Rough seas, but calm sailing for equities?

Welcome to the Saxo Market Call. Before we get started, it's important we emphasize that the views and opinions expressed in this podcast are those of the hosts and guests and do not constitute investment advice or recommendations. All information provided is for educational and entertainment purposes only. Everyone, it is Monday, 5th of October, and an interesting conclusion to last week's action with the soft U.S. jobs report. It wasn't as soft as the headlines were screaming into all the NFPs hysteria, but that NFP number was, of course, softer than expected, 29K versus the plus 90K expected. And then the negative revision setting in minus 60K, which ironically bring it pretty much back into line with where the ADP was the prior two months. So that played a bit negatively, played positively for fixed income, if only briefly. And we saw, because we've been seeing a spike in demand for treasuries, potentially as a safe haven, that was quickly erased. But the 4.2%, by the way, rise in unemployment was benign because the participation rate ticked up 0.2%. So when you have a bigger labor force and the unemployment rate ticks up slightly, that's fairly benign. And the underemployment rate, I'm forgetting what it was, but it was slightly down, actually, the under that is underemployment rate. Yeah. It was really a nothing burger in terms of takeaways, but it was certainly softer than the headlines were expecting going into it. So we saw a positive session on Wall Street. I think this goes along the lines of, hooray, we get some relief on the yield front. Although that relief was pretty modest. If you look out at the long end of the curve, again, the yields dipped after the U.S. jobs report, but then kind of came back to around unchanged, even slightly higher on the day in the case of the longer end of the yield curve. And then we have, of course, the massive focus in fixed income and a bit of relief intraday on Friday because we saw the Germany-France 10-year spread widen all the way to around 159 basis points at the high. But then some relief coming back in, and we closed the day around unchanged. If you look at Germany, Italy, it even actually improved four basis points overall in the day. We've opened here this week, though, with the euro itself trading weaker, and that spread was under pressure again, although it's come back. Back down a little bit from where it was widening back to 150 basis points, and it was at least the last time I looked at it slightly tighter again. There was a news item on Bloomberg about Japanese portfolios being a bit overweight, to say the least, on French debt, and this could be a source of selling that could add further stress to the market. I mean, if you look at the really long end of the very longest end, I should say, of French yields, something like that 2072 bond that yields at 21% trading at a nominal price of 21 right now. The 10-year hit, the French 10-year, that is, hit 4.995% on Friday before rolling over and closing the day down towards 4.92%, I believe it was. So this issue is still afoot. I have a link for you in the podcast episode description talking about, I think we talked last week about it, this so-called, what could officialdom in Europe do about the situation to tamp down yields? Tamp down these spreads. There is a supposed mechanism out there called this TPI, the Transmission Protection Instrument, a horribly named instrument for addressing a seeming unfair variations in the yields that the sovereigns are paying. But as mentioned, this is not very applicable in France's case because it is running underlying deficits of a large size, so it's not, it doesn't have its house in order, basically. But the link, to get back to what the link is, it's to a substat called half micro, half climate. Not come across this before, but FT Alphaville passed along this link and looks quite interesting as it makes the overall point. And again, we've alluded to this, this concern of the overall trajectory of populism across Europe at the core. So France facing the potential of a Le Pen runoff versus an unviable, when I say unviable, it means the majority is more likely to go to Le Pen than to somebody like Jean on the far left. That in France and then Germany with the, the very center parties corroding to non-existence almost, would have to team up with the AFD at minimum. So the, the point of the substat is that with this very high bar to ECB involvement, if they stick to their, you know, the terms of the TPI or don't come up with some, you know, wave the magic wand, existential, we have to save the Europe at all costs. And to do so, we need to tamp down these bond spreads that the cost, that high cost could mean it actually encourages the Eurozone breakup of some kind. I think those are the stresses. Those are the fractures. That is, those are the fault lines. Let's see where this head. It's very serious stuff. I saw rumors floating around in a couple of chats about maybe somebody was in trouble late last week. That's pure rumor. I have no idea. It certainly felt like at times when this, the way things were trading, you know, I think there was a lot of speculation around European fixed income, that that might be the case. And if you, if you look at, for example, European banking stocks, they had a very ugly Thursday last week, down something like 3%, and did not have a great Friday either. But it was, I think they managed to sort of bounce back a little bit in line with fixed income. By the way, the US, you know, we've talked about these amazing, you know, huge divergences in the US indices, but where the, I ran through some great statistics from, what was it? On Friday's podcast, actually, no, it was Thursday's podcast, I have my notes here, on how many of the S&P 500 components are down as much as 10, and then as much as 20%. Nearly half were down 20% recently, from their 52-week highs, not year-to-date, but from their 52-week respective highs. But the, among those that are under pressure lately in the US are financial stocks, financial services stocks. The XLF ETF is right around and under even, it's $200,000. So that's a lot of money. So the, you know, the banking sector is not enjoying this, even as the yield curve has started to steepen again. So here we are, you know, we post this positive session in the US. Treasury yields have not really spelled out a whole lot of relief here. Yes, at the front end, they're coming down and