The digest
Global equities closed higher last week, with a number of moving parts impacting financial markets. The MSCI World Index closed the week up 0.6%, whilst regionally, the Stoxx Europe 600 Index closed up 1.0%, the S&P 500 Index closed up 0.4%, and the MSCI Asia Pacific Index closed up 1.6%.1 Dovish Fedspeak from two usually more hawkish members, as well as Chinese stimulus hopes, were the key catalysts behind the market rally.
On Monday, Federal Reserve (Fed) Vice Chair Philip Jefferson said that the Federal Open Market Committee (FOMC) could “proceed carefully” following the recent rise in Treasury yields, whilst Dallas Fed Bank President Lorie Logan said the surge in long-term bond yields may mean less need for further tightening. This, paired with headlines on Tuesday suggesting the Chinese government was set to unleash a new round of stimulus measures, sent equities higher through the first half of the week.
Thursday’s US headline Consumer Price Index (CPI) figure came in slightly higher than expected at 0.4% month-over-month in September, showing that inflation remains sticky. With that, risk assets sold off and bond yields rallied back towards the highs. Market sentiment remains very precarious, with indicators retreating further into bearish territory last week.
Fund flows last week were bearish, with another US$16.9 billion inflow into money-market funds and US$8.2 billion out of global equities.2 European equity funds recorded their 31st consecutive weekly outflow, shedding US$0.7 billion.3
Week in review
Europe
European equities traded higher overall last week, but on relatively low volumes (last week was the third-worst week of the year for Stoxx 600 Index volumes). Dovish central bank chatter out of the United States buoyed the market, along with renewed China stimulus hopes. On Tuesday, a basket of China-exposed European names had its best day since 2 June and second-best day of the year.4 Markets then pared some of the week’s gains through Thursday and Friday, as the US September CPI report kept inflation concerns front and centre.
Markets have also been absorbing and assessing news out of the Middle East regarding the catastrophic escalation in geopolitical tensions between Israel and Palestine. The unexpected Hamas terror attack, followed by Israel’s heavy military response, has left many observers questioning whether the latest escalation will spill over into the rest of the region. This sent oil prices higher last week with the inference being that Iran may become embroiled in the conflict, which could impact global oil supplies. A report on Bloomberg estimates that if Iran is drawn into the war, crude oil could reach US$150 a barrel and cut about US$1 trillion off global economic output.5 As expected, we did see European aero and defense stocks trade higher last week.
Sector performance divergence was wide last week. Oil and gas stocks outperformed last week amidst higher oil prices. Also, European gas prices were up 45% on the week after a leak was discovered on a pipeline connecting the Finnish and Estonian grids. Utilities were also higher last week, bouncing after underperformance the previous week. In terms of the laggards, personal and household goods struggled as luxury stocks came under pressure following an earnings miss from LVMH. For the same reason, retail stocks struggled, also closing down on the week. Travel and leisure stocks were also weaker, weighed on by higher oil prices, flight cancellations in Israel and some weak stock-specific updates.
United States
US equities traded broadly higher last week, as dovish Fedspeak and positive earnings proved to be stronger forces than the CPI beat. The S&P 500 Index closed the week up 0.4%, the Dow Jones Industrial Average closed up 0.8% and the Nasdaq Index up 0.1%. The small-cap Russell 2000 Index underperformed on the back of the inflation report, closing the week down 1.5%.
As noted, the latest Fed rhetoric provided risk assets with a shot in the arm early last week, as two of the usually more hawkish Fed members provided comments which the market perceived as dovish. They suggested that the Fed would consider the impact of higher yields on the need to tighten policy once again, emphasising the need for the FOMC to proceed with caution. Some additional Fed members supported these comments, noting that the recent increase in bond yields could substitute for increases in the federal funds rate. This series of comments effectively locked in the market expectation of no hike in November. Expectations for December’s meeting are not so clear, however, with the market pricing in a 36% chance of a 25 basis point (bps) hike at that meeting.6
The September US headline CPI report complemented the idea that the Fed may have more work to do on interest rates and inflation, as it came in ahead of expectations, rising 0.4% on the month. The core CPI was in line with expectations at 0.3%. Rising shelter costs drove the headline CPI, as primary rents were up 0.49%. There was also a large boost in hotel prices, up 3.7%. Services were also strong, with core service ex-housing up 0.61% on the month. Used car prices were down 2.5%; however, this is not expected to continue.
