Friday Oct 27 2023 10:18
4 min
Oil rallied overnight as the US struck Iran-linked targets in Syria, raising the escalation tail risk somewhat. Remember just how hard it is to price geopolitical risk premia – traders are notoriously bad at this. The thing to look at is this: if there is no disruption and growth really takes a hit in Q4 as some are suggesting it will, then you could end up with ample supply and see a real narrowing of time spreads as traders cut front month longs. That’s not to say the geopolitics goes away, just that the fundamentals will reassert dominance at times.
Stocks were down this morning at the open before turning up a tad as of send time, still seemingly set to end a drab week on a suitably mediocre note. The FTSE 100 trades a little firmer around the 7,360 area with BP and Shell +1.5-2% lifting the index to a modest +0.15% gain with a similar gain in Frankfurt . We had three big >1% losses last week but a steadier profile this week with pretty small intraday movements, though yesterday’s session saw a more decisive move to the downside as it shed 0.8%. Like its counterparts the DAX and CAC, the FTSE 100 has shed more than 3% in October. The CAC lagged European peers in early trade this morning, down almost 1% with Sanofi plunging 15%.
The Nasdaq composite shipped almost 2% to fall further into correction territory, whilst the S&P 500 dipped into correction territory at the lows. It’s almost 10% off the July peak and has seemingly relinquished the 200-day line for the time being. For the month of October, the Nasdaq is down 4.72% and the S&P 500 is off a bit more than 3.5%. Amazon results were better than expected Q3 results with cost cutting measures helping. The company reported an operating margin of 7.8%, the highest since the record 8.2% in early 2021. On AWS the initial results looked weaker than Microsoft and Alphabet, but CEO Andy Jassy said “we are encouraged by the strength of our [AWS] customer pipeline”. Shares rallied 5% after-hours, offering support to the US futures overnight.
The European Central Bank left rates unchanged, as expected. It also signalled that the peak is in and sounded rightly more cautious. There were tidbits for everyone – Lagarde said it was “totally premature” to discuss a potential cut, but noted the sharp drop in inflation in September and didn’t really lean on the upside risks to inflation from higher oil prices. It all just kind confirms the view from the September meeting – the bar for another hike is very high, so the question is one of duration...which is in effect a question of when are they going to cut?
US GDP smoking hot: real annualised growth at 4.9% - the same as China – and current dollar growth of 8.5%. It underlines the resilience of the economy in terms of headline figures but won’t do too much to influence next week’s Fed meeting. Having dipped early Thursday from nearly 5% to around 4.85%, the 10yr Treasury yield is a bit firmer this morning, giving a bit of life to USD.
Fed, BoE and BoJ + US Nonfarm payrolls. The Fed is expected to leave rates unchanged. Though it left the door open for another hike this year, markets have firmly priced out the chance that this will take place at its Oct 31-Nov 1st meeting. There seems to be a bit of uncertainty around Q4 growth and inflation trends remain encouraging – the Fed has already signalled it’s more about how long it leaves rates this restrictive than worrying too much about another hike.