coming down pretty hard. Let's see if that continues. Obviously, if there's utter turmoil across sovereign debt, you're not going to see a central bank hiking aggressively into such an environment. That is one source of relief. But if the whole, you know, if the whole sort of foundation of everything is murky, and there's a lot of stress and concern, why should we be trading higher in risky assets? As one, and I hate zero hedge, but as one zero hedge headlines shouted, everything but the VIX is screaming fear. Well, not everything. We did see, you know, high yield spread. So high yield corporate debt, junk debt, got a bit of relief on Friday as well. Let's see. Let's see where we are here. What else happened at the weekend? We had the Brazilian first round of the election, with a stronger result than anticipated than many of the polls showed for Bolsonaro, 47% versus Lula's 45%. And that means that the, it was very likely seen in the October 25 runoff, that because neither candidate got 50%, that Bolsonaro gets the 50% hurdle. So you'll see a much stronger Brazilian real and much stronger Brazilian stock market to open opening up today. On the anticipation of this result, Bolsonaro, of course, seen as more market friendly. And that also fits in with the so called Dunreau doctrine, the idea that Trump is building a hemispheric coalition really across countries, or at least an alignment across virtually all countries with the notable exception of Canada, how will Canada or will Canada be brought into line here? Besides bit players like Cuba not quite being crushed under the American boot just yet. And I think Nicaragua is putting up a fight as well. So very interesting geopolitical alignment happening there with this election result. And then we have this, just if you haven't seen it, I haven't really read about this. I've just seen a couple of crazy headlines about some Russian lab leak and somebody dying. I don't know if they're researching biological agents or whatever. Just if you want to pursue that story. And then we have this interesting story, and I'll put a link as well to at least one story on this. A Ukraine robot offensive where they managed to sort of unwind something like a year of Russian gains, mostly with mostly with robots. So this is a surprising turn of events that they're able to actually, you know, and they're actually Russian troops captured using this, this method, as well as, of course, actual fatalities and so on. That's surprising. And when also we have the FT leading with a big read today on Russia's ability and success so far in shutting down much of Ukraine's ability to export foodstuffs, it puts huge pressure on the Ukrainian economy, which is very productive in the agricultural sector. So pretty ugly stuff there. And we've also had a, I haven't even read the articles, but it's, as Ola Henson put it, of course, here on the podcast quite often that this release reserves of crude and I think some refined products as well as like a small plaster on a massive wound, in his words. So this is basically irrelevant in the longer-term trajectory of things, this release of strategic reserves. And then sort of rounding out the macro and FX space, we did have, again, to note, it was a bit curiously delayed action in my mind, this scale of euro weakness to start the week. We traded all the way down to, what was it, $111.61, slicing through that $112 area, which I thought was quite key, without much to do. There is some Fibonacci retracement in the low $111s. $110 is a psychological area, but not really breaking down fully this huge rally we saw off of the post-Russia-Ukraine war breakout lows until we get down below something like $108.80. But let's take it one day at a time. This dollar move has been really brutal, and directionally so. When I say brutal, if you look at something like Dollar Canada, we've had just almost every single day up on no relief. It's a very difficult market to find risk-reward levels of interest for traders. It feels like it's a very aggravated move, for sure. Not to say it can't extend, but again, it needs this sort of constant feeding to continue to move directionally. And that constant feeding would have to come from more volatility, more concern, for example, in Europe. I think Eurodollar is a key driver there. Dollar Yen is certainly lost in the desert, just chopping back and forth aimlessly here. So let's keep an eye on the dollar as a risk sentiment indicator as well. Stronger dollar is not appreciated, given the brutality of this move so far. Yeah, and then in terms of calendar highlights for the week ahead, really the ISM services is the only one of note from the US this week, and it's up today. And on the earnings front, I want to talk a little bit about the US. I want to talk a little bit about the US. Almost nothing, as indicated last week. PepsiCo is the biggest company reporting their report on Thursday. And then on Friday, we have Delta Airlines. Kind of curious, actually, one instrument I left out was gold that we didn't see with the sort of relief trade coming back in with the further stress in the Germany-France spread. Gold is really disappointing, I think, with this backdrop. Of course, the softer yield should help. They do have a stronger dollar, which is not helping. And we also have this golden week going on in China, where the China has just checked out in terms of its financial markets through Wednesday of this week. So it just feels like gold is absent from the situation here. Not sure what to make of it. We'll continue to track things. It looks certainly heavy relative to recent action and risking a test fully down into that 4,000 and slightly below 4,000 range, unless we see really somebody putting in an effort to get this thing back up above the 4,250 to 4,300 area, to indicate we've got some kind of support on the chart there. And then over to a couple of single stock stories. So we did have a strong sort of AI space feel to things on Friday with the SOX index up over 2%. And the NASDAQ 100 was up a full percent on the session. But the two weakest performers on, I believe it was the NASDAQ 100, if not also the S&P 500, were the two hard-to-get stocks, the S&P 500 and the S&P 500. So we did have a strong sort of hard disk makers, so Western Digital and Seagate, and down over 10% each. This apparently was on the news that Japanese hard disk maker Toshiba, who does or is able to compete on the sort of high spec end of hard disks, is planning