EUROPEAN MARKET WRAP: DXY continues its ascent, whilst higher yields weigh on equities

• Another session of gains for the USD; upside halted by softer ISM prices paid


• Stocks on track for another session of losses with Stoxx 600 down 1% in higher yield environment


• Geopolitical risks linger as Iran vows to punish perpetrators of Kerman explosions

MACRO

EQUITIES

• European bourses, Stoxx 600 (-1.0%), initially began the morning around the unchanged mark before then succumbing to hefty losses as broader risk sentiment deteriorated.


• Sectors held a mostly negative bias; Optimised Personal Care Drug and Grocery remained at the top of the pile, assisted by gains in Sainsbury’s (+1.1%), Marks & Spencer (+2.1%) and Tesco (+1.6%) following a positive Kantar update in which supermarkets saw their highest level of transactions in December. Basic Resources lagged amid lower commodity prices and a broader negative risk tone in Asia overnight.


• The CAC 40 (-1.5%) is the European laggard, hampered by losses within the Luxury sector; LVMH (-3.6%), Kering (-3.6%) and Hermes (-2.5%) extended losses possibly in tandem with a broker downgrade for Burberry (-2.7%) and amid lower Chinese trade. The SMI (+0.2%) remained in the green, assisted by gains in Novartis (+3.7%) and Roche (+3.1%), which both received positive broker updates on their price targets and ratings respectively.


• In terms of stock specifics, Alstom (-11.1%) sank at the open and continued to extend losses with some desks attributing the sell-off to Barclays cutting its price target to EUR 8/shr (prev. 8.5, current. 10.8).


• 
  US Futures (ES -0.6%, NQ -0.7%, RTY -1.4%) are entirely in the red, with clear underperformance in the economy-linked Russell. ISM Manufacturing & JOLTS, particularly the Prices Paid component, caused a modest dovish reaction in stocks, though equities remained well within negative territory.

FX

• 
  DXY rose throughout the session from a 102.07 base to make a high of 102.60 amid a firmer yield environment. Barkin (2024 voter) refused to rule-out more rate hikes. ISM Mfg beat expectations (47.4 vs. Exp. 47.1), however was accompanied by softer prices paid and sub-Exp. JOLTS which saw USD halt its advances.


• 
  EUR fell victim to the firmer USD, declining from a 1.0965 high to a 1.0911 low (matched 11th Dec low). Also weaker vs. GBP with EUR/GBP cross finding support at 100DMA (0.8642),


• 
  GBP managed to stay afloat vs. the USD with some help from softer EUR. Cable high of 1.2652 still some way off yesterday's best of 1.2759.


• 
  JPY bad start to the year continued as yield plays pushes the pair from a low yesterday of 140.98 to a high of 143.40. Japanese participants return to market on Thursday.


• 
  Antipodeans AUD and NZD both softer vs. USD but AUD more so with AUD/NZD back below 1.08. 4th consecutive down session for AUD/USD with a low today of 0.6707 vs. 0.6871 high on 28th Dec.


• 
  CAD softer vs. USD for a fourth consecutive session after USD/CAD printed a 1.3177 base on 27th Dec. High watermark for the pair today was 1.3364.

FIXED

• Overall, EGBs began the session under modest pressure but picked up as the broader risk tone soured. Fed’s Barkin left rate hikes on the table while US ISM Manufacturing prices paid alongside JOLTS sparked a dovish reaction.


• ISM Prices Paid component came in below the forecast range at 45.2 (exp. 47.5) falling from the prior 49.9; sparking a dovish reaction, lifting EGBs back to earlier highs and lifting USTs to a new 112.07 peak with 10yr yield hitting 4% for the first time since early Dec.


• 
  Gilts continues to underperform their European counterparts with specifics light but desks cognisant of the five scheduled auctions from the UK DMO for January; commencing on Thursday with a 2bln 3.75% 2038 sale.


• 
  Bunds were unreactive to German unemployment figures or an unremarkable Schatz sale, which was arguably a slight disappointment given the line’s recent history, though a softer January outing conforms to historical precedence.

COMMODITIES

• 
  Crude benchmarks are set to end the European session with marked gains. Action that is largely a function of protest activity at Libya’s El Sharara oil field, 300k BPD.


• Newsflow which has superseded initial crude pressure that was in play during the European morning and is largely a continuation of the pullback which began in the second half of Tuesday’s session with specifics light.


• As it stands, WTI and Brent are just off respective USD 71.24/bbl and USD 76.90/bbl session peaks. A slight pullback given some discrepancy in reporting over the extent of the El Sharara shutdown.


• Spot gold drifted throughout the session after initial contained performance given an absence of catalysts. Downside which occurred as a function of USD strength and despite the tepid risk tone.


• 
  Base metals have languished in European trade, despite some fleeting support for the likes of iron in APAC trade; pressure stemming from the risk tone and USD, as mentioned.

OTHER NEWSFLOW

EUROPEAN DATA

• German Unemployment Chg SA (Dec) 5.0k vs. Exp. 20.0k (Prev. 22.0k)


• German Unemployment Rate SA (Dec) 5.9% vs. Exp. 5.9% (Prev. 5.9%)


• Swiss Manufacturing PMI (Dec) 43.0 (Prev. 42.1)

CENTRAL BANKS

• 
  Fed's Barkin (2024 voter) says Fed is "making real progress" on inflation while economy remains healthy; six-month core PCE now "just below" 2% target; potential for additional rate hikes "remains on the table". March rate call is a pretty long way away

GEOPOLITICS

• Iran vows to punish perpetrators of Kerman explosions, according to Mizan news agency.


• Turkish Foreign Minister says US Secretary of State Blinken will visit Turkey on Saturday

OTHER NEWS

• Some of China's large banks tighten interbank lending standard for smaller peers to mitigate credit risk, via Reuters citing sources.


• Downside in Bitcoin attributed to report from Matrixport who project a January rejection for Bitcoin Spot ETFs by the SEC, cautioning traders to hedge long exposure.

N. AMERICAN DATA

• US ISM Manufacturing PMI (Dec) 47.4 vs. Exp. 47.1 (Prev. 46.7)


• US ISM Mfg Prices Paid (Dec) 45.2 vs. Exp. 47.5 (Prev. 49.9)


• US ISM Manuf Employment Idx (Dec) 48.1 vs. Exp. 46.1 (Prev. 45.8)


• US ISM Manuf New Orders Idx (Dec) 47.1 (Prev. 48.3)


• US JOLTS Job Openings (Nov) 8.79M vs. Exp. 8.85M (Prev. 8.733M, Rev. 8.852M)


• US MBA Mortgage Applications w/e -10.7% (Prev. -1.5%)

03 Jan 2024 - 15:15- EquitiesResearch Sheet- Source: Newsquawk