MAXIN ADVISORS Weekly Market Review adresses the issues of the moment and the events of the past week in the financial markets.
With the strong advances in equities since October, and the SP500 hovering but failing to hold above our initial 4000 level, a large part of our expected year-end rally has already been achieved.
European equities are overbought, US indices are in neutral territory but have lost a lot of momentum and we see more and more SELL signals in individual stocks.
With 6 weeks to go before the end of a year that has seen extreme volatility and is for now one of the worst in many years, the legitimate question is whether we will push higher from here or turn down earlier than we expect.
The macro economic environment is also full of conflicting crosscurrents
On the inflation front, if US gauges have tentatively peaked, Europe, the UK and and Japan are accelerating upwards, reaching 40-year highs. Clearly the ECB, the BOE and BOJ have been way behind the curve in their fight against inflation.
The sharp acceleration upwards to 3.6 % in Japan is now starting to ring alarm bells in. country that wants high inflation to deflate its record stock of debt on one hand, but on the other hand, the combined effects of the sharp depreciation the Japanese Yen and the rise in costs of living may soon become unpopular with Japanese households.
In Europe, Christine Lagarde is finally talking about taking rates to “restrictive” territory, the ECB has finally resorted to quantitative tightening in October and the ECB should raise rates between 0.50 and 0.75 % at its next meeting.
The problem is that the markets are still unconvinced that rates should move much higher and with the Euro Area inflation at 10.6%, German inflation at a record 10.4 % and the UK hitting 11.1 % in October, for monetary policies to become “Restrictive”, short term rates should rise above 10 %. Still a very long way from where we are today.
10-year UK Gilts yields are back down to 3.39 % after their October panic stage and 10 year German bunds are still at an unbelievable 2 %, meaning that investors, and probably central banks as well, are still hoping that inflation will come down sharply ahead.
Unfortunately, with current rate levels, monetary policies in Japan and Europe are still extremely accommodative and inflation is cleary not coming down yet…
Bullish equity investors in Europe may be misreading sharply the underlying trends of inflation and rates. Not that inflation may not peak soon, but the markets are clearly not pricing rates at 5 or 7 %, as a FED governor has recently stated.
In the US, the picture is more complex. Short and long term rates have already risen much faster than in Europe and Japan, explaining the sharp rise in the US dollar over the summer, but 10 Year Government bond yields have fallen back below 4 % in November.
Granted, real estate prices have started to come down sharply and new homes sales are collapsing. In addition, US corporations have now slowed down considerably their pace of hirings and are even laying off staff in many sectors.
Labor costs have started easing and the trend should accelerate in coming months.
The main components of lasting and self fulfilling inflation are now rolling over and inflationary pressures in the US should be easing ahead. Unfortunately, this is clearly not yet the case in Europe and Japan and we could be surprised at how fast central Banks there will have to catch up.
Today, equity investors may be underestimating the resilience of inflation and the determination of the FED to move to a sharply restrictive stance with rate at 6 or 7 % in exactly the same way, European and Japanese investors may be underestimating the potential for UK, European and Japanese rates to rise sharply higher and double or even treble in 2023.
But besides stubbornly high inflation and rising rates, the financial markets are facing a second set, and potentially even more damaging, of headwinds.
Most commentators today, as well as Central banks, seem to be clinging to the hopes that the major economies will avoid economic contraction.
There are signs here and there that economic data is not as bad as could be feared, US retail sales came in stronger than expected, Mortgage application also surprised on the upside, retail sales and consumer confidence tick dup in the Uk and Swiss industrial output has been improving recently.
However, there are also strong negative undercurrents in the environment.
investors should keep a wary eye on the real estate sectors. US new and existing home sales are collapsing at the fastest pace in decades, prices are in a sharp downtrend almost everywhere. Real estate is not only one of the largest component of economic growth in most western economies, but it is also the largest chunk of households wealth.
The impact of a sharp economic downturn on the global should not be underestimated. It will shave off growth through the construction, building materials and furnishing industries but will also have a considerable negative wealth effect on consumers willingness to spend. We see it as one of the major dangers ahead, and are surprised at how it is being overlooked by most economists at the moment.
Another extremely worrying trend is the sharp decline in Business confidence surveys, a leading and reliable indicator of Economic activity. The Philadelphia Fed business outlook survey indicator released last week for November shows a -19 % collapse, significantly worse than the -6 % expected by the consensus of economists, but more importantly, it is now at levels that were last seen at the peak of the COVID pandemic, in 2011, 2007 and 2000 where it clearly heralded the sharp economic contractions that ensued.
Corporate CEO’s are sensing a sharp deterioration of their business environment ahead, and they are at the forefront of the economic pulse. They feel that consumers are re-trenching and that costs are increasing, they are seeing margin compressions across the board and are reining in investments and hiring.
These trends are not a good omen for the economies ahead.
Another worrying sign is the sharp inversion of the US 2 to 10 Year yield curve last week, with the spread reaching a historical 88 basis points, levels not seen since 1980.