some significant production increases. So actual competition for these other two hard disk makers. SanDisk was even down quite heavily on Friday's session as well. And so we did have a strong sort of AI space feel to things on Friday's session as well. And the S&P 500 was up with certainly Tesla and SpaceX. Tesla noting some strength in their energy business, but also the deliveries were way better than expected. Still, though, I mean, we're talking about a company that is relatively stagnant in terms of their ability to deliver cars. The pricing of the stock is all about these other, you know, future endeavors with, well, potentially with an eventual lash up with SpaceX, but with Optimus Prime, replacing human labor, supposedly, and of course, autonomous driving. As a part of this, this idea of replacing human activity with, with AI based technology. And then on that front, there was a another article I will put out a link to also hat tip to FT Alphaville is Anthropic. So Anthropic itself putting out this article talking about what work can robots do, saying it believes that only about 20% of human jobs are essentially, you know, there's no robot workaround for those jobs. I'm not sure what they meant in the physical sphere or what. But in any case, you know, most jobs can be done by robots. However, that there's a very, that the technology is very slow to become cost competitive with different categories of human labor over time. And it would take 40 years, essentially, to even reach 10% of replacing the current set of jobs based on past advances in robot technology. So that's not a very good idea. Very encouraging for those believing that we have are facing a robot revolution to take over everything. That's the sideline on Tesla, which is up 5% or so SpaceX was up over 7% super interesting what's going on here. They had three launches. I don't know if those are all on Friday, but they basically had three launches within like a one day window. One of those was a big Falcon heavy launch some kind of secret government satellite thing. But another one was more interesting. This was a this one had a Google satellite abort. board, which is going to be experimenting on how they're, some of their, it's going to basically be an experiment to see how their tensor TPUs, so the chips that they use for their AI inference calculations, basically, testing these in space. The idea being to actually get, you know, something that's operating in space to test what kind of damage, if any, is done by radiation, etc. So this scene is, you know, of course, queuing up the potential age of AI satellites in space, etc. And so if you want to know what SpaceX is doing, it's called StarMind. They're supposed, it's not supposed, they are moving forward with this, this program to have AI-based, sorry, space-based AI data centers. And I was going through a little rabbit hole on ChatGPT with, you know, what kind of scale are they talking about? How many launches would it require? And, you know, all these things that are going on, and I was going through a little rabbit hole are kind of unknown, these parameters, but it's surprisingly few launches, to my mind, to get something like a one gigawatt data center, assuming these, these metrics of how big each launch can be in terms of the AI data center that can be launched with one Starship launch. So 125 to 250 launches for a one gigawatt data center operating space with lots of unknowns. You know, what is the geometry of this sort of the radiators you need to dissipate the heat, which is the huge problem in space? You know, heat dissipates best when it's in contact with something. That's why water-based, of course, dissipation works way better than air-based dissipation. And in space, you have no air, it's a vacuum. So the radiators have to be absolutely massive to radiate away the heat generation, even though the shaded space, you know, space that's not exposed to the sun is more or less at, or closer, close to absolute zero. So that seems to be the vibe for why SpaceX was up over 7%. Actual experiments going on to move this, the knowledge of how these chips might operate in space forward. All right, that pretty much takes me to the end of today's podcast. A bit all over the place today, I must admit. I think it's a very, just a very uncomfortable, strange environment. We've had this big blow up in these European spreads, sovereign debt stress, you know, how much less is going to happen in the future? And I think it's going to be a very, very long time. I think it's going to be a very, very long time. I think it's going to be a very, does this continue? The French, I was digging a bit more into the French budget numbers. It's so incremental. It's not credible relative to the risks from this market. Will the ECB do anything? Just too many questions, not enough answers. And, you know, maybe the market can find some confidence from existing flows. If this sovereign spreads blowing wider was about some one-off flows or somebody getting into trouble, and maybe it sorts itself out for the short term, but for the medium term, I don't understand what really relieves the situation without official intervention. And as alluded to earlier in this podcast, it seems that the bar is very high to that intervention. And then we have the issue of the narrowness, the very narrow U.S. market advance. If you look at the broad averages, they're pinned near the highs. We're only, what, about a percent below the all-time high in the S&P 500, and not the different in the NASDAQ 100 either. And yet, the median stock is down as much as it is. So just a very confusing backdrop. Where does this all head? I really don't know. But I'm, you know, trading cautiously here. The VIX is very low, but I think that's misleading relative to all these little, you know, points of tension out there, whether it's credit, private equity, whether it's just the very volatile nature of the bond market in the background as well, as dollar pressing at the margins as a part of all this too. So yeah, a very interesting cocktail. We'll see. how it unfolds in the week ahead. In the meantime, stay careful out there and we'll be back soon with the next Saxo Market Call. This has been the Saxo Market Call podcast. Thanks for joining today's episode. We're always happy for your feedback and questions of all kinds. To reach out, you can drop us an email at marketcall at saxobank.com. That's marketcall at saxobank.com. Saxo, serious trading worldwide.