simultaneous rise in unemployment.

Over in Europe nominal sovereign bond yields had a more sustained decline, with those on 10yr bunds (-4.6bps), OATs (-5.1bps) and BTPs (-6.3bps) all moving lower on the day. Those moves were supported by a fresh decline in European natural gas prices, with futures down by -4.69% yesterday to hit their lowest level since late July. That followed weather forecasts suggesting that temperatures are set to be higher than normal over the next couple of weeks in Europe, which would help reduce demand for gas and lower the risk of shortages occurring. In addition, one official who did openly float the idea of a new phase of rate hikes was Bank of France Governor Villeroy. He said that the ECB should get to neutral “without hesitation”, but beyond that he said “We could start then a second part of the journey, a more flexible and possibly slower one”. On the other hand, President Lagarde didn’t explicitly mention any easing yesterday, saying that inflation was “undesirably high” and that it was difficult to tell if it was at its peak.

With all said and done, equities soared on both sides of the Atlantic, with the S&P 500 (+3.06%) surging even more than it did on Monday. The advance was incredibly broad-based, and the 497 companies that moved higher in the index was actually the highest number so far in 2022. The more cyclical sectors did particularly well, including tech as the NASDAQ (+3.34%) saw even larger advances. Elsewhere in the tech space, news that Elon Musk was planning to finally move ahead with his much discussed purchase of Twitter saw the stock advance +22.24%, after having traded halted intraday. Meanwhile in Europe, the STOXX 600 (+3.12%), the DAX (+3.78%) and the CAC 40 (+4.24%) all saw their strongest daily performances since March.

Here in the UK, there were further developments on the policy side, as Chancellor Kwarteng reiterated that the government would still be releasing their medium-term fiscal plan on November 23, contrary to reports from multiple outlets that it was set to be brought forward. That came as sterling strengthened for a 6th day running, gaining another +1.35% against the dollar to move back above $1.14 again, which also marked its longest run of consecutive gains in nearly 18 months. There were some interesting movements in gilts too. The 10yr yield came down by -8.6bps, but those on longer maturities saw sharp rises after the BoE said that they didn’t buy any of the gilts tendered on Tuesday as part of its emergency intervention, and yields on 30yr gilts (+14.9bps) closed back above 4% for the first time since the intervention began. Keep an eye out for any further developments today, as Prime Minister Truss will be delivering her speech to the Conservative Party conference.

Overnight in Asia, major indices are higher. The Nikkei (+0.41%), KOSPI (+0.20%) and Hang Seng (+5.38%) are notching gains as Chinese markets remain closed for holidays. Hong Kong markets are catching up after Tuesday’s holiday. Futures are showing some pullback in the US (S&P 500 -0.5%) and Europe (Stoxx 50 -0.4%) though.

There wasn’t much other data of note yesterday, with the US factory orders for August remaining unchanged, in line with expectations. Otherwise, Euro Area PPI hit a record high of +43.3% in August on a year-on-year basis, just above the +43.2% reading expected.

To the day ahead now, and data releases include the final services and composite PMIs for September, as well as the ISM services index from the US. Otherwise, there’s French industrial production for August, the ADP’s report of private payrolls from the US for September, and the US trade balance for August. Finally from central banks, we’ll hear from the Fed’s Bostic.