Market Synopsis: Stocks Lower, Treasury Yields Higher, Commodities Higher, Dollar Lower, Crypto Higher
Past Week Events:
This Week's Events:
Leading Economic Indicators Show Consistent Decline
The Leading Economic Index (LEI) experienced a 0.7% drop in August, reaching 104.6, which shows a consistent decline for a year and a half. The Conference Board's data reveals that the LEI has decreased by 3.4% over the six-month span from March to September 2023. This is a slight improvement from the 4.6% decline observed over the prior six months. Justyna Zabinska-La Monica, a senior manager at The Conference Board, highlighted that the LEI has been on a downward trend since April 2022. Despite the less negative growth rate in recent months, the indicators still point to potential economic vulnerabilities in the future. Conversely, the Coincident Economic Index rose by 0.3% to 110.9, showing an upward trend. However, The Conference Board anticipates that the current economic resilience might not last, predicting a possible mild recession in the first half of 2024.
Federal Reserve Chair Jerome Powell, addressing the Economic Club of New York, hinted at possible further tightening if strong economic data continues. However, he emphasized caution due to rising long-term bond yields. Powell believes interest rates might stabilize between the old normal and post-2008 levels. He attributed the surge in the 10-year Treasury yield more to term premiums than inflation expectations. Amid concerns of an oversupply of Treasuries and weakening foreign demand, the U.S. plans to issue $1 trillion in debt in Q3. Rising interest rates have impacted mortgage applications, which have dropped significantly.
Next Week:
The S&P Global Manufacturing and Services PMI Flashes for the month will be reported next week. This indicates the United States’ productivity in manufacturing and service sectors. The services flash was at 50.1 last month, and the manufacturing flash was at 49.8. These numbers are both projected to decrease following a recent trend. A number above 50 indicates growth in that sector.
The personal consumption expenditures (PCE) index, a key inflation gauge closely monitored by the Federal Reserve, has shown signs and symptoms of cooling. The core PCE, which excludes food and energy prices, rose by means of just 0.1% from the previous month, whilst the yearly rate is still at 3.9%. Inflationary pressures are easing, but the Federal Reserve is expecting a lot more before they pause or cut rates.
Gross Domestic Product (GDP) is released next week. GDP is the value of the goods and services produced within a country. The market forecasts it to increase by 4.5% year-year on the quarter, while the previous release saw a 2.1% increase year-year.
Market Snapshot:
This week, the financial landscape was marked by significant movements, especially in the realm of interest rates. The yield curve, which is a tool to gauge the health of the economy, saw a noticeable change. The 2s30s curve, an important comparison of short-term and long-term interest rates, became steeper. When this happens, it's often a sign that the market is worried about future economic conditions. In fact, this was the steepest it's been since August 2022. Such shifts can sometimes hint at an upcoming recession.
The stock market, especially sectors rich in tech companies, felt the pressure of these changes. The Nasdaq, an index that tracks many tech companies, went down by 3% over the week. While sectors related to energy and daily essentials (Staples) managed to hold their ground, others like Discretionary and Real Estate took a hit. A significant point to note is the S&P 500, a broad measure of the market, which broke its recent upward trend and came close to its average level from the past 200 days. Smaller, regional banks also had a challenging week, dipping to new lows.
On the commodities front, gold stood out with its price moving closer to the $2000 mark. Oil prices were also quite volatile, with the cost of WTI crude oil nearing $90 before pulling back a bit. The U.S. dollar, which is a good measure for many global transactions, saw a slight drop this week. Remarks from the head of the U.S. central bank, Jerome Powell painted a hawkish picture. Meanwhile, Bitcoin, a popular digital currency, seemed to gain traction, possibly because some see it as a protective asset during uncertain times considering the current geopolitical situation.
Looking beyond the U.S., there were some concerning signs. Argentina's currency, the Peso, took a dive in its unofficial market value by 10%, spotlighting the nation's ongoing economic struggles.
Quip of the Week:"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know."
Jean-Marie Eveillard, renowned global value investor
U.S Equities:
Indexes(Week)
SPX 4,224.16(-2.39%), DJIA 33,127.28(-1.61%),
NASDAQ 12,983.81(-3.16%), RUT 1,680.79(-2.26%)
Sectors:
The market saw an overall poor week, with every sector besides energy and consumer staples ending negative. This could be attributed to the rising geo-political tensions, and poor inflation data: CPI and PPI inflation data came in hotter than expected, which upset the market. On the flip side, energy prices, currently one of the most volatile on the stock market, saw a positive week. This can also be attributed to increasing geo-political tensions; even the threat of oil supply going down causing oil prices to shoot upwards, and this Israeli-Palestinian conflict is most definitely not alleviating this stress.
Treasuries:
This week saw Treasury yields significantly surge, with two-year yields hitting 17-year highs and five-year yields reaching 16-year peaks due to strong retail sales data. The 10-year Treasury yield rose notably, peaking above 5% briefly, amid expectations that the Federal Reserve might maintain high interest rates longer, impacting borrowing costs and pressuring stock market indexes as higher yields can slow economic growth. The steepening of the yield curve is very evident above as the two years gained only a fraction of what long term treasuries gained.
