The fourth quarter kicked off with a rather bearish feel, as global equities traded broadly lower last week. The MSCI World Index closed down 0.3%, while regionally, the Stoxx Europe 600 Index closed down 1.2%, the S&P 500 Index closed up 0.5%, and the MSCI Asia Pacific closed down 1.7%.1 (China’s market was closed all week for Golden Week). Friday’s hawkish September US employment report was the main headline-grabber for the week, with non-farm payrolls coming in well ahead of expectations at 336,000. The report seemed to make a November interest-rate hike more likely from the Federal Reserve (Fed), although still not necessarily expected. Equities initially sold off on the report as the restrictiveness of Fed policy came into question.
Bond yields remain at extremely lofty levels; the US 10-year Treasury yield hit 4.8852% on Friday, its highest level since 2007.2
Fund flows were bearish last week, with US$70.8 billion going into money market funds, the largest inflow since July.3 In terms of equity funds, European-focused equity funds posted their 30th consecutive week of outflows, losing another US$1.8 billion, while US equity funds posted another inflow of US$3.9 billion.4 Sentiment shifted further into bearish territory last week, as evidenced by the Bank of America Bull & Bear Indicator, and the CNN Fear & Greed Index, which point to investor sentiment near extreme levels.5
Week in review
European equities traded lower last the week. The region was down in both August and September and seasonality data points to a history of market bullishness in the fourth quarter. However, that was not evident last week, and Europe’s Stoxx 600 Index continues to trade well below its 50-, 100- and 200-day moving averages.6 European bond yields remain at elevated levels, with the German 10-year yield at its highest level since 2011. There was very little macro newsflow out of the region last week, with investors seemingly waiting on the upcoming earnings season. Third-quarter earnings season gets underway in mid-October, and pre-announcements have been lacking.
Sector performance was fairly mixed last week. Media stocks outperformed amidst broker upgrades and some strength in year-to-date laggards. Despite the higher-for-longer interest rate narrative, it was interesting to see technology stocks higher last week as investors rotated back into that space following a poor third quarter. Utilities were the notable laggard last week; the bond proxy sector suffered as credit yields pushed back towards the highs. Negative stock-specific broker updates in that space didn’t help sentiment either. Oil and gas stocks were weaker too, as oil prices pulled back from recent highs.
Brent crude oil prices were down over 11% on the week, as global growth concerns and a large build in weekly US gasoline inventories weighed. Also, of note, food and beverage stocks were down on after retailing giant Walmart noted weight-loss drugs were already having an impact on food shopping in the United States. Finally, investors continue to shun companies with weak balance sheets.
The brutal escalation in geopolitical tensions in the Middle East was a flashpoint this weekend, and assessing the market impact of such events always seems trivial. The largest economic impact so far has been felt in the oil market, with Brent crude oil surging as investors assess the potential broader impact in the region. The implication is that if Iran becomes further embroiled in the conflict, then this could impact global supplies. There is also the question on whether this derails the major diplomatic reset between the United States and Saudi Arabia. European defence stocks traded higher today overall.
US equities traded mixed last week, with an element of volatility returning to markets. The VIX traded back above 20 for a short time on Tuesday and Wednesday, its first time above that level since May.7 Again, rising bond yields was the key theme for markets last week, as the US 10-year Treasury yield inched closer to 5%.
Data out of the United States was stronger than expected. The headline non-farm payrolls reading in the September employment report came in at 336,000, which was stronger than anticipated. Revisions to prior reports were also hawkish, as the prior two months were revised up 119,000, the first upward revision of the year. The reading on private payrolls of 263,000 was also stronger than expected and came in well ahead of last week’s ADP private payrolls print of 89,000.
Given the notable employment gains, investors began to question once again whether Fed policy was sufficiently restrictive. Meanwhile, average hourly earnings growth fell to 0.2%, weaker than expected and the slowest pace of growth since February 2022.
Other US data were also stronger. The Institute for Supply Management (ISM) Manufacturing Index came in at 49.0 vs. 47.6 previous. August Factory Orders came in stronger than expected, whilst Durable Goods Orders were in line with market expectations but still growing. ISM Services data remains in expansion territory, coming in at 53.6. JOLTS data pointed to a strong labour market, showing 9.61 million job openings in August.
Comments from Fed officials were hawkish overall last week. Fed Governor Michelle Bowman said that US inflation was still “too high”, and she expected the Federal Open Market Committee (FOMC) to “raise rates further” in order to return inflation to 2% in a timely manner.8 Atlanta Fed Bank President Raphael Bostic added that the Fed should hold rates at elevated levels “for a long time” and said there was no hurry to reduce rates.9
Moves in US equity markets were almost identical to those moves in Europe last week. Communication services and technology stocks were up amidst the rally in the mega-cap constituents on Friday. Energy stocks lagged on the week, with West Texas Intermediate crude oil prices down nearly 9%. Utilities and consumer staples struggled for similar reasons mentioned above in the Europe section.
Last week was another poor week for Asia’s equity markets, despite China being closed all week for national holidays.
It looks like a slow start to this week seems likely, with markets in Taiwan, Japan and South Korea closed for holidays, while in the United States, fixed income markets will be closed for the Columbus Day holiday.
The Nikkei Index closed last week down 2.71%, as rising US bond yields continue to impact the market.
The yield on the 10-year Japanese government bond rose to a 10-year high of 0.806% last week before coming back to trade below 0.8%, despite the government’s best efforts to support the bond market.
