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Earnings optimism continues to drive US and global equity markets higher, with the S&P 500 index yesterday posting a fresh record closing high in the 4560s after gaining 0.5% on the session, while the Nasdaq 100 rallied over 1.0% (though closed just over 1.0% below record highs printed back in September). There was a lot of focus on a 12% spike in Tesla’s (TSLA) share price which took the company’s market capitalisation above $1T (the first automaker to do so) following a goliath 100K orders of its electric vehicles from rental company Hertz. Meanwhile, FB shares are up north of 2.0% in pre-market trade after a solid earnings report after the close last night which also saw the co. up its share buyback scheme by $50B. This is giving tech a broader boost and Nasdaq 100 futures are doing their best to close the gap to the record highs in pre-market trade this morning, up a further 0.5% following yesterday’s more than 1.0% gain. At present, the tech-heavy US index is trading around the 15.6K mark, not far from record levels printed back at the start of September just above 15.7K. S&P 500 and Dow futures, meanwhile, are also getting in on the spoils and are up 0.3-0.4% each (E-mini S&P 500 future now at 4575), mirroring the broadly positive tone being seen in European equity markets (the Stoxx 600 is up about 0.5% at just under 475 and is within striking distance of the record levels it posted back in August just above 476). Earnings remain in the spotlight with Microsoft and Alphabet (Google’s parent company) both set to report today ahead of Apple and Amazon later in the week and will likely remain a key driver of risk appetite.
US and European equity markets are thus shrugging off what was ultimately a much more mixed tone during Asia Pacific trade; Japanese and South Korean markets were buoyed in tandem with their global peers but Chinese markets were under pressure as fears about financial stability within the property development sector remained at the forefront; large Chinese developer Modern Land missed a $250 debt repayment and a Bloomberg report talking about how a record number of Chinese property companies are currently defaulting was doing the rounds. Evergrande, one of the countries’ largest and most indebted developers, avoided default last week, but has a number of key payments coming up, including a $47.5M payment at the end of the week ahead of a further $338M in November and December – if Evergrande defaults, this will be a catalyst for a downturn in risk appetite that could rock global, not just regional, markets. But there was some good news; US Treasury Secretary Yellen and Chinese Vice Premier Lui He were revealed to have recently engaged in discussions about the global economy and trade relations, a discussion which were reportedly constructive and will continue.
Looking at other markets; inflation expectations in Europe and the US continue to push higher, with US 5-year breakevens back above 3.0% (record highs since the 5-year TIPS started trading 20 years ago) and 10-year breakevens near 20-year highs in the mid-2.60s%. Energy prices continue to trade with their recent positive bias intact and this is likely the main driver; recent chatter from meteorologists about the potential for a colder than usual November saw US natural gas prices spike 12% yesterday (their largest one day gain so far this year) and this at the time pushed front-month WTI futures above $85.00 and front-month Brent above $86.50. Goldman Sachs’ new forecast for Brent was widely publicised yesterday too; their new year-end target is for Brent to hit $90 amid tight global market conditions, with high gas prices resulting in oil-switching that could add a further 1M barrels per day to oil demand. EU leaders will be meeting today to discuss the energy crisis and oil traders will also be keeping an eye on the latest weekly API inventory report ahead of the official inventory report on Monday. Also, stay tuned for OPEC+ commentary ahead of next week’s meeting where the cartel is expected to stick to its current plans of boosting output by 400K barrels per day per month until it has fully unwound its production cuts by mid-2022.
Despite the fact that long-term inflation expectations have been pushing higher, long-term US yields in the US have actually continued to drop in the past few sessions, driven by a fall in long-term real yields. Take the US 10Y; having been above 1.70% last Friday, it’s now fallen back to 1.62% and may well test 1.60%, amid a sharp drop in 10-year TIPS (real) yields back under the -1.0% mark. But the pullback in short-end US yields has been shallower and US 2-year yields are actually picking up this morning and heading back towards 0.45%, having nearly struck 0.50% last week. That suggests expectations for a more front-loaded Fed tightening cycle remain alive (hence higher front-end yields), but that expectations for the Fed’s long-term policy stance to be highly accommodative remains a strong conviction (hence deeply negative long-term real yields).
Finally, looking at FX markets; conditions remain on the subdued side given the plethora of key macro G10 economic events coming up in the latter half of the week. Recall this includes Australian Q3 CPI and the BoC’s latest policy decision on Wednesday, policy decisions from the BoJ and ECB plus US Q3 GDP on Thursday, and Eurozone flash October CPI, Eurozone Q3 GDP data, US September Core PCE and Canadian August GDP on Friday. Resultantly, the US dollar lacks conviction with the DXY a little softer and still struggling to reclaim the 94.00 level, with fellow FX havens CHF and JPY also struggling amid risk-on vibes particularly in global stock markets. CAD and EUR are both about 0.2% higher on the day versus the buck with EURUSD comfortably above 1.1600 for now, while the best performers on the day are AUD, NZD and GBP, each up about 0.4% versus the buck. Sterling is performing well despite the dovish tone to remarks from BoE MPC member Tenreyro yesterday, who expressed greater caution on rate hikes as expected, citing uncertainty regarding the end of furlough scheme as a reason to wait. A strong CBI Distributive Trades survey result this morning for the month of October may well be helping the pound as it could signal a shift in momentum towards gradual improvements in UK consumer sentiment in the coming months, though this seems unlikely amid high energy costs, inflation fears, supply chain disruption driven shortages. Perhaps the pound is also supported amid a lot of focus on the UK Chancellor’s Budget announcement tomorrow, with various spending plans/policy changes have already been unveiled including 1) unfreezing of public sector pay, 2) hike to minimum wage and 3) £6B for the NHS, which may be giving a sense of loosening of purse strings a little.
In terms of the key events on the calendar today; we have monthly US house price data at 1400BST followed by the US Conference Board’s Consumer Sentiment survey out at 1500BST. Confidence likely deteriorated further in October, with the alternative University of Michigan Consumer Sentiment survey out earlier in the month showing as much amid rising inflation concerns.
