- A strong start to earnings season was a big driver of this week’s upside with banks posting positive surprises.
- The NASDAQ and the S&P 500 both experienced their best week since August
- Bond yields weakened with flattening along the curve.
- The global energy crunch continues to effect supply chains with the port of Los Angeles and the Port of Long Beach going into 24/7 operation to attempt to alleviate some of the strain.
- WTI was up 3.7% with eight weeks straight of gains by weeks end at over 30% since August.
- No additional progress seen thus far on the Fiscal stimulus bill, with Manchin and Sinema holding out key votes.
- Accommodative monetary policy is expected to continue well into the near future based on September FOMC notes.
- In China, property developer Evergrande missed a third interest repayment in three weeks according to Nikkei.
- In Japan, the parliament was dissolved last Thursday ahead of highly anticipated October 31st general elections.
- In South Korea, Bank of Korea (BOK) policy makers unanimously decided to maintain benchmark interest rates at 0.75%.
U.S. equities remained strong last week with the S&P and NASDAQ posting their best week since August. Strong earnings, a crude oil rally, and expected accommodative monetary policy all contributed to solid gains with Growth finally snapping its four-week streak of underperformance to Value.
Oil posted a big rally with WTI up 3.7%, experiencing an eighth week of gains. There was some curve flattening with the 2Y and 3Y particularly weak amid increased Fed rate hike expectations. The U.S. Dollar Index ended slightly down, breaking its five-week streak and gold finished 0.6% up. Bitcoin rallied 12% amid optimism that the SEC will allow the first Bitcoin Future ETF to start trading next week.
CPI came in slightly hotter than expected while PPI was below the consensus. Markets pushed forward the timing of the fed rate hike to Q3-22 from Q4-22 on the news. Despite inflation fears, some economists have pushed back against the threat of stagflation citing strong persistent demand across the economy. They claim that these interruptions in growth economic indicators can be attributed to Hurricane Ida and lingering Delta Variant disruptions to supply chains, and that their effects will prove to be transitory.
Expectations persist for accommodative monetary policy despite the taper and rate hike timeline. In the last release of FOMC meeting minutes, various participants stressed economic conditions were likely to provide justification for keeping rates at or near the lower bound in the years to come. The minutes also stated that $10B in Treasuries and $5B in MBS purchases could be cut monthly, with purchases ending mid-2022, showing a divergence between growth objectives for monetary policy and taper timelines.
Global energy crisis
The ports of Los Angeles and Long Beach have pledged to operate 24/7 to help alleviate supply-chain issues ahead of the holidays. Container shipping rates remain elevated despite a price decrease in recent weeks. It still costs on average close to $11,000 to ship a 40-foot box from Shanghai to Los Angeles according to Bloomberg. Despite incremental supply chain improvements, the global energy crisis remains a headwind to economic growth and could exacerbate inflation in the months ahead, according to a report in the Wall Street Journal. The International Energy Agency claims that the current surge in energy prices can be explained by a global crude supply deficit caused by the price-driven shift from gas to oil. Indeed, the recent uptick in gas futures may have fueled short-term demand for oil.
Buy the dip
Last week, global equities experienced $12B of net inflows with the U.S. seeing an outsized portion of that money winning market share away from Emerging Markets and Japan according to Goldman Sachs. According to strategists at JP Morgan, overall de-risking activity was a driver to last week’s pullback and created a “Buy-the-Dip” opportunity. Buybacks and repositioning among large firms especially benefited Cyclicals given the backdrop of energy concerns and rising yields. Hedge funds boosted their net long S&P 500 positions to the highest level in a year, according to CFTC data.
U.S. markets started the week broadly stronger. Industrial production missed its consensus estimate Monday morning, yet this news failed to prevent the day from reaching near market highs. Softer than expected China data additionally failed to meaningfully slow market performance with headlines quiet and no clear themes.
Growth outpaced value, extending last week’s 120bps outperformance. Consumer discretionary received help from department stores and Homebuilders, while Tech was lifted by Apple and Microsoft. Healthcare was a laggard with certain Biotechs showing weakness and utilities trailing.
Treasury yields came off highs with more flattening in the middle of the curve. The Dollar was stronger, specifically against the Yen crosses but weaker versus the Euro. Gold finished at -0.1% and WTI edged down.