Yield curve inversions are historically a great advanced indicator of looming recessions as bond investors are usually much better macro Economic forecasters than their equity counterparts.
The magnitude of the spread is, in itself, a sign that bond investors believe that the only thing that will bring inflation down sharply, as long term rates imply, will be a sharp recession in the coming two years. The FED knows full well that it needs to destroy both final demand and jobs to bring the long term components of inflation down and its determination to raise rates to retrieve levels will do exactly that. When even the mots dovish FED Governors start forecasting rates peaking at between 5 and 7 %, equity investors should really pay attention.
Finally, last week we saw a major reversal in Copper and a sharp break down in oil prices, both significant indicators of future economic activity.
All the fundamental trends above unfortunately point to a sharp economic downdraft ahead, if economic laws are to be trusted, and frankly, there is nothing in the environment to make a solid case against them.
Western economies are facing the twin hurdles of sharply higher rates and potentially sharply lower growth ahead, the worst possible combination for equity markets.
Adding to the above are the dislocations we are starting to see in the US corporate world, where overleverage is taking companies down extremely fast, as we, unfortunately, predicted.
The rapid downfall of CARVANA, the “Amazon of used cars” and America’s second largest used car dealer is a prime example of the travails that await highly leveraged corporations in a ring rates environment.
It took Carvana just a few years to grow from a startup to the second-biggest used car seller in the US. But Its downfall may be even faster…
Secondhand car prices are dropping at the swiftest clip in decades and used car sales have fallen by 13 % in the third quarter of 2022, slashing Carvana’s revenues, cash flow and profits.
Carvana has accumulated USD 8 billion of debt, of which 3 Billion were added only this year to acquire auctioneer Adesa at the beginning of the year.
The company will bleed 1.6 Billion USD of losses this year and borrowing more money to keep going is getting harder as interest rates rise and money managers become choosier about who they lend to.
Carvana’s shares have plunged 96% this year and its bonds dropped this month after the company posted a wider-than-expected loss, and now trade below 50 cents on the
dollar — reflecting money managers’ belief that there is an extremely high chance of default.
Carvana announced last week that it would lay off 1500 of its 7500 employees, or 20 % of its workforce, with all the macro economic consequences of this unexpected job destruction when taken at the global level.
The combination of rising interest rates and lower revenues on highly leveraged companies is lethal, and unfortunately, as we have highlighted many times before, Corporate America has used artificially low interest rates for years to accumulate unprecedented levels of debt, sometimes simply to buy back their overvalued shares.
Unfortunately, our macro road map of a sharp economic downturn is starting to materialise and what is striking is that the market narrative is reluctant to face it for now.
How could that impact our expected year-end rally ? Could the markets turn earlier than our projected top window of the beginning of the year ?
The sharp rally in equities since October 13th was very much a relief rally furlong better than expected inflation numbers. Unfortunately and once again, as long term investors had run down their exposure to the bare at the end of September, most of the rally has been driven by exceptionally high levels of activity in the option markets with investors switching form put buying to call buying. That in turn. led to the sharp rises in the indexes and some individual stocks, particularly visible in the outperformance of the Dow jones in October and then the sharp catch up in technology stocks.
Will there be any follow-up ?
As we highlighted last week, the upward momentum is fading and negative divergence are starting to appear in most sectors and many heavy weight stocks.
The collapse of the crypto exchange FTX is sending shivers into investors spines, wondering how so much money could be lost in such a short period of time by a glaring lack of supervision from the regulators.
As we go into the year-end, and with the indexes having recouped 20 % in Eurpe and 15 % in the US after a devastating first nine months, will long term money managers pare their exposure going into the year end to protect somewhat those 15 % gains ?
What could trigger a reversal in sentiment ahead ? weak economic numbers ? higher inflation numbers ? Higher bond yields ? or yet another, and maybe sizeable corporate collapse ?
It is obviously difficult to say for sure, but the conditions are in place for such a turnaround and it could be fast…
The key in our views will be the behaviour of the markets next week.
If we keep rising in the first few days of the week and hold above 4’000 on the SP500, then we could go up to 4’150 in a straight line, even before year-end. That would be a major opportunist to sell and we could see the start of the next structural down leg even before new year.
But if we start the week in the red, then a corrective phase may be starting and it has the potential to take the SP 500 down towards 3800 or even 3700, a 300 points decline from where we are. As long as this corrective pullback holds the 3700-3800 support over the coming weeks, then we could mount a new uptrend that will test the 4150 level and maybe surpass it into the new year.
But if we don’t, then we will be starting our second leg of the secular bear market with our ultimate target at 2750 by October 2023
One key metric to watch next week will be the US 10 year government bond yields.
If they keep pushing lower, then our bullish scenario will be strengthened, but of they do not and start reversing, then equity markets may suffer way earlier than we think.
We are not sure we really like the technical picture of both the US 10 year and the US dollar.
So prudence is warranted and we have shifted to Neutral in our portfolios.
