Summary: The risk-off mood at the onset of the new week is mostly driven by protests in China over the zero covid policy. This comes after China’s announcement to cut the reserve requirement ratio by 25bps on Friday, which is unlikely to be enough to offset demand weakness. US equity futures gapped lower, and the US dollar got a safe-haven bid as well. Commodity markets are likely vulnerable to this risk aversion and dollar gains, with crude oil prices testing lows as Russian oil price cap discussions resume today. The key week ahead for US data and Fed as Powell takes the stage on Wednesday, but the focus today will be on China and a likely hawkish tilt in the comments from Fed’s Bullard.
In a shortened session with thin trading, the S&P 500 Index finished flat and the Nasdaq 100 Index slid by 0.7%. Over the week, S&P 500 gained 1.6% and Nasdaq 100 was up 0.7%. Among the S&P 500 sectors, real estate, utilities, and healthcare gained while communication services, and information technology were the laggards. Activision Blizzard (ATVI:xnas) dropped 4.1% on reports that the U.S. antitrust regulator might file a lawsuit to bar Microsoft (MSFT: xnas) from acquiring the video games developer. Manchester United (MANU:xnys) surged for the third day in a row, up 13% on Friday or 65% for the week, as the controlling shareholder is exploring a sale.
U.S. treasuries gained in price and lower in yields last week. The 10-year yield dropped 15bps to 3.68%. The market is increasingly pricing in a recession as the 3-month treasury bills vs 10-year treasury notes spread went to minus-64bps, a level usually seen within 12 months preceding the onset of a recession. For a detailed discussion of our take on the outlook of bonds, please refer to this note we published last Friday. We are having a busy and important calendar this coming week with several potentially market-moving data and events. The JOLT report on Wednesday and the jobs report on Friday will tell us about the state of the U.S. job market. The PCE scheduled to release on Thursday is the Fed’s key inflation gauge. Fed Chair Powell will speak at the Brookings Institute about the economic outlook and the labor market.
Investors were weighing new government measures to support the property sector against the alarmingly explosive uptrend in daily new Covid cases and the reports that megacities returning to the practice of movement restrictions and lockdowns. On Friday, Hang Seng Index declined 0.5% while CSI 300 climbed 0.5%. Over the week, Hang Sang Index fell 2.3% and CSI 300 edged down 0.7%. Chow Tai Fook Jewellery Group (01929:xhkg), tumbling 15.5%, was the biggest loser in the Hang Seng Index on Friday. The jeweller lowered mainland China same-store-sales growth (SSSG) to a high-single-digit year-over-year decline over the half-year from Oct 2022 to Mar 2023.
The Aussie share market has gained 12% from its October low, after rising 1.5% last week; with Virgin Money up the most, about 23%, on upgrading its outlook, while gold company Ramelius Resources rose 15% on maintaining its production outlook. This week stocks exposed to China are vulnerable of a pullback given forward earnings are likely to be downgraded following further China lockdowns and protests. It also means commodities, oil – iron ore, copper, lithium may see demand slow down and their prices fall – that’s important as its underpin some of our largest’ s companies profits. Fresh data on Friday showed the major iron ore companies, BHP, Rio, Fortescue, will be shipping almost 6% less than last year in the final quarter of this year. So the risk is the situation in China worsens, and iron ore shipments could continue to fall and hurt Fortescue, BHP and Rio. Early Monday AM, iron ore trades 0.6% lower. Be mindful investors could be looking to take profits or write options for downside protection in case markets fall on China concerns. Inversely; stocks not exposed to China could likely continue to rally given its first Christmas with no global lockdowns (excluding China). Consider looking at retailers doing well following Black Friday sales and ahead of the likely Santa rally; Shares in JB Hi Fi, Harvey Norman, Premier Investments (owner of Jay Jays and Peter Alexander) are all trading up 20% from June.
