14 November, 2022 - Who let the bulls out ?



Global equity markets rallied to the highest level since mid-September. The first tangible confirmation of a potential peak in FED's hawkishness as well as the relaxation of some Covid19 restrictions in China, opened the doors to the raging bulls. Nasdaq was the biggest gainer of the week with an 8% rise, which helped the S&P500 move closer to 4000, with a 6% gain. We have highlighted that the 4000-4050 level, for the S&P500, could be the target of an upside move, when the index successfully double-bottomed at around 3500. Having approached this level very soon, we now wait to see how the last 6 weeks of trading for the year will develop. In the case of European markets, the MSCI Europe is now close to the peak of August and down by "only" 10% since January. Even more importantly, European indices moved back above their 200-day moving average, in a development which could lead to further gains in the period ahead. In terms of sectors, Technology, Communications and Materials saw gains of more than 9%. Energy posted only small gains of 1.5%, as the market started rotating out of the out-performing sector into the more beaten-down stocks, like semiconductors, communications and consumer discretionary.


US Inflation surprised positively, both on the headline and the core level. The CPI rose by 0.4% on a monthly basis vs expectations for 0.6% and by 7.7% on an annual basis, vs. expectations for 8.0%. The Core CPI rose by 0.3% on a monthly basis. It is important to note that this increase was half of the 0.6% increase in September and the 0.6% increase in August. It was also roughly half of the 0.5% average pace since October of last year. The 12-month change in core CPI inflation moved down from a peak of 6.6% in September to 6.3% in October. And we should also note that starting in January, consumer prices will have to be compared with already high prices registered in the same period of 2022 which means a potential sharp drop in the annual rate of inflation just because of this "base effect".


China’s October inflation was announced much lower than expected. The CPI rose by only 2.1% vs expectations for 2.5% and compared to 2.8% in September. The PPI (producers price index) was announced at -1.3% on an annual basis, which shows that Chinese consumer inflation should remain low for the foreseeable future.


China is finally making baby steps in relaxing its strict zero-Covid policy. The National Health Commission on Friday said centralised quarantine periods for close contacts of positive Covid-19 cases will be reduced to five days from seven, while still requiring three further days of home quarantine. Centralised quarantine for international arrivals was also cut to five days from seven, followed by three days of home quarantine. Overall, the update provided details on 20 measures designed to help implement the zero Covid policy in a more "targeted and precise" manner. At the same time, China is set to approve the Pfizer/Biontech vaccine for foreign residents, while the first-ever inhaler vaccine, made by local firm CanSino Biologics has started to be deployed. A gradual re-opening of the Chinese economy is a scenario which should start being played out by financial markets in the coming months, with positive implications for commodities, chinese equities and shares of companies with significant exposure in the region (European luxury, apparel etc).


Even the geopolitics front provided some glimpse of hope last week. A number of press reports have continued to suggest some movement toward talks between Ukraine and Russia. A Wall Street Journal report mentioned that Zelensky was open to negotiations with Russia as long as they focus on safeguarding Ukraine's territorial integrity, compensating Kyiv, and bringing war criminals to justice. This came comes after a Washington Post report over the weekend that said the White House is privately encouraging Ukrainian leaders to signal an openness to negotiating with Russia and to drop refusal to engage unless Russian President Putin is removed from power. WSJ also reported that national security adviser Jake Sullivan has been in confidential conversations with Putin aides to reduce risk of a broader conflict. Reports also said EU and US allies in NATO have identified a short-term negotiation window if Ukraine can push for ceasefire from position of strength. At the same time, President Biden is set to meet today, for the first time in person, Chinese President Xu Jiping, ahead of the much awaited G20 meeting. Could we see some attempt to bridge the ever-increasing distance between the two super-powers ?


US election results showed that the "Republican wave" failed to materialize. It was only after 5 days that the Senate was finally decided to stay in Democrat hands, even if the Georgia elections will have to be repeated. The House is still undecided, but the Republicans have a significant probability to gain control, but with a much smaller margin, than the expected.


Cryptocurrencies crashed after a major crypto exchange (FTX) collapsed. FTX is a cryptocurrency exchange, meaning it enables customers to trade digital currencies for other digital currencies or traditional money, and vice versa. After FTX run into trouble due to very high leverage (memories of Lehman Brothers emerged), another major exchange, Binance, offered to buy it but just 24 hours later it withdrew its offer, as it gained access to its books for due dilligence. FTX filed for bankruptcy on Friday and Bitcoin fell below 16'000, the lowest level since November 2020 and down 80% from its peak.


Bond yields moved significantly lower (bond prices higher), after the inflation report. The US 10-year yield closed at 3.82%, down almost 40bps from the high of 4.20% before the announcement. The 2-year yield dropped to 4.35% from 4.70%, while the market now is pricing "just" 0.50% interest rate increase in the December meeting of the FED. The terminal rate is now thought to be closer to 4.80%, which means that if rates move to 4.50% in December we are only left with one more hike. As already mentioned, we are reaching the peak of this very aggressive interest rate cycle, which has melted down all financial assets this year.


In corporate news, another European luxury goods company (Richemont) posted solid results, after similar performances from LVMH and Kering (Gucci). The maker of Cartier (among other brands) posted 5% better sales than expected and 14% better earnings before interest and tax (EBIT). Having been very positive on European Consumer Discretionary sector at late September, we now think it might be time for a pause, having been up almost 20% since then. Longer-term, the prospects are solid and they are a buy on weakness. US big-Tech companies continued their cost-cutting efforts. Meta Platforms (Facebook) finally announced the layoffs of about 13% of their workforce, while Saleforce (a Dow Jones component) also is pondering deep cuts. Amazon itself is now focusing on cost cutting, according to an announcement this week.

 

Chart of the Week :

Eurozone companies' profit estimates have kept rising !



The chart shows the evolution of the estimates for the earnings per share (EPS) for the companies of the Eurostoxx50 (blue line, right axis) and the S&P500 (green line, left axis). It is really impressive that despite the war in Ukraine which started at the end of February, the profitability of European companies keeps moving higher, also thanks to the falling EUR (higher revenues from US sales) but also due to the big effort of cutting costs and increasing their operating margins. Inflation has also helped keep revenues high compared to last year, as volumes have fallen less than anticipated. On the contrary, the estimates for the US companies have beem moving down since April, as the USD has hurt most of them but at the same time the hiring wave of 2020/2021 made their costs skyrocket, at a time when demand has started going down. It is no surprise that, against all odds, the Eurozone index (Eurostoxx50) has performed better than the S&P500, even when measured since the start of the war.


Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

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• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week : Factset