The 2022 FIFA World Cup has just begun !
We hope that this period will bring some joy, not just to the football lovers like us but to the whole world, who has been through a very miserable year so far. It is now time to sit back a bit, relax and enjoy the "King of Sports" until we get to the wonderful holiday of Christmas and New Year. In terms of predictions, at KSH we are rather split, with Brazil , France and Germany among the favorites, but , then again, we hope we are better in forecasting financial markets ...
Global equities were mixed last week. The US markets lost ground, with Nasdaq being the worst performer with a 1.5% drop. It is worth noting that we are now exactly 1 year after the peak of Nasdaq on 19th November 2021, during which period it has lost 29%. Europe was higher, with Germany as the top performer, up 1.5% but Switzerland finished slightly lower. In terms of sectors, defensives moved higher with Healthcare, Staples and Utilities posting small weekly gains. Energy was among the worst performers with a 1.7% drop. We have made the decision to reduce significantly our Energy exposure in our various equity portfolios. The sector has decoupled from oil prices which seem to have peaked for now, but energy company stocks have kept moving higher, which does not seem sustainable.
Good news from the October US Producer Price Index (PPI), which was announced less than expected. On a yearly basis it rose by 8.0%, less than the 8.3% expected and 8.4% in September. The Core CPI, which excludes food and energy items, fell below 7% to 6.7% vs 7.1% in September. The data provided further evidence that we have probably seen the peak in inflation and helped investment sentiment throughout the week.
US October Retail Sales rose more than forecasted. The overall number rose by 1.3% for the month vs expectations for 1.0% while if we exclude the auto and fuel items, retail sales rose by 0.9% vs expectations for almost zero growth. The data were rather strong if viewed also through the lense of a rather small inflation increase in the month of October, which affects the dollar value of the calculations. One has to wait and see how this holiday season will finally evolve, as many specialists have predicted that the growth of sales will probably be one of the lowest in the last decade.
China announced a significant set of 16 new measures to help the real estate market. The banking regulator and central bank issued a set of internal directives to promote the “stable and healthy development” of the industry. The measures include credit support for debt-laden housing developers, financial support to ensure completion and handover of projects to homeowners, and assistance for deferred-payment loans for homebuyers. The new measures emphasised “guaranteeing the handover of buildings”, and ordered development banks to provide “special loans” . The aim is obviously to prevent massive defaults and to jump-start the sector. Real estate stocks and bonds rose by more than 20% on the news. After the new measures concerning their Covid strategy, this piece of news is another confirmation that the Xi Jiping is turning fast his attention to the economy, in start contrast with the cassandras which forecasted that his first priority is geopolitics and the invasion of Taiwan.
Republicans finally won the House of Representatives, but with a tight margin. The new Congress is now divided and for the rest two years, policies will have to be debated very forcefully between the two political parties before they are passed into laws. The control of the House will make Republicans push for a reduction in government spending, which might have implications on the depth of an upcoming recession, as less fiscal stimulus could drive economic activity even lower. On the other hand, the FED knowing this and seeing it in action, could start pivoting faster than anticipated (meaning to stop interest rate increases or even start reducing them) to provide the necessary stimulus to the economy, absent the fiscal stimulus. A very interesting 2023 is ahead in terms of the "battle" between the Congress and the FED.
Oil and other commodities slumped by almost 10%, with no apparent catalysts. WTI Crude oil prices fell below 80$, down more than 12% from its recent high at the start of the month. The positive sentiment that is brewing with regard to the Ukraine situation and the discussions that have been held between high level CIA officials and equivalent Russian ones has been making traders cut positions. Copper prices also fell by 8% for the week, after the recent surge, which looks to be more of a profit taking action. Copper is down 17% for the year.
Bonds did not move much, as the gains after the PPi report were lost after various FED officials keep pouring cold water on expectations for a pivot. The US 10-year finished the week at 3.80%, while the German equivalent is trading very close to 2%. The FED and ECB meetings are both in mid-December and until then there is little to move the market significantly in any direction. The very important CPI report is just one day ahead of the FED meeting.
More layoffs were announced by Technology companies in the US. Cisco announced a 5% reduction in its personnel despite reporting solid results for its recent quarter. Amazon is considering increasing the number of corporate jobs to cut, while the 2020/2021 market darling, Roku (a streaming channels integrator), is also reducing significantly its workforce. The relentless hiring of the Tech companies during the pandemic has come back to haunt their profits, now that demand has finally slowed down.
Chart of the Week :
China is attracting more interest by foreign investors, albeit by the more speculative and short-term trading oriented funds at this stage. According to recent data shown in the above chart there has been a significant increase in activity in options trading, the derivative products which aim to capture the potential upside while protecting somewhat the downside. This trading has been primarily executed by hedge funds, which have spotted that something is changing with respect to the attitude of the Chinese government vs Covid, the property market and their relations with the West. And hedge funds have also taken good notice of the almost 30% gain of Hang Seng in three weeks. The next step would be for longer-term funds to start committing capital again and the retail investor to finally rediscover the region.
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• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
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• Sources: Chart of the Week : Financial Times