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November 27, 2023 - While we were "Blackfriday-ing", virologists were busy.

ProMed issued a notification late on Tuesday detailing a reported epidemic of “undiagnosed pneumonia” in children in northern China, and memories came back. ProMed is a large, publicly available surveillance system which monitors human and animal disease outbreaks worldwide. It was ProMed which issued a similar alert in late December 2019, that brought a mystery virus later named Sars-Cov-2 to the attention of many doctors and scientists, including senior officials at the World Health Organization. And it was more than two months later, that the world woke up to the Covid-19 pandemic. Former FDA commissioner, and current Pfizer director, Scott Gottlieb tweeted about the current outbreak, noting that so far it is unclear whether this is a new epidemic or just a "high burden of seasonal illness " as China enters their first winter since exiting zero-Covid policies.

After these reports, the WHO made an official request to China for detailed information on this issue. China first reported about this on November 13th, during a press conference where the authorities from the National Health Commission reported an increase in incidence of respiratory diseases. But the ProMed alert and the media coverage triggered the action by the WHO. For now, Chinese authorities have attributed this increase to the lifting of COVID-19 restrictions and the circulation of known pathogens such as influenza, mycoplasma pneumoniae (a common bacterial infection which typically affects younger children), respiratory syncytial virus (RSV), and SARS-CoV-2 (the virus that causes COVID-19). There is no confirmation yet that there is a new, unknown strain or virus that is causing the illnesses.

But this is not the main reason to become cautious again, in the short-term. As November comes to an end and a big and very welcome rally has ensued from the October lows, we should highlight that there are risks moving into December and until year-end. Firstly, the end of November coincides with the closure of the financial year for many hedge funds and investment banks, who might want to crystallize profits and sell equities during the first ten days of the new month. Secondly, central banks might not find the current market euphoria ideal for their goals. As the main catalyst of this rally was the big drop of bond yields and the expectations for rate cuts as early as next April, central bankers might wish to push against this idea and try to make yields return to higher levels. Higher yields tighten the financial conditions and guarantee that inflation will move lower, whereas looser financial conditions (created by lower yields/rates) are an obstacle in their fight against inflation.

The published minutes of the last FED and ECB meetings revealed that communication is now more important than action. Starting with the ECB, the message after the central bank's last meeting was that they are probably done with raising interest rates, but what they now want to avoid is sending a message of complacency. In that sense, the ECB's minutes emphasized keeping rates higher for longer and there was even discussion about the possibility of another rate hike if needed, although the latter now carries a very low probability. Similarly, the USD bond market had already started discounting rate cuts by the FED, as soon as the 2nd quarter of next year. The FED minutes made it clear that there was no discussion on cutting rates and we are all keenly waiting for the December meeting when the 2024 growth and interest rate projections of the FED members will be updated.

The Eurozone Composite Purchasing Manager Index (PMI) increased 0.6 points to 47.1 in November, above the expected 46.8. Both manufacturing and services were up, although they remained in contraction territory, as the levels before 50 are usually associated with recessions. The Manufacturing PMI rose to 43.8 from 43.1 in October, while Services rose to 48.2 from 47.8. On a country level, the French November PMIs were broadly stable relative to October and a bit weaker than forecasts. while German numbers were up relative to October and better than expected. The stabilization and slow improvement of the PMIs at these low levels means that on one hand growth in the Eurozone will be at best close to zero and on the other hand that interest rates cannot be raised any further without pushing the region into a deeper recession.

Speaking about Black Friday, online sales showed robust growth although estimates of on-premises sales show small growth vs last year. Adobe said that Black Friday online sales in the U.S. reached a record $9.8 billion, a 7.5% year-over-year increase. The analytics firm also estimated that online sales reached $70.9 billion globally, an 8% increase from Black Friday last year. But Mastercard estimated that in-store sales rose by 2.5% in nominal terms, which means they were lower than last year if we take out the price increases based on the current 4% inflation.

Equities moved higher by about 1% on average in the US and Europe, in a week where the thanksgiving holiday meant low volumes and little news. The main trend in the markets was the out-performance of defensive sectors, such as healthcare, which led to the Swiss SMI being in the driver seat with an 1.5% gain for the week. Energy was the only sector which finished negative, as oil prices took a dive after the OPEC+ meeting was postponed, obviously due to disagreements among the members on the production strategy.

Bonds were slightly lower (yields higher), after the better-than-expected PMI data in the Eurozone and the not-so-bad jobless claims in the US. The US 10-year yield rose to 4.47% from the low of 4.40% and the 2-year approached 5% again, up from about 4.85%. German yields also moved higher by about 5bp across the curve for the week.

Chart of the Week : The world is desynchronized, according to the global cycle clock.

The above chart is a very interesting depiction of the different stages of the macro economic cycle and an estimation of where the different regions currently are. Starting at "midnight", it is when the economy starts to experience a fall in liquidity and a tightening of financial conditions (less credit available, lower willingness to lend by the banks, companies consider reducing spending etc). Japan seems to be entering this phase, which is were the US and Europe were in the middle of last year. The next phase is the growth slowdown which brings inflation down. This phase can be just a slower economic growth or an outright recession. Europe and the US are now in this phase of economic contraction and no-one knows whether they will eventually fall in recession. China looks to have been in this phase for over one year now and is exiting to move to the next stage. This is when the first recovery takes place, liquidity improves as central banks reduce interest rates and financial conditions become looser. It is also usually the phase when the stock market finds its bottom and a new bull market begins. The final stage is the period of robust growth, where all economic indicators have returned to healthy levels and investors are euphoric as there is good news all around them. Stock markets, at this stage, have already made significant gains from the bottom of phase three.


• 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.

• 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.

• 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.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : Pictet Asset Management. Photo: Michal Bednarek/Shutterstock


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