Directional influences failed to materialize. Early selling pressure, presumably a product of softer China Q3 and September production misses, was forgotten amidst higher earnings from banks. This gave credence to the Macroeconomic strength story, despite the negative surprise data.
Headlines also did not provide a clear theme in Monday’s session. No incremental change was achieved in the progress of fiscal stimulus. A story concerning Powell’s stock sale (over $1 million in October 2020) failed to place his re-nomination at risk. There was no endorsement on the fiscal compromise from either Senators Manchin or Sinema.
Some of the most important economic data being released this week include the PMI index (on Friday), Industrial Production already released (-1.3%), and the LEI index on Thursday.
Last week, the Bloomberg World index gained 2.14% amid the start of earnings season. Energy prices stole the headlines once again as Brent found comfort above $82 per barrel. Natural gas futures appear to have stabilized following unsustainable parabolic moves in the last couple of weeks. Cyclicals are leading markets higher, with the growth-at-a-reasonable-price factor participating in the upside. There is a feeling of Déjà vu, except this time, Central Banks are ready to use their tools to fight inflation.
In France, President Emmanuel Macron unveiled $35 billion industrial revival plan to be at the forefront of secular growth sectors such as renewable energy, electric cars, semiconductors and robotics. According to data compiled by Bloomberg, the share of industry in the French economic output has been declining for decades. The three major objectives set by Macron for his “France 2030” plan are “building small reactors in France, becoming the leader of green hydrogen and decarbonizing French industry”. Six months away from presidential elections, Macron hopes to create momentum around his candidacy with this plan as far right candidates gain popularity in polls. The CAC 40 index gained 2.55% last week.
In the United Kingdom (UK), Bank of England (BOE) Governor Andrew Bailey said that rising energy prices is a signal of persisting inflation and that the Central Bank is ready to react. The benchmark interest rate currently stands at 0.1%, leaving no policy flexibility in case of an exogenous shock. Markets are pricing in gradual rate hikes to bring the benchmark at 1% by the end of 2022. Economists expect the first rate hike to occur in November or December. Over the past three weeks, the UK 10-year yield rose from 0.80% to 1.13%, perfectly in sync with the global cyclical rotation. The FTSE 100 index gained 1.95% last week.
In China, property developer Evergrande missed a third interest repayment in three weeks according to Nikkei. Fellow developers Sinic Holdings and Fantasia Holdings warned of a potential default in the coming weeks. Ratings agencies subsequently downgraded their credit ratings. According to Bloomberg, Chinese property developers now represent nearly half of the world’s distressed dollar bonds. Another sign that investors are increasingly nervous is China five-year sovereign credit default swaps (CDS) climbed to the highest level since April 2020. The Hang Seng index gained 1.99% last week led by industrials and real estate.
In Japan, the parliament was dissolved last Thursday ahead of highly anticipated October 31st general elections. Prime Minister Fumio Kishida hopes his ruling coalition can retain majority in the House of Representatives. He tasked his advisory panel to think about ways to create “a virtuous cycle of growth and distribution” according to a Cabinet Office statement. Last month, Tokyo inflation rose 0.3% year-over year, which is the highest level since August 2020. Japanese stocks gained 3.16% last week led by materials, industrials and real estate. Financials and Utilities lagged the broader market.
In India, Finance Minister Nirmala Sitharaman said the government is not in a hurry to unwind pandemic-era stimulus. She added that building health infrastructure will remain a top priority as COVID-19 exposed the weaknesses of the current system. Asia’s third-largest economy is working on divesting state-owned enterprises to finance social programs and infrastructure investments. On the monetary side, India’s central bank decided to adopt a different tone by suspending its Quantitative Easing program. The Nifty 50 index gained 2.48% last week.
In South Korea, Bank of Korea (BOK) policy makers unanimously decided to maintain benchmark interest rates at 0.75%. The Central Bank sees the economy growing at 4% this year and inflation rising above 2%. The Korean 10-year bond yield climbed from 1.41% at the beginning of September to 1.88% mid-October as the bond market continues to price in higher consumer prices. BOK hinted that a rate hike should be expected next month as household debt grew over 10% from a year ago in June due to favorable financing conditions. The KOSPI index gained 1.99% last week, led by industrials and materials.
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