In the previous weeks, we have often argued that the USD is turning more risk-sensitive rather than being yield-sensitive with most of the interest rate story being priced in by the markets now. A confirmation of that trend was seen this morning when US 10-year yields stayed below 3.7% at the Asia open, while the USD rose higher amid a safe haven bid due to the protests in China. Biggest losers on the G10 board were the AUD and NZD, both down 0.5% with the risk-off move. The Japanese yen was more stable, depicting a risk-sensitivity as well, and USDJPY stayed range-bound around 139.30. EURUSD
As hopes of a China reopening retreated last week with a fresh surge in cases, crude oil prices fell sharply with WTI down ~5%. Meanwhile, EU talks on a cap on Russian oil have hinted at a higher price of $65-70/barrel, which suggests Russia’s supply to international markets could continue. Talks are likely to continue this week, and the protests in China mean more short-term headwinds to oil demand outlook are on the horizon. China’s central bank announced a cut in RRR, but that is unlikely to fully offset the demand weakness concerns. WTI future traded around $76/barrel in the Asian morning while Brent was below $84, and focus is likely to shift to the OPEC meeting on December 4 after we get past the cap negotiations. There were also reports that Iraq could increase oil export capacity, to add 1mn to 1.5mn barrels/day by 2025
Anger over suspected delays to rescue from a deadly fire burst into anti-lockdown protests in Xinjiang. After a fire at a locked-down apartment killed 10 people, hundreds of angry residents in Urumqi, Xinjiang took to the street to protest against the Covid lockdown imposed more than three months ago. Meanwhile, daily new cases shot up to a record high of 39,506, with Beijing, Guangzhou, Chongqing, and Shanghai significantly tightening movement restrictions. Video footage and photos on social media showed that protests against Covid restrictions sprang up in several other cities over the weekend, including Wuhan, Nanjing, Beijing and Shanghai.
The People’s Bank of China (PBOC) announced a reduction of 25bps for all banks except for some small which had already had their RRR cut to 5% earlier. The weighted average of RRR across all banks falls to 7.8% from 8.1% after the latest move. The PBOC projects that the reduction in RRR will make available to banks an additional RMB400 billion. The 25bps cut this time, the same as the cut in April this year, was small by historical standards when 50bp or 100bp cuts seemed to be the norm. It helps improve banks’ funding costs but it may do little to boost the economy as the demand for loans is subdued.
The Reserve Bank of Australia Governor Lowe appeared before the Australian parliament's Senate Economics Legislation Committee and said that demand is still too strong relative to supply. He said he is unsure about labor market, and wage growth is consistent with inflation returning to target. He was worried about housing supply and expects to see rental pressure over the next year. Australia’s October retail sales, however, dipped into negative territory for the first time this year, coming in at -0.2% MoM vs. expectations of +0.5%.
The U.S. Federal Communications Commission said on Friday that the U.S. had decided to ban the import and sale of telecommunication equipment from China’s Huawei Technologies, ZTE, Hytera Communications, and surveillance equipment makers Dahua Technology and Hangzhou Hikvision Digital Technology. The U.S. regulator said these Chinese telecommunication equipment makers pose “an unacceptable risk” to U.S. communication networks and national security.
Chevron had been banned from pumping due to US sanctions against the government of Venezuelan President Nicolás Maduro. But WSJ reported that on Saturday, the US said it will allow Chevron to resume pumping oil from its Venezuelan oil fields. The shift may open the door to other oil companies that had operated previously in Venezuela, despite the near-term headwinds and the massive investments that may be needed.
After a strong beat for Q2, analysts are expecting Pinduoduo’s Q3 results to remain solid with Q3 revenue growth to come at 44% y/y and the EBITDA margin to stay at healthy levels around 21.2%.
According to the analysis done by Peter Garnry, with 97% of the companies having reported, S&P 500 earnings were down 2.5% q/q making Q3 the worst earnings season since the market bounced back from the abyss during the early days of the pandemic. European and Chinese earnings have been even worse declining around 9% q/q driven by more intense margin pressures than observed in the US. On revenue European companies did the best with revenue up 6.7% q/q compared to only 3.9%b q/q for S&P 500. The average q/q revenue growth rate in the past two years was 5.3% in Europe and 3.5% in the US. Part of the difference can be explained by the stronger USD. The key dynamic for equities next year is the evolution of operating margins and if they go down to average levels in the past then headwinds will be too much for companies, and lower earnings next year will likely follow.
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Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy