What Is The Problem With Europe ?

MAXIN ADVISORS Weekly Market Review adresses the issues of the moment and the events of the past week in the financial markets. 

What Is The Problem With Europe ?

Since October 13th, European equity markets have rallied strongly, outperforming most other equity, apart from Hong Kong.

The Eurostoxx 50 Index rose by + 22 % in the past six weeks, reducing its 2022 decline to less than 8% and Germany’s Dax added 23 %, only matched by Italy’s FTSE MIB Index.

Is this the start of a new bull trend in European equities ?, or just a sharp bear market rally ? what justifies this strong outperformance ?

For the past two decade, European equities have been clear under-performers.

Over the nine years during which we have been managing fully transparently, multiplying our initial portfolio by 10x through active management, the EUROSTOXX50 only delivered a +27.45 % cumulative performance, a paltry 2.76 % return per annum, excluding dividends.

… and this is AFTER the strong 22 % performance of the past six weeks,

This poor performance represents less than half the 63 % performance of the MSCI World Index, 1/4 of the performance of the US SP500 and six time less than the US Nasdaq Index

.

At the end of October 2022, the European Indexes were in NEGATIVE territory when looked at over the past nine years. In fact, none of the European equity indexes have recovered to their 2007 peak, or their 2000 peak and they are still trading way below those levels 22 years later.

Allocating money to Europe in passive indexed managed was actually one of the worst portfolio allocation decision in the past two decade.

Over the period valuations remained rather stable, oscillating between 12x and 14x earnings, but corporate earnings growth has been negative. The Eurostoxx50 Index EPS declining from EUR 350 in 2007 to 130 in 2014, recovering to 200 in 2019, before COVID, but still 47 % below their 2007 peak, and the strong monetary and fiscal stimuluses of the COVID period sent them back above 300.

The negative performance of stocks and corporate earnings over the period is quite worrying considering the extremely accommodative monetary policies pursued by the European Central Banks over the period, with short term rates in negative rterritory, but also long dated bonds yielding negative returns.

Still, Europe is the only economic zone of the world where extreme liquidity and zero interest rates did not help equity markets to make new highs in the past 22 years …

So, the reasons for the staunch underperformance of European equities are probably far more structural than cyclical…

And the bleak macro picture facing Europe, makes it difficult to build a case for a new secular bull market from here.

In fact, Europe ha probably the worst set of macro economic conditions to be found today, and its proximity to Ukraine and Russia adds another layer of complexity to the situation.

Moreover, and contrary to the situation in Japan, an un-finished political construction has left the Euro Area with a single monetary policy when the various Nations of the block are pursuing completely different fiscal policies, a situation that has led to vast disparities between the North and the South, the West and the East, and makes the whole area un-manageable from a macro-economic standpoint. It explains to a large extent the secular underperformance of European equities in the past 20 years.

The Euro Area is the world’s third largest economy and its population exceeds that of the USA.

Today, it is mired in low and declining growth, it boats the highest rates of inflation, it has high structural unemployment, most countries run high public deficits, public debt and debt to GDP ratios, and the inherently conflicting situations of the North and the South has led its Central Bank to lag behind, fuelling inflation further.

Economic growth is already declining while inflation is now above 10 % and rising, the worst possible combination for any economy, and clearly for its asset markets.

Europe is also the economic zone where taxation is already amongst the highest in the world, France is the country of the OECD that pressures its citizens the most to pay for its bloated public sector, but the region like France have also accumulated unsustainable levels of public debt.

So the leeway of Nations when facing lower economic growth – and therefore tax receipts – and sharply higher interest rates increasing the cost of servicing their public debt is already slim.

With strikes and political unrest, the situation will become highly difficult to manage, suffice to look at the experience of France with the “Gilet Jaunes” under Macron and its impact on the French public finances to know that things are unlikely to improve in the short term.

What worries us the most is that the gap between interest rates and inflation rates is at the highest ever, meaning that Europe’s monetary policy is is still clearly and dangerously accommodative at the moment and is pushing inflation higher..

Sharply negative real interest rates are fuelling an acceleration in inflation that may very soon become politically intolerable. Europe has reached the stage where workers are now resorting to strikes and social unrest to demand wage increases of 10 % or more to compensate for the increases in the cost of living and some European countries like France are resorting to price subsidies on basic necessities.

The situation is actually the same in the UK where the Central bank has been slow to react and inflation is now accelerating upwards of 11 %.

For now, the market consensus expects a stabilisation of inflation in the data to come out this week. Unfortunately, we may have a negative surprise considering how low interest rates still are.

The European financial markets are clearly not pricing in all the above, and unfortunately we see absolutely no way out from a macro standpoint, apart from the European Central Bank and the Bank of England to start raising rates much more forcefully than the markets expect.

The October – November rally in European equities was very much based on hopes of an easing in inflationary pressures and more accommodative monetary policies, and European bond yields have also come down in a relief rally after their strong rise of the Nine months of the year.

But with inflation rising, and staying, above 10 %, short term rates and 10-years bond yields will not stay at 2 % for long.

We are getting very close to a strong pivot by the ECB, but not towards monetary easing, it will be a pivot towards a far more hawkish message and a sharp catch in interest rates.

Christine Lagarde started mentioning the need to bring monetary policy into restrictive territory, but for now the markets are not listening, Monetary policy in “restrictive” territory implies short term rates at anything between 6 and 8 %, even if inflation were to come down to say 6 % in the coming year, something we do not see happening that fast.

We see German 10-years bond yields rising to at least 4 to 5 % in the first half of 2023, with all the consequences this will have on equity markets, the EUR and peripheral bond markets such as Italy, Greece or Spain.

The point we are making is that the strong equity rally of the past 6 weeks was simply a relief rally and certainly not the beginning of. new secular bull market. If anything, the macro and liquidity situation in Europe is bound to deteriorate sharply ahead, as will the fiscal position of many of the European countries.

Most European equity indexes are highly overbought on a daily and weekly basis, even if they may look a bit better on a long term basis, and we are at levels where investors should be taking advantage of the recent rally to bai out completely of European Government and corporate bonds, if they have not done so previously.

The Problem with Europe is that it is the weakest political construction of all the major economic areas of the world, and that the unfinished business of the European construction is hampering growth in the more productive Northern economies while not really solving the problems of the politically weak Southern countries.

As we get into a major economic, real estate and public finance crisis, with inflation already at higher levels than in an other major economies, and with interest rates bound to rise much higher, the internal dynamics and contradictions of the European Union will be put to the test severely.

It is still too early to predict what the ultimate outcome will be, but one thing is for sure, the financial markets of the old continent are not about to outperform in a lasting way any time soon, even if the EURO starts rising in a lasting way.

If anything, Europe is the place where interest rates and bond yields should accelerate upwards the most from here, putting a lot of stress on European equity valuations.

Weekly Market Review
27 Nov 2022

Macro Highlights

China Eases Monetary Policy
The People’s Bank of China cut the reserve requirement ratio for financial institutions by 25bps on November 25th 2022, effective from December 5th releasing around CNY 500 billion in long-term liquidity in an attempt to boost economic recovery. It follows a similar move in April. The RRR for big banks now stands at 11%, the lowest since mid-2007 while the weighted average ratio for financial institutions stands at 7.8%. The central bank also added that it will step up the implementation of prudent monetary policy and will keep liquidity reasonably ample.

China Industrial Profits Fall 3% YoY in Jan-Oct
Profits earned by China’s industrial firms declined by 3.0% yoy to CNY 69.78 trillion in the first ten months of 2022, steeper than a 2.3% drop in the previous period, amid a record high of COVID infections with more cities imposing strict curbs, weakening consumption, and a deepening property crisis. Profits at state-owned industrial firms grew 1.1%; while those in the private sector fell 2.1%. Among the 41 industries surveyed, 22 saw profit falls, particularly in ferrous metal smelting (-92.7%), petroleum coal and other fuel (-70.9%), non-ferrous metal smelting (-20.0%), textile (-16.4%), rubber & plastics (-11.5%), and metal product industry (-9.7%). The bureau did not report monthly industrial profit figures starting with its July release.

Singapore Factory Output Falls for the First time in Over a Year
Singapore’s manufacturing production declined by 0.8% yoy in October 2022, compared with market consensus of a 0.9% drop and after a downwardly revised 1.6% gain in September. This was the first fall in factory output since September 2021, due to a slump in biomedical manufacturing (-14.5% vs -1.4% in September), led by pharmaceuticals (-27.1%). Also, production continued to fall for both chemicals (-4.6% vs -9.7%), weighed down by petrochemicals; and electronics (-0.7% vs -5.7%), linked to a plunge in other electronic modules and computer peripherals. At the same time, the output of transport engineering grew much softer (6.3% vs 38.8%), amid declines in both marine & offshore engineering and land. Meanwhile, manufacturing industries were flat following a 21.1% jump in September, amid a sharp drop in miscellaneous industries. On a monthly basis, manufacturing output rose by 0.9% in October, the third straight month of gain, and defying expectations of a 0.3% fall. 

Malaysia Inflation Rate Slows to 4-Month Low
Malaysia’s annual inflation rate fell to 4.0% in October 2022 from 4.5% in the prior month compared with market forecasts of 3.9%. This was the lowest print since June, amid a sharp slowdown in cost of housing (1.5% vs 4.0% in September). Also, prices of furnishing & household maintenance rose 4.1%, easing from a 4.4% gain in September. Meantime, inflation was stable for clothing (at 0.4%), health (at 1%), and miscellaneous goods & services ( at 2.4%); while little changed for alcoholic beverages, tobacco (0.8% vs 0.7%), transport (5.2% vs 5.3%), restaurants & hotels (6.8% vs 6.9%), and education (1.4% vs 1.3%). Cost of recreation went up faster (3.4% vs 3.1%). Also, food prices rose 7.1%, quickening from a 6.8% gain in September. Core consumer prices, which strip volatile items of fresh food and administered prices, rose 4.1%, the steepest gain on record, after a 4% rise in September. On a monthly basis, consumer prices increased 0.2% in October, after edging up 0.1% in September.

Canada Government Budget Deficit Shrinks in September
Canada recorded a government budget deficit of CAD 2.2 billion in September 2022, compared to a deficit of CAD 11.4 billion in the corresponding month of the previous year. Revenues increased by CAD 4.5 billion, or 16.9 percent, reflecting a broad-based improvement across revenue streams. At the same time, program expenses excluding net actuarial losses were down CAD 4.8 billion, or 13.7 percent, largely reflecting lower transfers to individuals and businesses due to expiring temporary COVID-19 measures. he budgetary deficit before net actuarial losses was $1.3 billion, compared to a deficit of $10.1 billion in the same period of 2021-22. The government’s 2022-23 financial results continue to improve compared to 2021-22 as the fiscal impact of the COVID-19 crisis and the unprecedented level of temporary COVID-19 response measures wane.

Brazil Current Account Deficit Smaller than Expected
Brazil’s current account gap shrank to USD 4.6 billion in October of 2022 from USD 6 billion in the corresponding month of the previous year and compared with market estimates of a USD 4.9 billion deficit. This was the smallest monthly current account shortfall since a surplus was recorded in June. The goods surplus rose to USD 2.6 billion from USD 1.4 billion in October of 2021 and the primary income gap narrowed to USD 4.1 billion from USD 5.2 billion. Meanwhile, the services deficit rose to USD 3.4 billion from USD 2.5 billion while the secondary income surplus was barely unchanged at USD 0.3 billion.

Mexico Q3 GDP Revised Lower
The Mexican economy expanded 0.9 percent on quarter in the three months to September 2022, slightly below preliminary estimates of a 1.0 percent gain and easing from a revised 1.1 percent growth in the previous period. Output slowed for all three major sectors, including the primary (2.0 percent vs. 2.9 percent in Q2), manufacturing (0.6 percent vs. 0.7 percent), and services (1.1 percent vs. 1.3 percent). The country’s economy advanced 4.3 percent yearly, following a revised 2.4 percent gain in the previous period but above a preliminary reading of a 4.2 percent raise. Looking for the bigger picture, the Finance Ministry said in a report that the economy will expand by 2.4 percent in 2022 despite a challenging international environment, partly because of strength in the labor market that has supported private consumption.

Mexico Current Account Deficit Widens in Q3
Mexico’s current account deficit rose to USD 5,505 million in the third quarter of 2022, from USD 4,324 million in the corresponding quarter of the previous year, almost in line with market estimates of USD 5,500 million. The goods shortfall widened to USD 12,391 million from USD 10,041 million in the third quarter of 2021, and the services deficit rose to USD 4,168 million from USD 3,053 million. Meanwhile, the primary income gap narrowed to USD 4,305 million from USD 4,889 million whereas the secondary income surplus rose to USD 15,359 million from USD 13,660 million.

Germany GDP Growth Rate Revised Higher to 0.4%
The German economy expanded 0.4% on quarter in Q3 2022, slightly better than a 0.3% rise in the first estimate, and following a 0.1% growth in Q2. Household expenditure was the main driver and jumped 1%, as consumers took the opportunity to travel and go out more, after nearly all Covid-19 restrictions had been lifted, despite continuing sharp price increases and the energy crisis. In contrast, government spending was flat and gross fixed capital formation in construction were down 1.4% while investment in machinery and equipment rose considerably (2.7%). Meanwhile, trade with foreign countries went up, boosted by the continuing high stock of orders and improved supply chains worldwide, with exports up 2% and imports 2.4%. On the production side, manufacturing was the key driver (0.9%), namely the automotive industry and manufacture of machinery and equipment. Most service branches also rose, namely trade, transport, accommodation and food services (+3.3%).

Germany Consumer Morale Stabilizes
The GfK Consumer Climate Indicator in Germany rose to -40.2 heading into December of 2022 from -41.9 in November, compared with market expectations of -39.6. The latest reading marked a further stabilization in sentiment amid government energy measures, with both economic conditions (-17.9 vs -22.2) and income expectations (-54.3 vs -60.5) increasing. Meantime, the willingness to buy was marginally lower (-18.6 vs -17.5), as consumers are still putting aside money in anticipation of exploding energy bills in the coming months. The index hit its record low of -42.8 in October. “Consumers’ long-standing fear of skyrocketing energy prices has currently eased, which is having a slightly positive impact on consumer sentiment,” said Rolf Bürkl, GfK consumer expert. “On the one hand, some energy prices have recovered a bit, and on the other hand, consumers apparently assume the measures adopted to cap energy prices can help curb inflation, even if this may turn out to be rather modest.” 

French Unemployment at 10-Years Low
The number of people registered as out of work in mainland France fell by 30.7 thousand from the previous month to 2.875 million in October of 2022, the lowest number since January 2012. It was the third consecutive reduction in unemployed individuals, as joblessness in the population aged 25 to 49 fell by 21.4 thousand to 1.682 million, and that of the population aged 50 or higher fell by 12.5 thousand to 0.821 million. On the other hand, unemployment in the younger population rose by 3.2 thousand to 0.373 million individuals. Compared to the same month of the previous year, the number of people registered as out of work fell by 309.2 thousand. 

French Consumer Morale at 6-Month High 
Consumer confidence in France increased slightly to 83 in November of 2022, the highest since May, from 82 in October and matching market expectations. Improvements were seen for current saving capacity (16 vs 13), the personal financial situation (-21 vs -23) and the outlook for the standard of living (-60 vs -64). Meanwhile, households’ fears about unemployment rose (28 vs 24), while the proportion of households considering that prices will be on the rise during the next twelve months has declined (-4 vs -1).

Italian Consumer Confidence Better than Expected
Italian consumer confidence rebounded by 8 points from the prior month’s 10-year low to 98.1 in November of 2022, well above market expectations of 91. Still, the gauge remains below 117.5-levels prior to the Russian invasion of Ukraine, as economic uncertainty continues to weigh. Increases were seen in all main components, in particular future expectations (102.8 vs 88.8 in October). Also, improvements were seen in the current climate (94.9 vs 91), the personal climate (99 vs 94.3) and the economic climate (95.2 vs 77.6).

Italian Business Confidence Rebounds
Manufacturing confidence in Italy rose to 102.5 in November of 2022 from an upwardly revised 100.7 in the prior month, beating market expectations of 99.6. It was the highest reading since August. Both manufacturing, services, retail and the general business climate sentiment indicators saw around 2-point improvements, as future expectations outpaced downward pressure from falling order books.

Spain Producer Inflation Slows to Over 1-Year Low
Spain’s producer price inflation eased to 26.1 percent year-on-year in October 2022, moving further away from the record high levels seen earlier this year. It was the lowest rate since September 2021, due to smaller increases in costs for energy (54.1 percent vs 84.2 percent in September), intermediate goods (15.9 percent vs 18.6 percent), and capital goods (5.5 percent vs 5.6 percent). Meanwhile, inflation picked up for non-durable consumer goods (14.2 percent vs 13.2 percent), while it was unchanged for durable consumer goods (at 7.8 percent). On a monthly basis, producer prices dropped 1.4 percent in October after being unchanged in September.

Swedish Producer Inflation Eases to 1 Year-Low
Annual producer inflation in Sweden eased to 18.7 percent in October 2022 from 20.6 percent in the previous month. It was the softest increase in producer prices since November 2021, mainly weighed down by the slowing costs for energy-related products (48.2 percent vs 54.2 percent in September). Meanwhile, cost rose marginally faster for consumer goods (18.1 percent vs 17.8 percent) and capital goods (12 percent vs 11.8 percent). Excluding energy-related products, producer prices grew by 14.2 percent. On a monthly basis, producer prices fell by 2.5 percent, after increasing by 0.4 percent in September, due to lower prices on trade services of electricity.

Danish Retail Sales Fall the Most in 7 Months
Retail sales in Denmark dropped 10.3 percent year-on-year in October 2022, following a 5.4 percent fall in the previous month. It was the sixth straight month of decline in retail trade, and the steepest pace since March, as sales decreased faster for all categories: clothing (-18.6 percent vs -7.4 percent), food and other groceries (-6.6 percent vs -4.6 percent), and other consumables (-11.6 percent vs -5.6 percent). On a seasonally adjusted monthly basis, retail sales went down 1.7 percent, the second straight month of decline, after a 0.4 percent drop in September.

Swiss Non-Farm Payrolls Rise 2.2% in Q3
Switzerland’s non-farm payrolls rose 2.2 percent year-on-year to 5.362 million in the third quarter of 2022, following a 3.2 percent advance in the previous three-month period. Employment in the industrial sector rose 2.0 percent to 1.122 million, as increases were seen in manufacturing (2.4 percent) and construction (1.0 percent). In addition, payrolls in services went up 2.3 percent to 4.241 million, driven by gains in hotels & restaurants (7.6 percent), transport & communication (3.2 percent), health (2.7 percent), business services (2.4 percent), education (1.6 percent) and financial & insurance activities (1.3 percent). Meanwhile, employment in wholesale and retail trade fell 0.1 percent.

UK Car Production Returns to Growth in Oct
UK car production rose 7.4% to 69,524 units in October 2022 from a year ago, returning to growth after a slump in September, though production figures remain well below pre-pandemic levels as global chip shortages continued to affect British car manufacturers. SMMT chief executive Mike Hawes said: “ A return to growth for UK car production in October is welcome, though output is still down significantly on pre-Covid levels amid turbulent component supply.” About 81% of output were exported, with the lion’s share going to the EU, and in smaller volumes to other countries such as the US, Japan, South Korea, Australia and Turkey. UK production of battery electric, plug-in hybrid and hybrid vehicles also rose, with combined volumes up 20.3% to 24,115 units.