Outside of the interest-rate impacts, some macro showed real wages and consumer spending continued to fall in August, which also weighed on sentiment. However, the Tankan Survey on Monday showed that a weak Japanese yen has boosted business sentiment among Japanese companies, lending some support. And finally, Purchasing Managers Index (PMI) data last week, which showed that the services sector expanded solidly in September, but that the deterioration in manufacturing conditions quickened. So, it was a mixed picture macro-wise in Japan.
One of the main talking points last week was whether the Bank of Japan had intervened in the foreign exchange markets or not, after the yen plunged to its lowest level in 11 months, hitting 150.16 at one point. While the yen strengthened sharply, the Ministry of Finance neither confirmed nor denied any action, continuing to state that it would act against excess volatility without committing to any specifics.
Sector-wise, year-to-date outperformers sold off the most over the week, with mining, refiners and non-ferrous metals all slumping, while shippers were the only sector that finished the week in the green.
This week, key data releases include the Producer Price Index (PPI), core machine orders, trade figures and retail sales.
China’s market was closed for Golden Week last week.
Domestic activity in China picked up significantly during the eight-day holiday. Approximately 395 million trips were taken in the first four days of the holiday, almost 76% above the prior year period, according to the Ministry of Transport.
Over the weekend, China reported that foreign reserves fell by a larger-than-expected US$45 billion in September.
On the macro front, China’s factory activity returned to expansion for the first time since March, the latest signal that the economy may have bottomed. The official manufacturing PMI rose to an above-consensus 50.2 in September from 49.7 in August. The nonmanufacturing PMI expanded to a better-than-expected 51.7 from 51.0 in August. Separately, the Caixin/S&P Global survey of manufacturing and services activity both eased from the previous month but remained in expansion.
In line with other bond markets, Chinese 10-year bond yields have also increased from 2.54% in mid-August to just under 2.70%, still a significant negative spread to US bonds.
The new Peoples Bank of China Governor, Pan Gongsheng, will be making an appearance at the International Monetary Fund meeting this week, his first major appearance since his appointment in July. Pan is likely to face questions about the Chinese government’s commitment to reform the economy as well as its support for China’s currency as well as the property sector and debt relief—the usual areas of concern for markets.
And finally, last week, the US government added 42 Chinese companies to its export control list.
Hong Kong’s market resumed trading on Tuesday and closed with a fifth weekly loss last week. Market turnover was muted, and sentiment was weak, again over concerns that the Fed could keep rates higher for longer. Chinese developers declined, with analysts saying September’s contracted sales are showing no solid recovery and that authorities may need to provide more stimulus. Electric vehicle (EV) makers suffered losses after the European Union (EU) formally launched an anti-subsidies probe into Chinese EVs, while the China Association of Automobile Manufacturers (CAAM) said China’s automakers are willing to boost cooperation and dialogue with their EU counterparts to resolve concerns.
Meanwhile, airline stocks outperformed last week after oil plunged the most in more than a year (although obviously trading higher today on the Israel/Gaza news) amid early signals that demand is flagging.
The week ahead
To start the week, the focus is clearly on events in Israel and concerns around any escalation in the wider region. Crude oil has been trading higher, along with gold. The narrative around events in the Middle East will no doubt be a driver for sentiment through the week.
Looking beyond that, the key events for markets will be several Consumer Price Index (CPI) reports, including US CPI on Thursday and Chinese CPI on Friday. In addition, the Fed minutes from its last meeting are released on Wednesday and will garner some attention.
US earnings season starts on Friday, with a few notable financial names reporting. In the United Kingdom, watch the Labour party conference for any proposed economic policy.
Monday 9 October
- Germany Industrial Production
- Eurozone Sentix Investor Confidence
Tuesday 10 October
- UK BRC Sales Like-For-Like (year-over-year)
- Japan BoP Current Account
- Italy Industrial Production
- US NFIB Small Business Optimism
Wednesday 11 October
- UK S&P Global, KPMG and REC UK Report on Jobs
- Japan Bloomberg October Japan Economic Survey
- Japan Machine Tool Orders (year-over-year)
- Germany CPI
- Eurozone ECB One-Year CPI Expectations
- Eurozone ECB Three-Year CPI Expectations
- US MBA Mortgage Applications
- US PPI
- US FOMC Meeting Minutes
Thursday 12 September
- UK RICS House Price Balance
- Japan PPI
- UK Gross Domestic Product
- UK Industrial Production
- US CPI
- US Initial Jobless Claims
- ECB Minutes
Friday 13 October
- China PPI and CPI
- France CPI
- Spain CPI
- Eurozone Industrial Production
- US Import Price Index
- US University of Michigan Sentiment
- China Trade Balance
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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. Source: Bloomberg.
3. Source: “Bonds to ‘Rally Big’ in 2024 Amid Recession, BofA’s Hartnett Says.” Bloomberg. 6 October 2023.
4. Sources: BofA Global Research, EPFR.
5. CNN’s Fear & Greed Index tracks seven indicators of investor sentiment. BofA’s Bull & Bear Indicator is a measure of market sentiment. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.
6. The 50-day, 100-day and 200-day moving averages are technical indicators, representing the average closing price of a security or index over the last 50 days or 100 days, respectively.
7. The CBOE Market Volatility Index (VIX) measures market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Often called the “fear gauge”, lower readings suggest a perceived low-risk environment, while higher readings suggest a period of higher volatility.
8. Source: “Fed’s Bowman Sees Need for Higher Rates to Curb Prices.” Bloomberg, 7 October 2023.
9. Source: “Fed’s Bostic sees no ‘urgency’ to raise rates again, but cuts a long way off,” Reuters. 3 October 2023.