Weekly Market Review
19 Nov 2022
Japan Inflation Hits 40-Year High
The annual inflation rate in Japan climbed to 3.7% in October 2022, the highest reading since January 1991 from 3.0% a month earlier amid high prices of imported raw commodities and persistent yen weakness. Upward pressure came from all components: food (6.2% vs 4.2% in September); housing (1.1% vs 0.6%); fuel, light, and water charges (14.6% vs 14.9%), mainly electricity (10.9% vs 21.5%) and gas (20.0% vs 19.4%); transport & communication (2.0% vs 0.6%); medical (0.2% vs -0.5%), furniture & household utensils (6.9% vs 6.6%); culture & recreation (0.9% vs 2.2%), and miscellaneous (0.8% vs 1.2%).
The core consumer price index in Japan, which excludes fresh food but includes fuel costs, jumped 3.6% in October 2022 from a year ago, accelerating at the fastest pace since February 1982 as high global commodity prices and a weak yen pushed up import costs. October’s figure followed a 3% gain in September and posted above analysts’ expectations for a 3.5% rise. The core inflation print also exceeded the central bank’s 2% target for the seventh straight month, presenting a challenge to the Bank of Japan which is increasingly pressured to adjust its policy of ultra-low interest rates. However, BOJ Governor Haruhiko Kuroda recently stated that the central bank would stick to monetary easing to support the economy, citing the desire to achieve sustainable inflation accompanied by wage growth. He also argued that global commodity costs drive about 50% of price hikes and that cost-push inflation would not last long.
US Existing Home Sales Lowest since 2011
Existing home sales in the US tumbled 5.9% to a seasonally adjusted annual rate of 4.43 million in October of 2022, the lowest since December of 2011 with the exception of a very brief fall at the beginning of the pandemic, and compared to the market forecasts of 4.38 million. It was the ninth straight month of falling sales as home prices remained elevated and a 30-year fixed mortgage rate hit a 20-year high pushing many buyers out of the market. Total housing inventory fell 0.8% to 1.22 million units. The median existing-home price for all housing types was $379,100, up 6.6% from October 2021. Properties typically remained on the market for 21 days in October, up from 19 days in September.
Kansas Fed Manufacturing Index Remains Negative
The Kansas City Fed’s Manufacturing Production index was at -10 in November of 2022, the second-lowest figure since May of 2020, solely behind the -22 from the prior month. The slower pace of factory growth in the period was driven by a decline in activity in primary metals, plastics and rubber products, chemicals, furniture, and fabricated metals manufacturing. Most month-over-month indexes decreased, with the current delivery time index reaching its lowest on record. In the meantime, the year-on-year index grew at the slowest pace since March of 2021, pressured by reduced volumes of new orders and backlog of orders. On the other hand, the future composite index edged to 0 from -1 in the prior month, amid a rebound in expectations of production (6 vs -1 in October).
Canada Producer Prices Rise More than Expected
Producer prices in Canada rose by 2.4% month-over-month in October of 2022, the most since March, following a revised flat reading in September and well above market expectations of a 0.4% rise. The biggest upward pressure came from refined petroleum energy products which rose 14.9%, the most since March and the first increase in four months. Costs also advanced for primary non-ferrous metal products (+2.2%), most precious metals such as unwrought silver and silver alloys (+5.6%), unwrought gold and gold alloys (+1.8%), as well as unwrought platinum group metals, and their alloys (+4.7%). At the same time, prices rose for motorized and recreational vehicles (+0.7%) but decreased for the third straight month for softwood lumber (-18.%). On a yearly basis, producer prices rose by 10.1%, after an upwardly revised 9.1% increase in the previous month.
Foreign Investment in Canada Falls the Most Since 2018
Foreign investors reduced their exposure to Canadian securities by a net CAD 22.3 billion in September of 2022, the most since December 2018, and swinging from the net acquisition of CAD 26.2 billion in the prior month. Non-residents sold a net CAD 13.3 billion in debt securities, mainly through federal government money market instruments (CAD -9.2 billion) and federal government bonds (CAD -5.8 billion). In the meantime, foreigners unloaded a net CAD 8.9 billion in Canadian equities, tracking the 4.6% decline in the benchmark S&P/TSX Composite index during the period. On the other hand, Canadian residents acquired a net CAD 9.6 billion of foreign securities, as net purchases of bonds (CAD 12.9 billion) offset the sales of equities (CAD -1.4 billion).
UK Retail Sales Top Estimates
Retail sales in the UK increased 0.6% month-over-month in October of 2022, after falling an upwardly revised 1.5% in September when an additional bank holiday for the Queen’s funeral was observed by many businesses including retailers. Figures compare with market forecasts of a 0.3% rise. Increases were seen in all of the main sectors apart from food stores, where sales fell 1%. In recent months, supermarkets have highlighted that they are seeing a decline in volumes sold because of increased cost of living and food prices. Meanwhile, non-food stores sales rose 1.1%, namely second-hand goods stores and auctioning houses (3.6%) and clothing stores (2.5%); auto fuel sales jumped 3.3%; and non-store retailing (predominantly online retailers) sales went up 1.8%. Still, retail sales volumes were 0.6% lower than its pre-pandemic level in February of 2020. Compared to October 2021, retail sales were 6.1% lower.