Baltic Exchange Dry Index Rises for 3rd Day, Posts Weekly Gain
The Baltic Dry Index, which measures the cost of shipping goods worldwide, extended gains for the third session on Friday, rising about 6.6% to a nearly two-week high of 1,324 points. The capesize index, which tracks iron ore and coal cargos of 150,000 tonnes, extended its winning streak for the third day, jumping 16.6% to 1.613 points; and the supramax index was up 8 points to 1,182 points. Meanwhile, the panamax index, which tracks about 60,000 to 70,000 tonnes of coal and grains cargoes, gained for the second day, rising 0.9% to 1,479 points. The Baltic Dry Index advanced by 11.4% this week, the highest since early October. 

The Week Ahead

The upcoming week will be rich in economic dataand speeches by Fed officials including Fed Chair Jerome Powell’s talk at the Brookings Institution. In November, the economy is seen adding 200k non-farm jobs, with unemployment sticking at 3.7%. The average hourly earnings growth is seen slowing to 0.3%. Other indicators include a revised estimate for third-quarter GDP, corporate profits, JOLTs Job Openings, the PCE Price Index, Personal Income & Spending, ISM Manufacturing PMI and CB consumer confidence. Corporate earnings will also provide additional insight with Pinduoduo, Intuit, Workday, Salesforce, Synopsys, and Dollar General reporting results.

Canada will publish its third-quarter GDP and unemployment report. Brazil will also report GDP figures for the June-September period.

In Europe, preliminary inflation rates for the Eurozone, Germany, Italy and Spain will be published. Consumer prices in the Euro Area likely rose 10.4% in November, easing from a 10.6% advance in October and marking the first slowdown since June 2021. At the same time, producer prices in the region are forecast to fall for the first time since May 2020. Unemployment data for major European economies will also be released with Manufacturing PMIs. Several countries including France and Italy will update Q3 GDP figures, while Switzerland and Turkey will release preliminary readings.. Other data will include: Euro Area business survey, Germany domestic and international trade, and Switzerland inflation and retail sales.

In the United Kingdom, the economic calendar will be soft with only the Bank of England’s monetary indicators, CBI distributive trades, Nationwide housing prices, and final manufacturing PMI to be released. Investors will also follow an OPEC and non-OPEC countries meeting, after a report from the WSJ earlier this month suggested that an increase in oil production was under discussion.

In Asia, Chinese manufacturing PMI figures for November will show where factory activity stands as officials in the world’s second-largest economy mandated widespread pandemic lockdowns in important industrial hubs. In Japan, key releases include consumer confidence for November and the unemployment rate, retail sales, and industrial production for October. In India, the focus will be on Q3 GDP growth data, followed by the manufacturing PMI for November. A busy week of economic releases also includes South Korea’s November’s PMI, balance of trade, and inflation rate, Indonesia’s November CPI print and Thailand’s trade data for October.

In Australia, the monthly CPI reading is expected to show that inflation climbed to 7.4% in October. Other Aussie releases include the Ai Group Manufacturing index for November and building permits, construction, and home credit data for October. In New Zealand, investors await the business confidence indicator for November.

INFLATION

If Inflation gauges are peaking in the US and China, they are still rising to new highs in Europe and accelerating sharply in Japan.

BONDS

USA

10-Year Treasury Yield Consolidates Below 3.7%
The yield on the US 10-year Treasury note, seen as a proxy for global borrowing costs, consolidated below 3.7%, a level not seen since October 4th, as the narrative started to change from inflation and tightening to recession and the likelihood of a policy pivot. Minutes from the last Federal Reserve meeting showed officials see the case for a slower pace of interest rate rises. The November meeting minutes also showed that policymakers were growing concerned about the economy’s health, with officials noting that a recession is now almost as likely as their baseline projection of weak growth. This outlook for monetary policy is decoupling from the one seen for Europe, in which the ECB reassured markets that its tightening cycle is far over despite the continent heading for a recession in the last quarter of 2022. Germany’s 10-year Bund yield, the European benchmark, rebounded from a two-month low to around 1.9%.

Europe

German 10-Year Bond Yield at 2-Month Low
German 10-year yields stood at 1.9%, remaining close to their lowest level since September 19th and heading for their third straight weekly fall, as investors hoped that central banks might not raise interest rates as much as previously thought amid cooling inflation pressures and fears of a global economic downturn. Also, the gap between the 2-year and 10-year government bond yields touched -27 bps, the widest since October 1992, in a sign that investors expect the ECB to continue raising rates, before pausing or even cutting rates next year to support the economy. Earlier this week, the ECB’s meeting accounts showed that policymakers will continue tightening monetary policy to combat high inflation, even in the event of a shallow recession, but they are willing to pause the ongoing interest rate hikes if there is a prolonged and deep recession.

UK 10-Year Bond Yield Stabilize Around 3%
The yield on the UK’s 10-year Gilt steadied around 3%, remaining close to its lowest level since early September, on hopes that central banks might not end up hiking as aggressively as feared. Deputy Governor Ramsden backed more interest rate hikes, but said he would consider cutting rates if the economy developed differently to his expectation and persistence in inflation stopped being a concern. MPC member Tenreyro said she saw rates on hold this year and then falling in 2024, while Dhingra has warned that an over-tightening of policy could stoke a deep recession. Markets are now split between pricing a 50 and 75 bps hike in December, after the central bank has raised rates by 290 bps since December 2021.