Commodities:
Oil
The recent escalation between Israel and Hamas has reverberated through the intricate corridors of the global oil market. Following Hamas's unanticipated assault on Israeli territories, oil prices surged to a notable $94 per barrel, igniting concerns of it breaching the symbolic $100 mark. Although there's palpable apprehension regarding potential disruptions to the Middle East's oil and gas exports, the actual supply dynamics have remained relatively stable.
Israel, while not a significant contributor to the global oil supply chain, did halt operations at its Tamar gas field. This cessation impacted gas transmissions to Egypt, which subsequently channels a substantial portion of its gas to the European continent. Consequently, the European markets are grappling with escalating gas prices, underscoring the interconnected nature of global energy networks.
The broader geopolitical landscape presents further complexities. Speculations are rife about the U.S. intensifying sanctions on Iranian oil exports, given Tehran's affiliations with Hamas and Hezbollah. Such a move could precipitate a significant reduction in Iranian oil in the global market, exerting upward pressure on prices. However, there's potential respite with Saudi Arabia possibly intervening to stabilize the market equilibrium.
A pivotal point of focus remains the Strait of Hormuz, a critical artery for global oil and gas consignments. Any impediment or turmoil in this region could have profound implications, particularly for Europe, which is heavily reliant on Qatari gas.
Furthermore, Saudi Arabia and Russia, both stalwarts in the petroleum sector, had previously adopted a restrained approach, curbing oil supply to bolster prices. Yet, the current geopolitical milieu might necessitate a recalibration of their strategy. With the U.S. electoral landscape on the horizon, escalating oil prices could influence electoral sentiments. For Russia, maintaining elevated oil prices is imperative for its economic stability, especially amidst the ongoing Ukrainian crisis.
Gold
With tensions arising from the Israeli-Palestinian conflict and inflationary pressures still remaining, investors are increasingly looking for a safe-haven like gold to put their money in during this chaotic and challenging time. Despite gold being a non-yielding asset, its appeal comes from its safety which is particularly important during this time.
Crypto:
BTC -29,843, 5.05% ETH - 1,627, 3.96%
BTC Graph (5-day)
Bitcoin experienced a boost this week due to growing optimism regarding the possible approval of multiple spot bitcoin exchange-traded funds (ETFs), as mentioned by JPMorgan in a research report on Wednesday. This optimism was fueled by the SEC's choice not to contest a recent verdict in the Grayscale case, nudging the approval of pending applications a step closer. Grayscale manages the Grayscale Bitcoin Trust (GBTC), recognized as the largest cryptocurrency fund globally. Although the exact timing for an approval remains uncertain, it's anticipated to happen within the upcoming months, likely before January 10, which marks the final deadline for the Ark 21 Shares applications, as analyzed by Nikolaos Panigirtzoglou and team. ETFs, akin to stocks, are traded on exchanges and mirror the performance of a specified underlying asset, offering a more affordable and direct avenue for investors to delve into cryptocurrencies without acquiring the digital assets themselves. The crypto realm is hopeful that sanctioning a spot bitcoin ETF will entice mainstream capital influx into the sector. JPMorgan foresees a scenario where the regulator might approve numerous applications simultaneously, preventing a "first mover advantage" for any particular applicant, thus fostering competitive ETF fees. They also note that Grayscale could be compelled to reduce its fees if it attains approval to transition the trust into an ETF, which would be advantageous for investors.
Europe:
Stoxx 600- 433.73, -3.44% DAX- 14,798, -2.56% FTSE 100 -7,402, -2.60%
DAX Chart (5-day)
There has been a notable rise in the yields on 30-year British government bonds to 5.134%, marking a peak not seen since September 1998, amid a broader global trend driven by Middle East tensions and rising oil prices. This uptick is part of a worldwide financial scenario, mirrored in the U.S. with ten-year Treasury yields surpassing 5% for the first time since July 2007 following Federal Reserve Chair Jerome Powell's remarks hinting at sustained high-interest rates. Amidst this global backdrop, the UK market remains jittery, with the uncertainty exacerbated by high bond yields and geopolitical unrest. Although the British government's borrowing in September was lower than anticipated, Finance Minister Jeremy Hunt voiced concerns over the unsustainable doubling of debt servicing costs due to inflation and higher interest rates. The Bank of England has hiked its interest rate 14 times since December 2021 to 5.25%, but investors see a pause, estimating only a 13% probability of another rate increase on November 2. Meanwhile, the average maturity of British government debt stands at around eight years, albeit more sensitive to short-term fluctuations due to the Bank of England's quantitative easing program, with the government's Office for Budget Responsibility projecting the effective maturity closer to two years.
Asia:
XJO (Australia)-6,900, -2.13% Shanghai 180 Index-7,640, -3.63% Nikkei 225- 31,259, -3.27%
XJO Chart (5-day)
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