UK Consumer Confidence Improves Slightly in Nov
The GfK Consumer Confidence indicator in the United Kingdom rose slightly to -44 in November 2022, improving for the second straight month as political concerns eased, though it remained near a record low of -49 reached in September as the cost-of-living crisis and a dim economic outlook weighed on sentiment. Joe Staton, client strategy director at GfK, said: “This month’s fillip is likely to reflect nothing more than a collective sigh of relief as a new prime minister takes charge following the alarming fiscal antics we saw in September.” However, he noted that this improvement is not expected to be sustained as external factors have not changed much. All five components of the barometer improved in November including personal finances over the next year, but concerns about surging inflation and a weak economy persisted. UK inflation hit a 41-year high of 11.1% in October, while the country’s economy unexpectedly contracted by 0.2% QoQ in the third quarter.
Swiss Industrial Output Growth Slightly Accelerates in Q3
Industrial production in Switzerland rose 5.2% year-on-year in the third quarter of 2022, slightly accelerating from a downwardly revised 5% gain in the previous three-month period, amid smaller contraction rates in both mining & quarrying (-2.1% vs -12%) and electricity supply (-6.6% vs -9.8%). Meanwhile, manufacturing output growth remained stable at 6.3%. On a seasonally adjusted quarterly basis, industrial production rose 0.5% in the third quarter, after a downwardly revised 0.1% decline in the previous period.
Norway GDP Grows 1.5% in Q3
The Norwegian economy advanced 1.5% on quarter in Q3 2022, following an upwardly revised 1.3% growth in Q2, and marking the biggest expansion in four quarters. Petroleum activities and ocean transport rose 7.6%, much higher than 1.5% in Q2. Gross fixed capital formation went up 0.4%, twice a 0.2% rise in Q2, with investment in services related to extraction jumping 15.5%. Exports rose faster (5.7% vs 2.8%) while imports slowed (2.9% vs 5.7%). Mainland GDP, which excludes the largely petroleum-based offshore sector, grew 0.8% in Q3, above market expectations of 0.4%, and after an upwardly revised 1.2% raise in Q2, particularly driven by the service industries and especially in wholesale trade.
Norway Household Spending Grows for 2nd Month
Household consumption of goods in Norway rose by 1 percent month-over-month in September 2022, the same pace as the downwardly revised rate a month earlier. It was the second consecutive rise in household spending after rebounding from a 2.8 percent fall in July, supported by the increases in consumption of electricity and heating fuels (3.4 percent vs -2.5 percent in August), purchases of vehicles and petrol (4.1 percent vs 1.1 percent), and other goods (0.5 percent vs 0.0 percent). Meanwhile, consumption of food, beverages and tobacco declined by 0.3 percent, after a 2.8 percent advance in August.
Swedish Jobless Rate Slightly Falls in October
Sweden’s unemployment rate declined to 7.1 percent in October of 2022 from 7.6 percent in the same month last year, as the number of unemployed decreased by 22 thousand to 396 thousand, while employment rose by 130 thousand to 5.19 million. The labor force participation rate increased 1.0 percentage point to 74.1 percent and the employment rate was up 1.3 percentage point to 68.8. Seasonally adjusted, the unemployment rate was at 7.3 percent in October.
Chile Q3 GDP Growth at Over 1-1/2-Year Low
Chile’s gross domestic product advanced by a meagre 0.3% year-on-year in the third quarter of 2022, following an upwardly revised 5.6% growth in the previous period and slightly above market expectations of a 0.2% rise. Still, it was the weakest expansion since the first quarter of 2021 when the economy stagnated. Both fixed investment (2.2% vs 7% in Q2) and government spending (4% vs 8.2%) slowed while private consumption declined (-2.8% vs 7.6%). Regarding net external demand, total exports rose by 4.1% (vs -0.5% in Q2), whereas total imports decreased by 2.7% (vs 10.4% in Q2%). On a seasonally adjusted quarterly basis, the economy shrank by 1.2%, the sharpest contraction since the second quarter of 2020, compared with market forecasts of a 1% decline.
Macau’s Economy Remains Stuck in Recession
Macau’s gross domestic product shrank by 33.4% on year in the third quarter of 2022, following a downwardly revised 39% decline in the previous three-month period. It marks the fourth consecutive quarter of economic downturn, attributed to the “relatively static” Covid control measures implemented in July. Exports of services slumped by 46.7% year-on-year, of which exports of gaming services (-72.5%) and exports of other tourism services (-45.9%), amid a decrease in the number of visitor arrivals. Exports of goods also dropped by 43%. Meanwhile, imports of goods and services fell by 27.9% and 5.3% respectively. Both private consumption (-13.3%) and fixed investment also declined (-34.3%), while government spending increased (5.7%).