Asia

Japan 10Y Bond Yield Hits 4-week High
Japan 10 Year Government Bond Yield increased to a 4-week high of 0.26% after official data showed that Tokyo’s core inflation rate hit its highest since April 1982 in November, due to high energy and food prices as well as persistent yen weakness. Core inflation in the capital city of Japan accelerated to 3.6% yoy this month, exceeding the Bank of Japan’s 2% target for the sixth straight month. Meantime, the government said earlier in the week that it stayed vigilant over risks from a global economic slowdown and market fluctuations while leaving the overall assessment of the nation’s economy unchanged in its monthly report for November. Data from last week showed that the Japanese economy unexpectedly shrank for the first time in a year in Q3, amid sluggish global growth and a surge in imports that hurt consumption and business activity. The move in JGB was in contrast to the US Treasuries, amid dovish cues on interest rates from the Federal Reserve.

EQUITIES

World Indexes

USA

US Stocks Book Gains for Holiday Week
The Dow Jones added more than 150 points in shortened trading on Friday while the S&P 500 was little changed as investors reassessed the outlook for monetary policy while looking for clues on consumer health as Black Friday shopping started.

Nasdaq underperformed, falling roughly 0.5%, as shares of Activision Blizzard closed down more than 4% following news that the FTC was planning to file an antitrust lawsuit to prevent Microsoft from acquiring the videogame publisher. Investors also digested the latest move from China, with the central bank cutting the reserve requirement ratio for banks by 25 basis points to shore up growth in an economy battered by persistent coronavirus-induced restrictions and real estate crises. Investors continued to parse the minutes from the last Fed meeting, with policymakers seeing the case for slower interest rate hikes while recognizing that recession risks are rising. For the week, the Dow gained 1.8%, the S&P 500 1.5% and the Nasdaq 0.7%.

Americas

Canadian Stocks Extend Gains
The S&P/TSX Composite index rose 0.4% to the 20,400 level on Friday, extending gains from the two prior sessions to levels last seen in early June as advances for heavy-weight banks offset the retreat from tech shares. BMO, TD Bank, and the RBC all extended the strong momentum from earlier in the week to hover 0.5% above the flatline as investors continued to gauge expectations of tighter policy by the BoC. Money markets currently price a 25bps rate hike by the central bank in their December decision, anticipating the softest rate hike since March. In the meantime, traders awaited further news from the EU regarding the possible price cap on Russian oil, as the Western Canadian Select oil benchmark trades at a $10/barrel discount to Urals oil and would face higher competition should the cap go through and be triggered. The Toronto Exchange’s benchmark equity index closed the week 2% higher.

Brazilian Stocks Drop on Friday
Brazil’s Ibovespa fell nearly 1% to trade below the 109,000 level on Friday, after jumping almost 3% the day before, on easing political fears after Brazil’s electoral court rejected a challenge against the presidential election result made by the pro-President Jair Bolsonaro coalition. Meanwhile, investors were still waiting for news about the PEC of Transition and the ministerial team of the new government, especially who will occupy the Ministry of Economy. Brazilian Senator Marcelo Castro, the upcoming author of a constitutional amendment for a spending cap waiver, told Reuters on Thursday that the bill must be approved by December 10th so lawmakers can focus on the country’s budget for next year. All sectors were trading in the red, except basic materials amid rising prices of oil and iron ore. The Ibovespa closed the week flat.

Miners Drag Down Mexican Index
The Mexican S&P/BMV IPC index closed 0.6% down on Friday, in line with the retreat for Latin American bourses as surging Covid cases in China pressured sentiment for economies affected by commodity prices. Mining giant Grupo Mexico led the losses in the session, tanking more than 4% and tracking the retreat for silver and copper benchmarks as Beijing tightened pandemic restrictions for households and businesses, pressuring industrial demand. Financial stocks also booked losses, with Inbursa and Banorte dropping more than 1.5% each. The IPC index closed the week 0.6% higher. On the data front, Mexico’s GDP growth for Q3 was revised slightly higher to 4.3% year-on-year. 

Europe

European Stocks Climb for 6th Week
European equity markets edged up on Friday, with the STOXX 600 advancing for a sixth straight week for the first time since October last year, amid further signals that central banks might not end up hiking as aggressively as feared. Earlier this week, minutes from the Federal Reserve’s latest meeting suggested there will be a slower pace of interest rate hikes in the coming months, while the European Central Bank’s meeting accounts showed policymakers agreed to tighten policy further but suggested that a prolonged and deep recession would lead to a pause to the ongoing interest rate increases. Among single stocks, Credit Suisse dropped nearly 6% to 3.35 Swiss francs, a record low. Domestically, the German DAX also closed higher, and notched its eighth consecutive week of gains, after quarterly economic growth was revised higher to 0.4% in the third quarter, and consumer confidence in the country improved for the second month heading into December.

