The digest
The second half of October has seen a sharp global equity bounce. Investors shrugged off weaker earnings from US technology company heavyweights as hopes of a central-bank pivot toward less hawkish policies gathered some momentum. The MSCI World Index was up 4%, while regional performance was similar to the week prior, with the S&P 500 Index up 4%, STOXX Europe 600 Index up 3.7%. Asia lagged, with the MSCI Asia Pacific Index down 0.2%.
With that, the moves for October are worth noting as there is some stark divergence, with the S&P 500 Index up 8.8%, STOXX Europe 600 Index up 5.8%, and the MSCI Asia Pacific Index down 2.4%.1
Suggestion of a central bank pivot?
Last week saw a rise in the market noise around the prospect of a central bank pivot to more dovish policies, thanks to a combination of weaker US data and less hawkish central bank comments.
Early in the week, US housing market data showed a slowing of activity, with the sharpest deceleration of house prices since the series started. The market took this as “bad news is good news” in that weaker data could pressure to the Fed to ease off on its hawkish policy path.
Last week’s Bank of Canada (BoC) decision caught some attention as the central bank raised rates by a lower-than-expected 50 basis points (bps).2 In addition, BoC policymakers stated they see a significant slowing of the Canadian economy and are getting closer to the end of tightening. Thursday’s European Central Bank (ECB) meeting was less Hawkish than expected. The ECB raised interest rates by 75 bps (bringing the deposit rate to 1.5%), largely as expected. Inflation in the eurozone surged to 9.9% in September, so a tightening of the central bank’s monetary policy stance was anticipated.
Crucially, the Governing Council said it was taking a meeting-by-meeting approach to monetary policy decisions but was satisfied that it had already made “substantial progress in withdrawing monetary policy accommodation”. This is a change in working the previous meeting where the ECB said, “the certainty is that we are far from the goal”.
ECB President Christine Lagarde said the ECB will raise rates further in the future, but the size will be dependent on data. Economic activity has slowed significantly, and the central bank sees further weakening in the fourth quarter and into the first quarter of next year.
It is interesting that following the ECB meeting last week, we saw some stronger-than-expected inflation data out of Europe, with Italian, French and German inflation readings all higher than anticipated.
The week in review
Europe
European equities gained ground last week as investors navigated a glut of corporate earnings and a busy couple of weeks for central-bank decisions. Although the US Federal Reserve (Fed) is in a black-out period in terms of speaking ahead of its policy meeting on 2 November, hopes of a broader central bank dovish pivot were raised after the BoC’s smaller-than-expected hike as well as the “less hawkish” ECB announcement.
We saw notable dispersion between the best- and worst-performing sectors. Falling bond yields gave traditional yield plays a boost, with real estate and utilities stocks gaining last week. Basic resources stocks declined, along with iron ore, which slumped on China concerns.
We think the unwind of bearish positioning has also been a factor recently. However, fund flow data still shows outflows from European equities.
Looking at broader themes, equities took the appointment of Rishi Sunak as UK prime minister as constructive, and an improving European energy outlook for this winter also helped sentiment.
UK assets recover: In the United Kingdom, after the chaos of the short-lived Truss administration, the swift appointment of Rishi Sunak reassured markets. The British pound continues to recover ground and UK gilt yields tightened significantly across the curve. Domestic UK equities also have performed well in the past week, with the FTSE 250 Index moving higher. Sunak has delayed the autumn statement on tax and spending to 17 November to wait for more accurate economic forecasts—which also reassured investors.
European energy outlook: Mild autumn weather (22C/72F in Berlin on Friday) and close-to-capacity gas reserves helped European gas futures fall to pre-Russian invasion levels at one point last week. There is still a long way to go before we get through the winter, and questions remain over longer-term gas supply, but from a European perspective the picture looks encouraging.