Baltic Exchange Dry Index Falls for 7th Day, Books 5th Weekly Loss
The Baltic Dry index, which measures the cost of shipping goods worldwide, slumped about 3.2% to 1,189 points on Friday, extending losses for a seventh day to its lowest level since September 8th. The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, extended its decline to a sixth straight session, slipping about 5.6% to 1,122 points; and the panamax index, which tracks about 60,000 to 70,000 tonnes of coal and grains cargoes, fell for the second day, down 3.4% to a ten-week low of 1,594 points. At the same time, the supramax index declined for a 20th straight session to 1,170 points. The Baltic Dry index dropped 12.3% in the third week of November, notching its fifth weekly fall in six.
The Week Ahead
In the US, investors will be closely watching the release of FOMC meeting minutes, the University of Michigan’s consumer sentiment, durable goods orders, and new home sales. November flash PMI figures for major developed economies including the US, Japan, Germany, France, and Australia will take center stage. Finally, central banks in China, New Zealand, Sweden, South Korea, Turkey, Malaysia, and South Africa will be deciding on the course of monetary policy.
US Stocks decline amid Hawkish Fed
The blue-chip Dow Jones and the S&P 500 lost some upside momentum seen at the open on Friday but closed up roughly 0.6% each, as most of the optimism about upbeat earnings was offset by persistent concerns about a Fed-induced downturn. The tech-heavy Nasdaq underperformed, however, closing near the flatline, as rising Treasury yields dragged high-growth and other tech stocks. Hawkish speeches from several Federal Reserve policymakers dashed hopes of a pause in the central bank’s tightening cycle. Among them, St. Louis Fed President James Bullard was the most drastic, warning that tightening conditions have only had a modest effect on inflation. On the corporate side, Applied Materials rose almost 2% after the chip tools maker forecasted first-quarter revenue above analysts’ expectations.
Bath & Body Works skyrocketed over 25% after the retailer beat Wall Street forecasts for revenue, while Macy’s jumped more than 7% after beating estimates and raising its full-year earnings guidance. Cisco added almost 5% after topping earnings and revenue expectations. The Dow is virtually flat for the week, while the S&P 500 lost 0.7% and Nasdaq 1.2%.
Canada TSX Pushes Higher despite Energy Rout
Canada’s S&P/TSX Composite index closed up 0.5% at the 19,980 mark on Friday, halting two consecutive sessions of losses as gains for tech companies and banks offset the sharp retreat for energy producers, while investors digested a batch of macroeconomic data. Industrial producer prices in Canada rose 2.4% month-on-month in October, soaring past expectations of a 0.4% rise and strengthening the recent hawkish rhetoric by BoC Governor Tiff Macklem. Lenders led the gains in Toronto, with TD Bank, BMO, and RBC all adding more than 0.5%. On the other hand, heavy-weighing energy producers tanked nearly 3% on average, pressured by the steep decline in crude oil prices late in the last two sessions. The TSX closed down 0.7% on the week.
Bovespa Turns Downwards amid Fiscal Disputes
Brazil’s Ibovespa index fell Friday to 108,870 on Friday, continuing the now three-day selloff sending the index to its lowest level since September amid jitters about the incoming government’s spending cap plan. Vice President-elect Geraldo Alckmin on Thursday said that Brazil’s incoming government will be fiscally responsible, promising a budget surplus and reduction in public debt in an effort to quell market unrest over a proposed welfare plan. Traders also digested news that congressional leaders Artur Lira and Rodrigo Pacheco reportedly debated yesterday on the possibility of “downsizing” the Proposed Amendment to the Constitution (PEC) of the Transition. Real estate remained in the green, while commodiy-linked stocks and the Bolsonaro-basket fell. Elsewhere, investors continued to gauge the outlook for Federal Reserve monetary policy after several officials delivered hawkish comments.
The Ibovespa closed down 3% this week.
Mexbol Gains, Grupo Mexico Underperforms
Mexico’s S&P/BMV IPC closed 0.4% higher at the 51,570 mark on Friday, halting four consecutive sessions of losses with broad support from all sectors, as investors continued to assess the outlook for monetary tightening for the Federal Reserve. Mining giant Grupo Mexico gave up morning gains and fell 1.5% due to declining prices for silver and copper. Banks were sharply in the green, supported by expectations of higher borrowing costs. The IPC index declined 0.7% on the week, retreating from the five-month high touched on November 11th.
China Stocks Fall For 3rd Session, end the week higher
The Shanghai Composite fell 0.58% to close at 3,097 while the Shenzhen Component lost 0.37% to 11,180 on Friday, as mainland stocks remained under pressure amid mounting worries over resurgent Covid outbreaks in China that dashed reopening hopes and dimmed the economic outlook further. Investors also heeded a warning from the People’s Bank of China that inflation may accelerate due to an expected pick up in demand, giving it less room for further monetary easing. Still, the benchmark indexes finished the week slightly higher, buoyed recently by policy shifts involving China’s property sector and Covid approach, as well as positive updates about President Xi Jinping’s interactions with other world leaders. Technology stocks led the retreat, with sharp losses from China National Software (-7.7%), Shenzhen SED Industry (-5.4%) and East Money Information (-2.2%). Financial and commodity-linked stocks also declined.
