The Thanksgiving holiday brought nice presents to investors as bonds and equities moved simultaneously higher, offering decent returns for the week. The US indices rose by more than 1% for the week, with the S&P500 reaching an important resistance again at around 4040-4050. Europe also moved higher by about 1% on average and most indices are now sitting at the highest level since May of this year. Chinese equities moved slightly lower as the country is still trying to cope with the new Covid19 wave. However, as we are approaching again the very strong resistance levels of the markets, we now chose to be cautious and with an eye on raising potentially the cash levels.
The minutes of the last FED meeting revealed that 50bps in December is now an almost done deal, after three consecutive hikes by 75bps. According to the minutes "a substantial majority of participants judged that a slowing in the pace of increase would likely soon be appropriate. A slower pace in these circumstances would better allow the Committee to assess progress toward its goals of maximum employment and price stability". Our scenario of peak-hawkishness, which we highlighted many weeks ago is now starting to materialize. The next step would be to get a clearer picture as to whether the 5% terminal rate which is priced by the market is going to prove the actual end, as our base-scenario is, or not. The macroeconomic data our of inflation and the labor market in the next 2-3 months will help us in that respect. Voices within the FED for rates being raised to 6% or 7% are still a very isolated minority.
More measures were announced by China's Central Bank, aimed to stimulate the economy. In particular, it cut by 25bps the RRR (Reserve Requirement Ratio) for banks, which should release close to the equivalent of 80bn$ of liquidity into the system. At the same time and according to a Reuters exclusive, China's central bank will offer cheap loans to financial firms for buying bonds issued by property developers. If this were to materialize it would constitute the strongest policy support yet, for the real estate sector. The Central bank hopes the loans will boost market sentiment toward the heavily indebted property sector and rescue a number of private developers. The PBOC is also drafting a "white list" of good-quality and systemically important developers that would receive wider support from Beijing to improve their balance sheets, according to the same report. These news are helping the Chinese high yield bond market continue its recovery.
But China also continues to struggle with the Covid19 resurgence. Daily cases reached a new high, despite the lockdowns, as local governments look confused with how to apply the new measures. And demonstrations have started to break out in various parts of lockdown cities. However, we should assume that the path forward is that of pragmatism, which means that the central government will make baby steps towards a re-opening of the economy, accepting thus a higher spread of the virus along the way. A full-reopening is estimated some time in March of next year, as the improving weather and the typical slowdown of the virus spread will make things easier. Also by that time, a higher number of vaccinations will have been accomplished, especially among the elder community. There is light at the end of the tunnel.
The Eurozone November PMI numbers presented a mixed picture, but were still better than feared. Manufacturing was the bright spot, with France and Germany posting a remarkable increase vs October at 49.4 and 46.7 correspondingly. The Eurozone Manufacturing Index rose to 47.3 vs 46.4 in October, remaining in contraction territory however (below 50). On the contrary, the Services sector moved further down, with France announcing a drop below 50 to 49.4 vs 51.7 in October and Germany's index remaining almost unchanged at 46.4. The Eurozone Services Index for November remained unchanged at 48.6 and still in contraction territory (below 50). These numbers show that the Eurozone economy is stabilizing and not deteriorating further, but a recession is hard to be avoided if we remain at these subdued levels of PMIs.
The US November PMI was much worse than expected. Manufacturing fell almost 3 full points to 47.6, down from 50.4 in October and in contraction territory. Services also moved lower, but to a lesser extent. The index was announced at 46.1, down from 47.8 in October. The higher interest rates are starting to have a heavy toll in the economy, which is actually the whole purpose of the rising rates campaign by the FED.
Important data are going to be announced this week. On Wednesday we are going to find out the November inflation numbers for the Eurozone, although some country-level figures will be out already on Tuesday, which would set the tone in markets. Expectations are that both the headline and the Core CPI numbers will remain unchanged vs October, at 10.6% and 5.0% respectively. On Friday we are expecting the US labor market data, with the November non-farm payrolls expected to have fallen further closer to 200'000 from 260'000 the previous month.
Bond yields moved lower (prices higher) after the FED minutes and the US PMI numbers. The US-10 year fell below 3.70% and is now almost 50bps below its high just a few weeks ago. The German equivalent yield is below 2%, at 1.85% down from its peak at 2.30%. Corporate bond prices have also moved higher, rewarding investors who chose to buy during the depressed levels of early November.
In corporate news, Disney brought back its previous CEO, Bob Iger just two years after his decision to leave the company and surrender then the leadership to one of his preferred senior executives. But things have not worked out well for the company and senior management was pushing for the return of Mr. Iger, an event which triggered a 10% rally in the stock price when announced. At the same time, the company reopened its Chinese operations which were closed due to Covid19 restrictions and its streaming business is showing strong growth. Having fallen almost 50% this year, we decided to buy back the high quality stock in our High Conviction certificate, with significant upside potential on an 18-month basis.
Chart of the Week :
The S&P500 rarely falls in December, but there are similarities with 2002 unfortunately ...
As we are entering the final stretch of the year, we analyzed the past performance of the S&P500 index for the month of December in the last 20 years. In the last 3 years, we experienced a nice Santa-rally. And it is clear from the chart that there have been only 6 instances out of 20, where December posted losses and in 3-4 of these 6 cases, the drop was rather small (between -0.1% and -1.8%). However, two major monthly sell-offs occured in December. The one is in December 2002 which looks, unfortunately very similar to this year as were also in the middle of a bear market and the index had fallen almost 20% and then October/November was a strong period only for the market to crash until the end of that year. The second sell-off occured in 2018, the last time that the FED was aggressively tightening its monetary policy. But the difference is that in late summer of 2018 the market had registered a new high, which then was followed by a sharp drawdown. Having reached significant resistance level already at the end of November, maybe it is prudent to reduce risk again now, avoiding a 2002 or 2018 repeat.
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• Sources: Chart of the Week : KSH, Facset