Credit: Also worth noting, European credit conditions have improved in this context, with the XOVER tightening by some 100 bps from recent highs.3
United States
US equities continued their recovery last week, with the S&P 500 Index on track for its best October since 2011 despite some underperformance by the so-called “FANG” stocks. Hopes of a dovish pivot from the Fed seemed to dominate the narrative last week as the macro data disappointed and the “bad news is good news” trade seemed to re-emerge. The Fed is expected to raise rates by 75 bps on Wednesday, with the pace slowing thereafter as the macro picture declines. Fed officials spent all of last week in blackout period, so we didn’t hear any fresh comments.
Weakening US macro data led to a sharp move in yields, with the US 10-year note registering its first fall in 13 weeks, which supported the move in equities last week. US corporate earnings so far have been beating estimates overall; however, a couple of guidance warnings among the bellwethers dampened investor sentiment a little. US-focused equity funds saw their third straight weekly inflow.
So far, just under half of the S&P 500’s market capitalisation has reported third-quarter (Q3) earnings. Earnings are beating estimates overall, and value stocks are delivering stronger revenue and earnings per share (EPS) growth than growth stocks. More globally oriented S&P 500 companies are delivering faster EPS growth than their more domestically oriented peers.
Consumer-exposed companies are continuing to forecast slowing sales, with Amazon cutting sales guidance ahead of the holiday period. Meanwhile, Meta shares fell 25% after its earnings came up short of expectations and warned of higher investment costs. Meta has now lost some US$700 billion in market cap since its highs in September 2021.
In terms of sectors, communication services was the only sector to finish the week in the red, as losses in Google and Meta spurred declines. Meanwhile, industrials were higher last week, along with utilities and real estate investment trusts.
US macro data disappointed last week. Home price data was weak, with the FHFA House Price Index and the S&P CoreLogic CS both weaker than anticipated. Pending home sales were down 10.2% in September. Meanwhile, the Conference Board’s US consumer confidence reading declined in October.
The CNN Fear & Greed Index is now in “Greed” territory. As recently as 14 October this was in “Extreme Fear” territory, demonstrating just how quickly markets/sentiment has changed into month-end.4
Asia
Last week was mixed in Asia, but most of the focus was on China and Hong Kong, which suffered in the wake of President’s Xi Jinping’s new hardline politburo appointments, seemingly increasing his power in the country, together with an increase in COVID-19 numbers.
Japan’s equity market held up pretty well, closing slightly higher last week. The market got off to a decent start on hopes that the Fed may pivot and adopt a less aggressive policy stance than previously anticipated. However, ground was lost later in the week as investors digested weaker earnings reports, and Prime Minister Fumio Kishida announced a ¥71.6 trillion stimulus package.
On Wednesday, the Bank of Japan (BoJ) increased its purchases of JGBs, adding a further ¥100 billion in 10-25 year debt and ¥50 billion in longer-dated paper. This increase was anticipated, but it nevertheless prompted sharp gains at the long end of the yield curve, where yields fell sharply to their lowest levels since mid-October. Meanwhile, benchmark 10-year JGBs also dipped sharply late in the week, finishing around 0.237%, having started the week at 0.251%.
There was a fair bit of macro news out last week. Japan’s manufacturing sector continued to expand in October, as the latest Purchasing Managers Index (PMI) data released on Monday registered a reading of 50.7. The BoJ wrapped up its monetary policy meeting on Friday, announcing that it would hold interest rates at ultra-low levels (-0.1% for short-term rates, and 0% for 10-year government yields), as widely anticipated. However, it raised its target for core consumer inflation to 2.9% for the fiscal year ending March 2023 and 1.6% the following year. Elsewhere, in Tokyo we saw some higher inflation readings.
China’s equity market performed poorly last week, with A-shares under heavy selling pressure after the 20th Party Congress concluded. The new politburo showed China’s growing emphasis on ideology over pragmatism, meaning that there seems to be little chance of China lifting its zero-COVID policy any time soon. Several Chinese cities doubled down on COVID-19 curbs after the country reported three straight days of more than 1,000 new cases nationwide.
