- US equities ended the week lower, reversing gains from the previous week as the S&P declined, falling in 6 of 7 sessions.
- The 2/10’s curve reached the lowest levels since 1981 as the 10-year finished around 3.60% (off the lows of 3.40%) with prospects of a potential recession in 2023 gaining momentum.
- All S&P sectors were lower for the week with Energy being the big laggard alongside oil’s slide, with WTI crude falling more than 11% amid a deteriorating macro backdrop.
- This year is set to be the worst for both the cap-weighted S&P 500, and the equal weighted since 2008. However, the equal-weighted (SPW) has outperformed and dropped less due to energy.
- CPI slowed for a 5th straight month, falling to 7.1% vs 7.3%, which should justify slower Fed rate hikes, and potentially a lower terminal rate.
- FOMC meeting will conclude on Wednesday, with expectations that the Fed will scale back the magnitude of their hikes from 75bp to 50bp. There still continues to be a number of projections regarding what the terminal rate may be, but most have settled around 5.0%-5.25%.
- European Union (EU) energy ministers are currently discussing a proposal to cap gas prices in the European Union, but a consensus is far from being found on the topic.
- Japan agreed to join the United States and the Netherlands on tightening China chip exports to prevent Beijing’s military from obtaining advancing semiconductors.
US equities ended the week lower, reversing gains from the previous week as the S&P declined, falling in 6 of 7 sessions. Other major indices remained on their heels, retreating after hitting recent highs, following Federal reserve chairman Powell’s remarks on November 30th. The sell-off this time wasn’t driven by higher treasury yields, but rather was attributed to risk aversion and the threats to US economic growth. The 2/10’s curve reached the lowest levels since 1981 as the 10-year finished around 3.60% (off the lows of 3.40%) with prospects of a potential recession in 2023 gaining momentum.
The Dollar posted a weekly gain of 0.4% and is headed for its best yearly performance since 2015, even though it is down about 7% from record highs. The retreat has mainly been attributed to easing inflationary pressures.
All S&P sectors were lower for the week, with Energy being the big laggard alongside oil’s slide, with WTI crude falling more than 11%, posting its worst week since April amid rising concerns about the deteriorating macro backdrop. Consumer Discretionary was also an underperformer, with autos weighing on the space, as TSLA dragged down other EV and lithium names.
Financials, and more notably banks, were weaker with regionals faring worse than large caps, although both were broadly lower. Department stores, airlines, trucking, industrial metals (particularly aluminum), apparel, software, and profitless tech were among the other laggards.
The Russell 2K and small caps also declined more than 5% on the week on profit concerns. While US stocks face the prospect of more earnings downgrades next year, small caps could be at higher risk. Despite the Russell 2K, 12-month forward EPS having dropped about 6.5% since the start of October. This is compared to -2.6% for the S&P 500 and -3.9% for the Nasdaq 100; small-caps are generally not as profitable as some of their larger peers and tend to be more sensitive to tighter monetary policy. Even as small caps have held up better than the Nasdaq 100 on a year-to-date basis, they have recently lagged as recession fears ratchet up. The Russell 2K is down since October 31st, compared to positive returns for both the S&P 500 and Nasdaq 100%.
The Bloomberg World index closed the week down 2.18%, with growth down 2.99% and value up 2.16%. The Dollar index remained range-bound ahead of the Federal Reserve monetary policy announcement this week. The Bloomberg Commodities index fell 2.38% last week, dragged by Brent oil, down 11.07%. The slowing down of the global economy continues to be a dominant narrative, with the lagging effects of tightening policy adding to uncertainty. The European Central Bank will hold its monetary policy press conference on Thursday and share its perspective on the health of the economy as well as the battle against inflation.
European Union (EU) energy ministers are currently discussing a proposal to cap gas prices in the European Union, but a consensus is far from being found on the topic. A group of 12 countries including Belgium, Greece, Italy and Poland are pushing for a lower ceiling on gas prices as the one proposed only protects consumers when the spread between European gas prices and global markets exceeds €58 and when the Dutch Tile Transfer Facility exceeds €275 per megawatt hour. The Czech Republic, which currently holds the rotating presidency of the EU, suggested to lower the ceiling to €220 from €275. EU Energy ministers will meet this week to attempt to reach an agreement. Last week, energy was the worst performing sector of the Euro STOXX index, down 3.06%. G-7 leaders held a call with Ukrainian President on Monday hosted by German Chancellor Olaf Scholz to discuss additional support to Ukraine. Zelenskiy asked for modern tanks and long-range missiles as well as economic support to finance natural gas imports for the winter. Regarding conflict resolution, he suggested that Russia starts withdrawing troops around Christmas “as a good-faith gesture” that Russia is stopping the aggression. The G-7 also launched a new platform to coordinate aid initiatives and have the maximum impact. Indeed, the US has already delivered $13 billion of the $38 billion promised to Ukraine, while the European Union agreed to increase the bloc’s weapons fund by $2.1 billion. The Euro STOXX index dropped 1% last week.
In China, a pilot program plans to open the Hong Kong border by late January, as it has been closed for over two years. Under the current regulation, visitors from Hong Kong are limited by a daily quota and must quarantine for five days upon arrival. The news came after the government U-turn on its COVID Zero policy last week in response to social unrest. According to Goldman Sachs, the reopening of the economy could boost Hong Kong’s GDP as well as the economy of Singapore and Malaysia. In other news, China filed a case with the World Trade Organization (WTO) regarding US chip sanctions, claiming that the United States is using economic protectionism. The WTO does not have a mandate to force the US to retract sanctions. The Hang Seng index gained 6.56% last week.
Japan agreed to join the United States and the Netherlands on tightening China chip exports to prevent Beijing’s military from obtaining advancing semiconductors. Japanese semiconductor companies were mostly opposed to the move to avoid losing market share in China. Last week, Hagiuda Koichi, the policy chief of Japan’s main ruling party, visited Taiwan and met with the executives of Taiwan Semiconductor Manufacturing to discuss increased cooperation. Visits of Taiwan by foreign officials are always negatively seen by Beijing; therefore, it could be a new turn in diplomatic relations between China and Japan. The NIKKEI 225 index gained 0.44% last week, and the Japanese yen weakened to 136 per dollar.
In Brazil, outgoing President Jair Bolsonaro broke his silence for the first time since Lula was declared the winner of presidential elections. He told supporters gathered in front of this residence, “The armed forces are united, they owe loyalty to our people. The ones who decide what the armed forces are going to do are you.” The electoral court fined Bolsonaro’s party $4.3 million over baseless fraud claims regarding the election. The case was promptly dismissed for “bad faith litigation”. Meanwhile Lula announced that he is splitting the economy ministry currently led by Paulo Guedes into three cabinet positions: finance, planning and development. Brazilian stocks dropped 3.94% last week.
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