CAC 40 Closes Flat
French stocks ended Friday’s session virtually flat, with the benchmark CAC 40 hovering near an eight-month peak of 6,720 points, as gains in the energy and healthcare sector offset gains in real estate. In a session marked by tight trading volumes amid a shortened-holiday week in the US, investors continued to digest the latest minutes from the ECB and the Federal Reserve. In terms of individual share price movement, TotalEnergies and ArcelorMittal rallied roughly 1% each to lead the index, while Renault was among the biggest laggards, down 1.5%. The CAC 40 added 1% this week, posting its eighth consecutive weekly gain. 

FTSE 100 at Three-Month High
The FTSE 100 index closed just shy of the 7,500 level, the highest in three months, driven by gains in energy and industrials. In the lack of fresh catalysts, investors continued to parse the latest remarks from the ECB and the Federal Reserve. Minutes from the ECB’s last meeting showed that policymakers remained committed to raising rates, even in a case of a recession. While the ECB seems to be far from ending its tightening cycle, the minutes of the Fed’s November meeting showed that a substantial majority of policymakers agreed that soon it would be appropriate to slow the interest rate hikes. On the corporate side, Frasers Group and Imperial Brands rose more than 1% each to lead the FTSE 100, while Endeavour Mining was among the biggest laggards, down nearly 2%. The FTSE 100 rallied roughly 1.5% this week, recording its second consecutive weekly gain.

Spanish Stocks at 3-Month High
The IBEX 35 index rose on Friday, and climbed more than 3% on the week to above 8,420, the highest since August 18th. On Friday, banks rose more than 1% to led gains in the Spanish index, in particular Santander (+1.7%), Sabadell (1.2%), BBVA (+1.1%) and CaixaBank (+0.7%). On the other hand, Inditex went down 0.4%, as the Spanish owner of the clothing brand Zara is currently facing two days of strikes in its region when the unions and management failed to reach a settlement.

Italian Shares Close Higher
The FTSE MIB index closed a choppy session at the flatline at 24,720 on Friday, notching a 0.2% increase on the week as investors continued to monitor developments regarding EU price caps on Russian oil and natural gas exports. Utility shares closed marginally higher on the week after the EU Commission proposed a ceiling on TTF contracts of EUR 275/Mwh, well above current prices. The sector was also supported by news that the Italian government is spending around EUR 5 billion per month to shield families and businesses from soaring energy bills. In the meantime, ministers continued to debate the ceiling on oil prices, last considered at around $65-$70 per barrel. Among single shares, A2A added more than 2%, extending gains after announcing that it will trim green investments and continue its dividend policy.

China

China Stocks Mixed on Covid Fears
The Shanghai Composite rose 0.4% to close at 3,102 while the Shenzhen Component fell 0.48% to 10,904 in mixed trade on Friday, as Covid-related concerns in China countered fresh support for the country’s ailing property sector. China continued to grapple with surging Covid cases that stoked fears of wider restrictions and clouded the outlook further for the world’s second-largest economy. Meanwhile, the country’s largest banks have pledged at least $162 billion in new loans to property developers in a move that analysts hope could boost economic growth. Top government officials also signaled more monetary stimulus ahead to support the economy, including a possible cut to the reserve requirement ratio. Growth-oriented new energy, healthcare and technology stocks declined, while property, industrial and consumer-related firms advanced.

Hong Kong registers 2nd Straight Weekly Losses
The stock market in Hong Kong closed the week 2.52% lower for the week, the second straight weekly fall, pressured by the worsening COVID situation in China. Curbs reportedly are expanding across the mainland as daily cases hit a record high Thursday. In Beijing, normal life has been severely disrupted, with supermarket delivery apps being overwhelmed, amid growing fears of lockdown-like restrictions. At the same time, traders were unsure about the impact of the massive support from the government in the Chinese property sector, as developers remain wary of collecting enough cash via sales, bonds, or equity financing. Consumer cyclicals, tech, healthcare, and utilities, dragged down the index, amid sharp drops from Chow Tai Fook Jewelry (-12.2%), Haidilao Intl. (-4.7%), Zhongsheng Group (-4.4%), Tencent (-3.8%), Meituan (-3.4), Net Ease (-3.4%), and Baidu Inc. (-3.1%).

Demonstrations across China are now putting considerable pressure on the Government to ease or even change its COVID policy. XI Jing Ping is being attacked directly and the rule of the Cup being questioned, rare features in a country where public opinion is highly controlled.

Japan

Japanese Shares Ease on Profit-Taking
The Nikkei 225 Index fell 0.35% to close at 28,283 while the broader Topix Index shed 0.04% to 2,018 on Friday, as investors took some profits off the table following a strong rally driven largely by expectations that the US Federal Reserve will slow the pace of interest rate hikes. Investors also reacted to data showing core consumer prices in Tokyo, a leading indicator of nationwide price trends, surged to a 40-year high of 3.6% in November amid broadening inflationary pressures. Technology stocks led the retreat, with notable losses from Tokyo Electron (-0.8%), Keyence (-1.5%) and Advantest (-1%). Other index heavyweights also declined such as Fast Retailing (-0.8%), Sony Group (-0.8%) and Kawasaki Kisen (-1.1%), while notable gains were seen from SoftBank Group (0.3%), Mitsubishi UFJ (1%) and Toyota Motor (0.4%).