Notably, food and beverage stocks were lower last week, given the continued gloomy outlook for consumption. Military and defence stocks rose as President Xi (worryingly) emphasized army and military force development.
There were also reports emerged that major Chinese state-owned banks sold dollars in both onshore and offshore markets during the week after the slide in China’s currency.
Despite a better-than-expected year-over-year gross domestic product (GDP) number, China saw some other weaker macro data last week, which didn’t help markets, namely retail sales and imports and exports.
Hong Kong’s equity market was the worst-performing market in Asia last week, closing down 8.32%. Most of the hit came on Monday after the 20th Party Congress in China, as major tech shares plunged after President Xi packed key posts in the politburo with loyalists. Tencent, Alibaba, Kuaishou and Baidu all suffered badly.
The week ahead
The next two weeks could be key for setting the tone into year end. There are several central bank meetings this week, including the Reserve Bank of Australia, Fed, Norges Bank and Bank of England. Wednesday’s Fed interest-rate decision and statement will likely be the key event of the week.
Looking further ahead, the US mid-term elections on 8 November will also be important. Polls over the weekend suggest the Republicans could win control of the House of Representatives as voters focus on soaring inflation. Interestingly, following mid-term election years the S&P 500 Index has been up 18 of 18 times since 1950.5
Finally, over the weekend we saw Luiz Lula de Silva beat incumbent Jair Bolsonaro to become Brazilian president.
Monday 31 October
- Switzerland Retail Sales Real
- Spain Retail Sales
- Italy GDP
- UK Net Consumer Credit
- UK Mortgage Approvals
- Eurozone CPI estimate & GDP
- US Treasury financing
Tuesday 1 November
- Sweden Swedbank/Silf PMI Manufacturing
- Switzerland PMI Manufacturing
- UK Nationwide House Prices
- UK S&P Global/CIPS Manufacturing PMI
- US S&P/Markit Manufacturing PMI
- US Construction spending & JOLTS job openings
Tuesday 2 November
- Germany Trade Balance
- France Budget Balance year-to-date
- Spain S&P Global Manufacturing PMI
- Italy S&P Global Manufacturing PMI
- France S&P Global Manufacturing PMI
- Germany unemployment change
- Eurozone S&P Global Manufacturing PMI
- US ADP Employment
- US Federal Open Market Committee meeting
Thursday 3 November
- Spain unemployment change
- Italy unemployment rate
- UK Official Reserves Changes
- UK S&P Global/CIPS Services PMI
- UK Bank of England policy meeting
- Eurozone unemployment rate
- US Challenger layoffs
- US Jobless claims & trade balance
- US Factory Orders
Friday 4 November
- Germany Factory Orders
- France Industrial & Manufacturing Production
- Spain S&P Global Spain Services PMI
- France S&P Global Services PMI
- Germany S&P Global Germany Services PMI
- UK New Car Registrations
- Eurozone S&P Global Services PMI
- UK S&P Global/CIPS Construction PMI
- Eurozone PPI
- US October Employment Report
Views you can use
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UK vs. US pensions: The risks of derivatives-led LDI approach
It is unlikely that US corporate defined benefit (DB) pensions will have to face liquidity issues like those UK DB pensions recently witnessed, primarily because of their different approach to valuing liabilities, varying use of derivatives/leverage, and therefore a different investment style of liability-driven investing (LDI), according to Franklin Templeton Fixed Income’s Tom Meyers. Read more.
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K2 hedge fund strategy outlook: Fourth quarter 2022
From an investment standpoint, aggressive regime shifts like the current one often create price dislocations as allocators restructure their portfolios, according to K2 Advisors. Read the team’s latest outlook. Read more:
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. One basis point is equal to 0.01%.
3. Source: Bloomberg, as of 28 October 2022. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
4. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
5. Source: Bloomberg.