European Shares Rise, DAX Hits 5-Month High
European shares extended gains on Friday, with Germany’s DAX 40 jumping more than 1% to hit a 23-week high of 14,449. The European Central Bank has announced Eurozone banks are set to repay €296 billion in multi-year loans from the ECB next week, less than the €500 billion expected by markets, in the first voluntary repayment window of the ECB’s TLTRO since terms were changed in October. ECB President Christine Lagarde said earlier in the session that the central bank will keep raising interest rates to combat inflation, even if the move restricts economic activity. On the corporate front, Francesco De Ferrari, who heads Credit Suisse’s wealth management business, told Reuters he is targeting growth markets, high net worth clients and technology to fuel the fortunes of the embattled Swiss bank.
FTSE 100 Snaps Three-Day Decline, Posts Weekly Gains
London equities snapped three days of losses on Friday, with benchmark FTSE 100 adding roughly 0.5% to close around the 7,400 mark, driven by gains among real estate, consumer discretionary, and utility stocks, while rising almost 1% for the week. Data showed retail sales rose twice as much as expected in October, although it continued to show a downward trend. Investors also continued to digest the Autumn Statement unveiled on Thursday. Finance Minister Jeremy Hunt proposed around £30 billion in spending cuts and £25 billion in tax increases, including a six-year freeze on income tax thresholds and lowering the top income tax rate to £125,000. At the same time, it forecasted that the UK economy would shrink by 1.4% this year and would not recover to pre-pandemic levels until the end of 2024.
DAX Extends Winning Streak to 7th Week
The German DAX 40 index rallied more than 1% to finish Friday’s session at around 14,430 points, driven by gains among utilities and energy stocks, while adding 1% this week to post its seventh consecutive weekly gain. Investors tracked several economic releases and earnings results for clues about the eurozone economy and the ECB’s rate path. President Christine Lagarde said the central bank would keep hiking interest rates and may even need to restrict growth to rein on inflation. The ECB has announced that banks are due to repay €296 billion in multi-year loans from the ECB next week, less than the €500 billion expected by markets, in the first voluntary repayment window of the ECB’s TLTRO.
The regional STOXX 600 added roughly 1% to finish the session at around 430 points, driven by gains among utilities, real estate, and financial stocks. The European benchmark rose 0.1% this week to post its fifth consecutive weekly gain.
French Stocks Close Higher, Post Weekly Gain
The CAC 40 index rose.1% to close at 6,644.46 on Friday, after two sessions of decline in a row, in line with its regional peers. The ECB announced the biggest withdrawal of cash from the euro zone’s banking system in its history as part of the effort to contain inflation. Among top gainers, Teleperformance advanced 3.7%, after the company said it will exit what it calls the “highly egregious” part of its social media content-moderation business. It was followed by Schneider Electric (+2.8%) after Erste Group raised its recommendation from “hold” to “buy”. By contrast, real estate group Unibail-Rodamco led the losses, down 1.2%, following a downgrade of its share by Goldman Sachs, going from ‘neutral’ to ‘sell’ with a 12-month price target reduced from 44 to 39 euros. The CAC 40 ended the week 0.8% higher.
Madrid Stocks End on Positive Note
The IBEX 35 index rose 1.1% to close at 8,128 on Friday, following two straight sessions of declines, in line with its European peers. Traders digested hawkish remarks from both the ECB’s Lagarde and US Fed’s policymakers while the ECB announced that Eurozone banks will repay 296 billion euros in multi-year loans from the European Central Bank next week in its latest step to fight runaway inflation in the eurozone. Domestically, Economy Minister Nadia Calvino said that the Spanish government expects to reach within the next hours an agreement with banks on mortgage relief measures that could be approved at the next cabinet meeting on Tuesday. On the business front, banks and utility companies were among the top performers. In corporate news, the board of directors of Siemens-Gamesa has already issued its favorable opinion on the voluntary takeover bid made by Siemens Energy to take over the entire company.
The IBEX 35 index ended the week 0.4% higher.
