EUROPEAN MARKET WRAP: DXY starts 2024 on the front foot as yields march higher

2nd January 2024

• Solid start to the year for the USD as DXY takes back 102 status


• Crude initially bolstered by geopolitics before slipping into the red


• Deterioration in risk sentiment puts Stoxx 600 on track to close lower

MACRO

EQUITIES

• European bourses, Stoxx 600 (-0.3%), dipped into the red, despite spending the early portion of the European morning firmer.


• Sectors held a mostly positive bias throughout the session, though succumbed to selling pressure leading to a more mixed environment. Telecommunications outperformed, propped up by Nokia (+2.1%), which shrugged off initial weakness after the Co. announced it would miss its FY23 targets. Energy held towards the top of the pile, after Crude prices posted gains of up to 2%, though subsequently pared the entire move. Technology lagged, in tandem with underperformance in the NQ and amid higher yields.


• The AEX (-0.5%) was the standout laggard, dragged down by index heavyweight ASML (-2.3%) as it cancelled shipments of some machines to China after a US request, via Bloomberg; additionally, their license has been partially revoked by the Dutch government.


• In terms of stock specifics, Maersk (+5.5%) was the best performer in the Stoxx 600 after the Co. suspended transits in the Red Sea for 48 hours following an attack by Houthis over the weekend.


• 
  US Futures (ES -0.9%, NQ -1.7%, RTY -0.3%) are weaker across the board, with the higher yield environment potentially weighing on sentiment. At the open futures bounced off worst levels, though ultimately remain well within negative territory. US Final Manufacturing PMI was revised slightly lower, though had little follow-through on equities.

FX

• 
  DXY - After a steady start, DXY rose from a base of 101.33 to a high of 102.19. No fresh fundamentals behind the move but it came alongside firmer yields (initially driven by crude gains and heavy US corporate supply) as well as technical support being lost for EUR/USD and Cable (see below). Soft Final Manufacturing PMI halted advances. Great attention ahead lies on ISM Mfg and JOLTS tomorrow, ADP and IJC Thu, NFP Fri.


• 
  EUR - Mainly driven by gains in the USD with price action exacerbated by loss of support at 1.10. EZ money supply and Final Mfg PMI had little sway. Session low of 1.0946 brought a cluster of pre-Christmas lows into view starting with Dec 21st at 1.0935.


• 
  JPY - Spent the entire session on the backfoot vs. the USD (note: Japan is away from market until Thurs). Rose from a 140.82 base to a 142.21 high. BoJ still expected to be the hawkish outlier in 2024.


• 
  GBP - Fell under the pressure of the firmer USD despite an encouraging start. Losses picked up after support at 1.27 evaporated, bringing Cable to a low of 1.2621 as risk sentiment deteriorated. Next downside target: 1.2615 (Dec 21st low).


• 
  Antipodeans - AUD outperformed its NZD counterpart at the start of the trade post-Chinese data and firmer iron ore prices with AUD/NZD above 1.08. Thereafter, AUD got hit by the rampant USD which saw the pair lose 0.68 status. NZD near the bottom of the G10 pile throughout the session.


• 
  CAD - Failed to benefit from the initially firmer crude price with the pair taking its lead from the firmer USD. Rose from a low of 1.3230 to a peak of 1.3323 with the next upside target at 1.3371 (Dec 21st high).

FIXED

• 
  EGBs remain pressured with action largely a function of strength in energy benchmarks and the region unreactive to Final PMIs and M3; today’s 136.25 Bund trough brings into play the 135.81-84 band from December 15th & 14th respectively.


• 
  Gilts echo the above, given an absence of specific catalysts. As do USTs, with US Manufacturing PMI revised modestly down ahead of the December ISM figures this week. More broadly, the short-end/belly of the US yield curve continues to outperform but the 5, 7 & 10yr buckets remain someway from the 4.00% mark.


• The week ahead is decidedly busier with FOMC December Minutes, ISM and NFP stateside while Europe’s headliner is the December Flash HICP print. Reminder, on Dec. 22nd ECB’s Schnabel says she currently expects inflation to rise again slightly in the short term; headline Y/Y is expected to tick higher to 3.0% (prev. 2.4%).


• 
  Bunds specifically have supply to contend with on Wednesday, via a 2025 Schatz. Recent auctions have been strong, though the latest failure occurred in January 2023.

COMMODITIES

• 
  WTI & Brent were bolstered with gains in excess of 2.0% on the session, though the session bests leave them several dollars shy of December’s peaks at USD 76.18/bbl and USD 81.72/bbl respectively.


• Strength which occurred in the wake of the latest geopolitical developments as while Israel is to pull some forces from the Strip, Netanyahu says the conflict will continue for many months.


• 
  However, as the session continues benchmarks have seen a marked pullback and are now near unchanged. A reversal which occurred without specific driver, but was exacerbated after the historic energy product open (14:00GMT) and in proximity to Bloomberg reports, citing delegates, that OPEC+ plans a monitoring meeting early-February.


• Elsewhere, Maersk suspended Red Sea transit for 48hrs after a Houthi attack while Hapag-Lloyd announced it will continue re-routing around the Cape of Good Hope until at least January 9th.


• 
  Spot gold initially benefited from the above concerns, however a deterioration in the broader risk tone and marked USD bid caused XAU to give up the bulk of its gains and retreat to the USD 2062/oz trough, approaching the 10-DMA at USD 2053/oz.


• 
  Base metals have been mixed, with action initially dictated by varied Chinese PMIs and thereafter the broader tone. Outokumpu says the stainless steel market has slowed significantly, negatively impacting ferrochrome deliveries and as such Co. is to temporarily restrict production.

OTHER NEWSFLOW

EUROPEAN DATA

• EU HCOB Manufacturing Final PMI (Dec) 44.4 vs. Exp. 44.2 (Prev. 44.2)


• German HCOB Manufacturing PMI (Dec) 43.3 (Prev. 43.1)


• French S&P Global Manufacturing PMI (Dec) 42.1 (Prev. 42)


• Italian HCOB Manufacturing PMI (Dec) 45.3 (Prev. 44.4)


• Spanish HCOB Manufacturing PMI (Dec) 46.2 (Prev. 46.3)


• EZ Money-M3 Annual Growth (Nov) -0.9% vs. Exp. -1.0% (Prev. -1.0%)


• UK S&P Global/CIPS Manufacturing PMI Final (Dec) 46.2 vs. Exp. 46.4 (Prev. 46.4)

CENTRAL BANKS

• ECB's De Cos says uncertainty over data remain high; inflation is expected to continue its downward trend.

GEOPOLITICS

OTHER NEWS

• OPEC+ plans a monitoring meeting early-February, via Bloomberg citing delegates.

N. AMERICAN DATA

• US S&P Global Manufacturing PMI Final (Dec) 47.9 (Prev. 48.2)


• Canadian S&P Global Manufacturing PMI SA (Dec) 45.4 (Prev. 47.7)

02 Jan 2024 - 15:00- EquitiesData- Source: Newsquawk