We saw whipsaw moves in US credit markets on the back of the inflation report last week. Thursday saw the largest one-day move in the US 30-year Treasury yield in 3.5 years (since the outbreak of COVID-19 in March 2020).7 On the face of it, the move in yields did seem like an over-reaction to a print which was only slightly above market expectations. However, a weak 30-year Treasury auction on Thursday also pushed yields higher. Finally, the US dollar rebounded on the back of the CPI report.
Third quarter earnings season was in full swing last week in the United States, with a number of high-profile banks reporting. JPM, Wells Fargo and Citi all reported on Friday, and they reported upbeat earnings overall. This week will be big for market sentiment too, with Tesla, Bank of America, Goldman Sachs, Morgan Stanley, Netflix, among others, reporting. In total, 55 of the S&P 500 Index stocks will report this week.
Asia
Asian equities finished higher overall last week, but performance was mixed across the region.
Chinese markets reopened last week after being closed for the Golden Week holiday. The Shanghai Composite Index closed the week down 0.7%, with investors unimpressed with travel and consumption data over the holiday week, suggesting the COVID-19 recovery is stalling once again. Reports that the government is considering the issuance of 1 trillion yuan of additional sovereign debt for spending on infrastructure were in focus. However, domestic investors were sceptical that such measures would help boost household and private sector consumption demand.
Hong Kong’s Hang Seng Index snapped a five-week losing streak, helped by headlines around potential China stimulus. Banks were stronger overall, as China’s sovereign wealth fund increased its holdings in the nation’s four largest state-owned banks for the first time since 2015. The auto sector was also strong, following a September sales beat.
Japan’s Nikkei Index outperformed, closing last week up 4.3% amidst the dovish US central bank rhetoric. It is likely that short-covering drove some of the gains.
Week ahead
Macro week ahead highlights
Earnings will be a clear focus for markets this week, as third quarter reporting kicks into gear in Europe and the United States. Events in the Middle East will also be closely watched. In terms of data, highlights include Chinese gross domestic product (GDP) and Industrial Production on Tuesday, as well as US Retail Sales; Eurozone and UK CPI on Wednesday; and a US Manufacturing Survey on Thursday.
Euro-area key events:
Tuesday 17 October: UK unemployment rate; Germany ZEW Survey expectations
Wednesday 18 October: UK CPI inflation; Euro-area final CPI inflation
Friday 20 October: UK Retail Sales; Germany Producer Price Index (PPI)
Monday 16 October
- Norway Trade Balance
- Germany Wholesale Price Index
- Eurozone Economic Survey; Eurozone August Trade Balance
- France Economic Survey
- Spain Economic Survey
- Italy CPI EU Harmonised
- Japan Industrial Production
- US Empire State Manufacturing Survey
Tuesday 17 October
- UK September Jobless Claims, Average Weekly Earnings, ILO Unemployment Rate
- Eurozone ZEW Survey Expectations
- Germany ZEW Survey Expectations
- China GDP, Industrial Production, Retail Sales, Property Investment
- US Retail Sales; Industrial/Manufacturing Production; Business Inventories; Housing Market Index
Wednesday 18 October
- UK Retail Price Index; CPI; House Price Index
- Italy Trade Balance
- Eurozone CPI; Construction Output
- US Housing Starts and Building Permits
Thursday 19 October
- Switzerland Imports and Exports
- France Business/Manufacturing Confidence, Production Outlook Indicator
- Spain Trade Balance
- Eurozone Current Account
- Japan CPI
- US Philadelphia Fed Manufacturing Survey; Initial Claims, Continuing Claims; Existing Home Sales
Friday 20 October
- UK Retail Sales Incl Auto Fuel; Public Finances, Central Gov NCR, Public Sector Net Borrowing
- Sweden Unemployment Rate
- Germany PPI
- Eurozone EU27 New Car Registrations
- Sweden Economic Survey
- Norway Economic Survey
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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: “BofA Says US Stocks Can Avoid Big Drop If Yields Stay Below.” Bloomberg. 13 October 2023.
3. Ibid.
4. Source: Bloomberg.
5. Source: “Oil Will Rise to $150 on Escalation of Conflict, Energy Analyst Say.” Bloomberg. 16 October 2023.
6. Source: Bloomberg. Based on fed funds futures. There is no assurance that any estimate, forecast or projection will be realised.
7. Source: “Treasury yields slip as interest rate rise concerns revived.” Financial Times. 13 October 2023.