FTSE MIB Closes Week higher
The FTSE MIB index closed 1% higher at 24,620 on Friday, erasing losses from the prior two sessions and advancing 0.8% on the week as investors continue to assess the outlook of monetary tightening by major central banks. Traders also digested reports that Giorgia Meloni’s cabinet will set EUR 30 billion for extra spending in the new government’s first budget law, expected to fund further measures to protect businesses and households from soaring energy prices. The reports strongly supported utility providers traded in Milan, with Enel jumping 3% while Italgas and Terna added 2% each. The heavyweight financial sector also closed in the green, led by a 1.5% jump for Generali
Japanese Shares Mixed Amid Market Caution
The Nikkei 225 Index fell 0.11% to close at 27,900 while the broader Topix Index gained 0.04% to 1,967 in mixed trade on Friday, as caution dominated sentiment after US Federal Reserve officials signaled that they are ready to tighten policy further to stamp out inflation. Japanese shares also wobbled after Bank of Japan Governor Haruhiko Kuroda stressed the need to maintain ultra-loose monetary policy to support the economy, in the wake of data showing annual core consumer prices in the country surged to a 40-year high in October. Notable losses were seen from index heavyweights such as SoftBank Group (-3.9%), Tokyo Electron (-1%), Mitsubishi UFJ (-0.6%), Nippon Yusen (-2.4%) and Recruit Holdings (-3.2%). Meanwhile, firms that eked out gains include Nintendo (0.7%), Sumitomo Mitsui (0.5%) and Sony Group (0.2%).
Rate Outlook Drags World Bonds
Global government bond yields started to march higher after major central banks flagged a longer monetary tightening path and warned it was very premature to consider pausing. Fed policymakers had no choice but to ramp up their hawkish rhetoric with inflation only starting to ease after hitting decades-high levels and signs that the US economy remains resilient, with the job market tight and US consumers keeping speeding. In Europe, ECB President Christine Lagarde warned that the central bank would keep hiking interest rates and may even need to restrict growth to rein on inflation. The US 10-year Treasury yield, the benchmark for borrowing costs worldwide, topped 3.8%, bouncing sharply from an over one-month low of 3.7% reached earlier this week. Germany’s 10-year Bund yield, the European benchmark, jumped above 2%.
Canada 10-Year Government Bond Yield Climbs Above 3.1%
Canada’s 10-year government bond yield climbed above 3.1%, bouncing off an over one-month low of around 3% hit earlier this week, as prospects of further interest rate increases dented investors’ appetite for government debt. Federal Reserve policymakers ramped up its hawkish narrative, saying that inflation is still too high while warning that considering a pause is still very premature. Domestically, the Bank of Canada surprised markets last month by increasing its benchmark rate by a smaller-than-expected 50 bps while assessing the growth outlook. Still, the central bank is expected to keep its tightening cycle until a terminal level of around 4.25%.
German 10-Year Bond Yield Holds Above 2%
The yield on Germany’s 10-year government bond held above 2%, following the European Central Bank’s announcement that Eurozone banks are set to repay €296 billion in multi-year loans from the ECB next week, less than the €500 billion expected by markets, in the first voluntary repayment window of the ECB’s TLTRO since terms were changed in October.
ECB President Lagarde said the central bank would keep raising rates as inflation in the Eurozone hit an all-time high of 10.6% in October, far above the 2% target, while a recession is seen as unlikely to ease price pressures enough to let the ECB step off the brakes. Investors are now split between pricing a 50 and 75 basis-point hike in December, and see the reduction of bond holdings starting in the first half of 2023. For the week, the German yield booked a second consecutive week of losses for the first time since July, amid hopes of a less aggressive approach from major central banks, including the US Fed.
UK 10-Year Bond Yield Rises on Friday
The yield on the UK’s 10-year Gilt rose towards 3.3%, moving away from a two-month low of 3.09% hit on Thursday, after UK Chancellor Jeremy Hunt announced tax rises and spending cuts in an effort to fix the country’s public finances and restore its economic credibility. The tax changes were broadly expected by markets, with main measures including cutting the threshold for the top rate of income tax of 45% to £125,000 and freezing allowances and thresholds for income tax, national insurance, and inheritance tax for a further two years. The budget aims to slash the dividend allowance to £1,000 next year, and then to £500 in April 2024. The Office for Budget Responsibility has judged that the UK is now in recession, predicting the country’s GDP will contract by 1.4% next year, before returning to growth in 2024. The Bank of England is likely to continue hiking rates despite a slowdown in the economy, but their peak will likely be lower than in the US.
Dollar Supported by Hawkish Fed View
The dollar index stabilized around 106.5 on Friday, supported this week by strong US retail sales data and hawkish remarks from Federal Reserve officials who pushed back against expectations of a policy shift. Most notably, St. Louis Fed President James Bullard said that the policy rate is not sufficiently restrictive and suggested that it could reach the 5% to 7% range as authorities try to stamp out inflation, higher than what the market is currently pricing. Markets are betting that the Fed would deliver a more moderate 50 basis point rate hike in December, and a series of 25 basis point increases next year. Still, the dollar index remains close to three-month lows after facing heavy selling pressure recently due to softening US inflation data, while traders look ahead to November and December inflation readings for confirmation of a trend.