Asia

India

Sensex At Record High
The BSE Sensex closed 20 points above the flatline at 62,293 on Friday, slightly extending its record high as gains among Mumbai’s heavyweight auto manufacturers offset losses for banks. Sentiment in the session was mixed as investors continued to hope for slower monetary tightening by the Federal Reserve signaled by FOMC minutes, weighing against a record-high amount Covid cases being recorded in China and Beijing mandating fresh curbs on households and businesses. Tata Motors and Hero Moto rose 2.3% and 1.5%, respectively, to lead the gains in India’s benchmark stock index as signs of lower energy demand in China could ease gasoline prices. On the other hand, ICICI Bank led the losses among lenders with a 1% retreat. On the week, the Sensex closed 1% higher.

Middle East

CURRENCIES

Dollar Ends Week lower 
The dollar index regained some ground but failed to hold the 106 mark on Friday, as investors assessed the outlook for growth and monetary policy. The latest Fed meeting minutes showed that a substantial majority of policymakers agreed it would soon be appropriate to slow the pace of interest rate hikes while pointing to increased recessionary risks. Earlier this month, the Fed delivered its fourth straight 75 basis point rate increase to tame stubbornly high inflation, pushing borrowing costs to the highest since 2008. The DXY is on track to end the Thanksgiven week, in which trading volumes were substantially thin, down almost 1%

CRYPTO CURRENCIES

COMMODITIES

Energy

Oil Falls Sharply for 3rd week
WTI crude futures fell below $77 per barrel in thin trading on Friday ending the week more than 6.5 % lower due largely to concerns about Chinese demand and reports of a high price cap by G7 nations on Russian oil that eased supply worries. The US oil benchmark is down for the third consecutive week, as China continued to grapple with surging Covid cases, stoking fears that authorities would adopt wider movement restrictions that could hurt energy demand in the world’s top crude importer. Meanwhile, markets evaluated the impact of the G7’s proposed price cap on Russian oil in the range of $65-70 per barrel which is higher than current prices for Urals, allaying fears that Russia would retaliate by cutting supply. Still, investors remain cautious ahead of the European Union ban on Russian crude on Dec. 5, as well as an OPEC+ meeting 

US Natural Gas up 15% Last Week
US natural gas futures rose to above $7.2/MMBtu, set to close the fourth week of November 15% higher and approaching the 2-month high of $7.3 touched on November 23rd, lifted by concerns of potential coal supply disruptions. Workers at the largest US rail union voted against a tentative contract deal reached in September, raising the possibility of a year-end strike that could disrupt coal deliveries and force power generators to switch to gas. In the meantime, uncertainty over the supply and demand of natural gas in the US over the coming months prevailed as investors monitored forecasts of cold weather and news regarding the restart of the Freeport LNG export terminal. Freeport has signaled that operations should restart in December, but has not yet submitted activity requests to the US government. Meanwhile, EIA data showed US utilities pulled 80 billion cubic feet of gas from storage during the week ending November 18th, below market expectations of an 87 billion draw. 

Gasoline Futures Extend Losses to 8-Week Low
Gasoline futures extended losses toward $2.3 per gallon, the lowest in eight weeks amid renewed fuel demand concerns, in particular from China, and after a bigger-than-expected inventory build last week eased concerns about market tightness. The latest EIA data showed US gasoline stocks rose by 3.058 million barrels in the week ended November 18th, the most since mid-July, compared with market expectations for a smaller 383,000-barrel rise. The report also showed gasoline production fell by 625 thousand barrels, the first weekly decrease since early October.

Copper

Precious Metals

Gold Firms Up on Fed Slowdown Hopes
Gold firmed up above $1,750 an ounce on Friday to end the week marginally higher as the latest Federal Reserve meeting minutes showed that a substantial majority of US policymakers backed a slower pace of interest rate hikes in the coming months. The central bank now wants to assess the impact of its historic tightening campaign on the economy after raising the policy rate in six consecutive meetings and bringing borrowing costs to the highest levels since 2008. Markets are betting that the Fed would moderate the size of rate hikes to 50 basis points in December after delivering its fourth straight 75 basis point increase earlier this month. Gold is highly sensitive to the rates outlook as higher interest rates raise the opportunity cost of holding non-yielding bullion, denting its appeal.

Soft Commodities

Soybeans Futures Continue to Trade in Narrow Range 
Soybeans futures continued to trade in a range near $14.5 per bushel in late November, well below their May peak of roughly $17.3, as investors mulled a gloomy outlook for demand against tight supplies. Rising coronavirus cases and renewed restrictions in China clouded the demand outlook in the world’s top grains consumer, thus keeping a lid on prices. On the supply side, the upcoming soy season is likely to be affected by a lack of rain, while farmers are unincentivized to invest in planting due to the La Nina climate pattern. Meanwhile, Russia agreed to extend a United Nations-brokered deal allowing exports of Ukrainian grain and other farm products from the Black Sea.

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