Stocks rebounded on Friday as the US employment report showed unemployment started to pick up despite a stronger than expected addition to the non-farm payrolls.
However, stocks finished the week lower as the Fed, after an expected decision to raise rates by 75bp, dashed hopes of a near term pivot, causing the market to fall. Fed Chair Powell indicated during the FOMC press conference on Wednesday that the terminal rate “would end higher than previously expected” as inflationary pressures failed to abate. Prior to saying this which took the carpet from under the equity market, traders (and algos) had initially responded more favorably to Fed Chair saying that the central bank would take into account the “cumulative monetary tightening of monetary policy, the lags of which affects economic activity and inflation and financial developments”, which was more like what investors had expected to hear, hoping for a pivot in monetary policy or at least a reduction in the pace of monetary tightening from 75bps to 50bps…
On the data front, the ISM manufacturing data continued to drop, falling to 50.2 (from 50.9 last month). The ISM services index dropped to the lowest this year (54.4 from 56.7 last month). The jobs opening remained strong however, increasing according to the JOLTS survey (to 10.7mn from 10.2mn) but jobs were mostly created in the “multiple jobs” category. Still, and as reported above despite a marginal increase in the unemployment rate, more NFP jobs (261k vs. 192k expected) than expected were created as well in October, sending a more nuanced job market message.
On the inflation front, the cost of US labor rose by 3.5% between July and September, less than the expected 4% but productivity rose at just a 0.3% annualized rate.
Elsewhere the BoE also raised rates last week by 75 bps, failing to support GBP as the central bank warned about the inevitability of an historically long recession. The BoE also said last week that it must sell in a “timely and orderly” way the GBP19.3bn Gilts purchased during its emergency operation last month to halt a fire sale of pension assets.
Depending on which side we stand, Russian claims that it provided the proof that the UK was behind the sabotage of Nordstream 1 and 2 will be left to propaganda…or not.
ECB President Lagarde talked about inflation being too high as well and that recession risks at the European levels had increased.
Commodities rallied strongly and across the board on Friday (and Thursday) after news emerged that China might lift its strict covid policies, also providing a two-day powerful jolt (and USD0.5trn rally according to Bloomberg) to ailing Chinese equity markets (which gained 7% on Friday). There were some back and forth rumors as to whether China’s lifting of restrictions was confirmed news or not but copper and silver both rallied 8% with other commodities including oil posted strong gains as well on Friday on solidifying evidence this might be the case. At the margin, Chinese stocks may have been supported by German Chancellor O. Scholtz official visit to China which caused some stir among those that would have preferred to see Germany cut the second branch it is sitting on or only confined to share to the role of lending its credit signature to collectively finance the consequences of the covid and energy crises at the European level … The German Chancellor explained the five reasons for his visit in an article from Politico.
Precious metals also rallied, led by a research report pointing at large unidentified sovereign purchase of 399 tons of Gold last quarter (which doubled the previous quarterly record) and by the dollar index dropping 1.5% across the board, including vs. EM currencies such as MXN, BRL and also ZAR. USDNOK shed 3% on Friday. Even the lead laden JPY managed to eke out a 1% gain on Friday vs. USD.
On the earnings front, 70% of the reports so far have beaten expectations by 1.9% with energy and health care earnings offsetting those more muted of financials and consumer discretionary sectors (the latter being dominated by Tesla heavy weight).
While stocks finished the week off the lows, the week proved particularly brutal for the Nasdaq again and large mega caps that were dragged down (by 6.8%) on higher bond yields and mixed earnings.
After the recent bounce rooted in seasonality, bearish positioning and hopes of a near term pivot, a defensive equity markets posture seems perhaps more justified as the dynamics of monetary policy, an economy seeing no growth, inflation remaining high, real estate showing all signs of a severe correction in the making, all conjure to reduce the odds of a soft (as opposed to hard) landing that is expected to remain a drag on financial markets.
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Over the past week, the S&P500 sold off by -3,3% (-20,8% YTD) while the Nasdaq100 sold off by -5,9% (-33,5% YTD). The US small cap index sold off by -2,4% (-19,7% YTD). AAPL shed -11,1% (-22,1%).
Cboe Volatility Index sold off by -4,7% (42,6% YTD) to 24,55.
The Eurostoxx50 rallied 2,1% (-11,9%), outperforming the S&P500 by 5,3%.
Diversified EM equities (VWO) rallied 5,5% (-24,1%, Z-score 2,8), outperforming the S&P500 by 8,7%.
The Dollar DXY Index (UUP) measuring the USD performance vs. other G7 currencies gained 0,2% (16,4%) while the MSCI EM currency index (measuring the performance of EM currencies vs. the USD) gained 0,5% (-8,4%).
10Y US Treasuries underperformed with yields rising 15bps (265bps) to 4,16%. 10Y Bunds climbed 19bps (247bps) to 2,30%. 10Y Italian BTPs underperformed rising 29bps (329bps) to 4,46%, outperforming Bunds by -1bp.
US High Yield (HY) Average Spread over Treasuries climbed 7bps (179bps) to 4,62%. US Investment Grade Average OAS dropped -6bps (64bps) to 1,64%.
In European credit markets, EUR 5Y Senior Financial Spread dropped -2bps (65bps) to 1,20%.
Gold rallied 2,3% (-8,1%) while Silver rallied 8,3% (-10,5%, Z-score 3,0). Major Gold Mines (GDX) gained 0,9% (-22,1%).
Goldman Sachs Commodity Index rallied 4,6% (34,9%, Z-score 2,5). WTI Crude rallied 5,4% (23,1%, Z-score 2,2).
Overnight in Asia,,,
Ø S&P500 -16points; Nikkei +0.8%; Hang Seng unch.
Ø Apple said overnight that shipments of its newest premium iPhones will be lower than previously expected after China lockdowns affected operations at a supplier’s factory.
Ø Meta is planning to begin layoffs that will affect thousands of workers from this week, Wall Street Journal reported. The cuts will add to job losses in Silicon Valley after Twitter last week slashed 3,700 jobs after E. Musk completion of his USD44mn takeover.
Ø US Midterm elections are held tomorrow with only the extent of the outcome remaining open to questions as the Democrats are seen to have lost considerable ground.
Have a nice week ahead!
Marc Bentin, BentinPartner GmbH
Chief Investment Officer
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Marc Bentin serves as Economic Advisor to Blue Lotus Management,
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