Euro Holds Close to 5-Month Highs
The euro traded just above $1.03, remaining close to its strongest level since July 4th, as the European Central Bank is seen tightening monetary policy further to tame stubbornly high inflation, despite fears of economic slowdown. ECB President Christine Lagarde said the central bank would keep raising rates as inflation in the Eurozone hit an all-time high of 10.6% in October, far above the 2% target, and even a recession is seen as unlikely to ease price pressures enough to let the ECB step off the brakes. Investors are now split between pricing a 50 and 75 basis-point hike in December after the central bank has raised rates by an unprecedented 200 basis points since July. In addition, the reduction of the ECB’s €5 trillion debt holding, also known as quantitative tightening, is seen starting in the first half of 2023. Hopes of a less aggressive approach from the US Federal Reserve faded following hawkish remarks by several Fed officials.
Japanese Yen Rises on Hot Inflation Data
The Japanese yen appreciated past 140 per dollar after data showed that annual core consumer prices in Japan surged to a 40-year high of 3.6% in October as high global commodity prices and a weak yen pushed up import costs. The currency also strengthened even after Bank of Japan Governor Haruhiko Kuroda stressed the need to maintain ultra-loose monetary policy to support the economy in the wake of the hot inflation reading. Kuroda previously stated as well the central bank’s desire to achieve sustainable inflation accompanied by wage growth. Moreover, latest data showed the country’s trade deficit widened more than expected in October as soaring import costs outpaced export growth, while its economy unexpectedly contracted in the third quarter. The yen continues to face downward pressure as US Federal Reserve officials signaled that they are ready to tighten policy further to stamp out inflation.
Crude Oil Falls Sharply for 2nd Session
WTI crude futures tumbled 4% to around $78 per barrel on Friday, the lowest since September 28th, and poised to end the week more than 10% lower as a weakening demand outlook overshadowed supply-side concerns. Resurgent Covid outbreaks in China dashed reopening hopes and clouded the demand outlook in the world’s top crude importer. Concerns remain that aggressive monetary tightening by major central banks could tip the global economy into recession, hurting energy demand. Recently, St. Louis Federal Reserve President James Bullard suggested that the federal funds rate could reach the 5% to 7% range as authorities fight inflation, higher than what the market is currently pricing. Still, investors remained cautious about a highly uncertain supply outlook heading into winter, with the European Union set to ban Russian crude flows from December, while OPEC is expected to keep oil markets tight.
US Natural Gas Futures 5% Weekly Gain
US natural gas futures fell to below $6.2/MMBtu on Friday, after four consecutive sessions of gains but are still set to end the week more than 5% as heating demand is set to rise due to colder weather. On the other hand, Freeport LNG export plant in Texas may not return to service this month as repair work and efforts to secure regulatory approvals are still ongoing, making more gas available for domestic use. Meanwhile, EIA data showed US utilities added 64 billion cubic feet (bcf) of gas to storage during the week ended November 11th, in line with expectations. That compares with an increase of 23 bcf in the same week last year and a five-year (2017-2021) average decline of 5 bcf. Stockpiles are close to the five-year average of 3.651 tcf for this time of the year.
Gold End The Week Lower
Gold prices steadied around $1,750 an ounce on Friday ending the week lower, weighed down by hawkish US Federal Reserve messaging which suggested more rate hikes than markets anticipated, pushing back against expectations of a Fed pivot. Most notably, St. Louis Fed President James Bullard said that the policy rate is not sufficiently restrictive and suggested that it could reach the 5% to 7% range as authorities try to stamp out inflation, higher than what the market is currently pricing. San Francisco Fed President Mary Daly also emphasized that a pause is “off the table,” while Kansas City Fed President Esther George said that policymakers must be “careful not to stop too soon” on hiking rates.
Silver Extends Retreat
Silver futures fell to below $20.9 per ounce, extending its retreat from the five-month high of $21.7 hit on November 14th, pressured by a fresh rally for the US dollar as investors continued to assess the outlook on the Fed’s aggressiveness to fight inflation. Besides increasing the opportunity cost of holding non-interest-bearing bullion assets, the outlook of higher interest rates also dented demand for industrial silver usage as electricity conductors, tracking the decline for copper. On the other hand, silver futures remain 16% above the 14-month low of $18 per ounce touched on September 1st, partially contributed by looming supply concerns. Inventories at New York’s COMEX fell 70% in the last 18 months to just over 1 million tonnes, while those at the London Bullion Market Association fell for the 10th straight month to a record-low 27.1 thousand tonnes.
Wheat Prices Remain Close to 2-Month Low
Chicago wheat futures were at $8.1 per bushel, hovering close to the two-month low of $8 touched on November 10th amid expectations of continued supply from major exporters. Following a period of supply uncertainty, Russia agreed to extend the UN-brokered deal that guarantees a trade corridor for vessels carrying Ukrainian grain in the Black Sea for four months. According to Ukrainian authorities, the country was able to export more than 11 million tonnes of grain by ships since the start of the deal on August 1st, significantly easing shortage concerns. In the meantime, data from the USDA’s WASDE report increased projections for world supply and ending stocks for the upcoming marketing year, compared to expectations of a decline, as higher output in Australia and Kazakhstan offset potential declines in Argentina and the EU. Since the release of the report, Argentinian producers signaled that wheat farmland could be substituted for soybean plantations due to drought concerns.
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