A Week in the Markets: 15th November

S&P 500

5D: -0.31%, 1M: +4.73%, 3M: +4.81%, 1Y: +30.62%


Following continued strong corporate third quarter earnings and positive economic sentiment from the Fed, the S&P 500 started the week extremely strongly as it completed its longest streak of all-time closing highs since 1997. However, the streak was quickly ended as the blue-chip index ticked down 0.3% on Tuesday ahead of inflation data. Wednesday’s October US consumer price index jumped 6.2% from last year and up 0.9% monthly against the 0.6% estimate. This saw the S&P 500 fall 0.8% as fears of earlier Fed rate hikes re-emerged. Despite edging up on Friday after investors’ attention returned to strong earnings, which were boosted by J&J announcing a spin-off of its consumer business, the S&P 500 finished down 0.31% for the week.


US equity index performance continues to be dampened by inflation concerns. Recent CPI data has weakened Federal Reserve sentiment that inflation is only ‘transitory’, beckoning warnings of earlier interest rate hikes. Although, the Fed has reassured investors that there will be no rate changes soon. Also, investors remain slightly optimistic looking ahead to 2022 with wage increases likely to increase with the price level, softening the blow. Moreover, market sentiment is still strongly underpinned by very positive third-quarter corporate earnings. With over 80% of S&P 500 listed companies beating analyst expectations, the blue-chip index has proved that firms have been able to pass on the higher production costs to consumers. Upcoming this week, consumers will be in the spotlights as retail sales data from the Census Bureau will be released on Tuesday, alongside more earnings from Walmart, Target and Home Depot. Based on data from last week consumers are getting worried about rising prices, so retail sales will provide a better update on consumer sentiment. Investors will also be keeping an eye on Biden’s meeting with China’s Xi Jinping.



FTSE 100

5D: +0.60%, 1M: +2.89%, 3M: +1.79%, 1Y: +16.33%


Despite some downward pressure on the Index, it ended the week with an overall 0.6% gain. The Index started the week down 0.05% on weakness in consumer-focussed and travel stocks, but losses were limited by firmer commodity prices supporting mining and oil stocks. Losses extended into Tuesday’s session on weakness in banks and mining stocks. This comes after the Bank of England kept interest rates unchanged last week, surprising investors who were convinced they would raise rates, which would have increased borrowing costs and boosted the profitability of banks. The Index rose to its best session in nearly a month on Wednesday, supported by a weaker pound after U.S. CPI recorded their largest YoY advance since November 1990, which supported the export-heavy FTSE 100 shares. The gains extended into Thursday’s session, helped by China-exposed mining stocks after Evergrande averted another default at the last minute, and third quarter GDP data beat estimates. Gains slipped slightly on Friday after AstraZeneca missed profit estimates and a stronger dollar weighed on commodity stocks.


Looking ahead into next week, we have several UK economic data and corporate earnings releases. On Tuesday, we have several UK labour market data coming out, unemployment rate (SEP) is forecasted to decline further to 4.4%, and the claimant count change (OCT) is also expected to continue its consecutive monthly decline, as the economy recovers from the coronavirus hit. However, with the end of furlough on the 30th September and rising supply-side costs for businesses, employers may have found they couldn’t afford to keep employees on, thus the claimant count decline may not be as large as expected. On Wednesday, we have the UK CPI year-on-year reading coming out, core inflation is expected to rise by 0.8%, mirroring inflation readings we’ve been seeing elsewhere in the world, notably the U.S. recently. If CPI was to beat expectations we could see the strengthening of Sterling, which would negatively impact export-heavy sectors in the FTSE 100 Index. We end the week with UK retail sales month-on-month reading, which is forecasted to increase. The reading will be a good indicator of economic activity and the potential trajectory of the economy.



Hang Seng Index

5D: +1.84%, 1M: -0.01%, 3M: -4.03%, 1Y: -3.17%


The Hang Seng Index finished at HK$25,327.98, a 0.32% increase from the previous closing. This is positive since it has been increasing by 1.84% Week on Week but a 0.01% decrease Month on Month. The reason for this increase comes from a considerable rebound in the Chinese technology sector from international investors shifting their investments from US treasuries to more valuable assets in the Asia-Pacific region. The e-commerce firms have had successful earnings from Single’s Day shopping spree, with Alibaba recording ¥540.3 in sales increasing at 1.8%, JD.com increasing its shares by 8.3% and Pinduoduo by 7.7%. US-China should stabilise in the short term with President Xi doing a virtual meeting with his US counterpart Joe Biden. They will discuss on Monday topics such as Climate Change, trade, and economic recovery from Covid-19. To end this week, the Chinese CPI , PPI increased slightly from the previous month. This gives confidence in a better environment in China from rising inflation, global energy crunch and decreasing supply chain headwinds impacting the country.


Looking forward, the HSI should stabilise with positive news coming within the Chinese Real Estate sector, with Evergrande averting from defaults with a last-minute bond payment of $148 million. This had led Evergrande shares to rise by 6.8% – impacting the investment in other Chinese real estate developers such as China Resources Land, Longfor Group and Country Garden Holdings positively. This should be followed by the announcement from the Chinese regulators in relaxing the rules on how developed raise funds, which should alleviate some of their financial woes. The good news is that it would allow developers to issue more domestic bonds while repaying their foreign-denominated bonds. In addition, leading to the creation of other types of securities products while decreasing the risks for investors. However, despite the good news with easing policies from the financial system to loan to the developers, the sector is still precarious. It will provide some entertainment for the investors and the markets in the future. Lastly, the confirmation of Chinese President Xi Jinping at the Chinese Communist Party's Central Committee should confirm the ''Common Prosperity'' doctrine. Thus, Chinese regulators will further regulate other sectors like the financial, luxury and casino industries. Next week, the Chinese Retail Sales, Industrial Production, Fixed Asset Investment House Prices and Unemployment Rate should give investors a good outlook on the state of the Chinese economy and should affect the HSI positively or negatively.



US 10-Year Treasury

5D: +9.2bps, 1M: -0.84bps, 3M: +64.74bps, 1Y: +67.18bps


From the tone of "inflation is transitionary", the Biden administration has finally changed to "inflation hurts pocketbooks, and reversing this trend is a top priority for me." On Wednesday, the CPI showed that US inflation surged to 6.2% in October, hitting a 31-year high since November 1990, while Core CPI rose 0.6% and jumped 4.6% year on year. The markets have quickly responded to the news with the US 10-Year Treasury yield seeing the largest one-day rise in a year, hitting above 1.55. After the CPI release, traders moved up their expectations on when the Fed rate hike would occur, and they are surely expecting it to come sooner.


Biden's $1 trillion infrastructure bill passed by Congress last Friday, involves investment in trains, high-speed internet and clean energy. On Wednesday this week, Biden touted the infrastructure plan will be an eventual fix for the nation's inflation and supply chain disruption. However, the effects are waited to be observed when the building starts. After the holiday on Thursday, the US 10-Year Treasury yield turned lower after job openings and the Michigan consumer sentiment report. The yield was then rebounded, closed this week at 1.566.


Next week. There will be several speaks by FOMC Members on Wednesday and Friday. The markets will focus on their speech and tones to predict the further actions taken by Fed. Any hawkish messages delivered would likely put upward pressure on the bond yield.



USD/TRY

5D: +2.78%, 1M: +7.6 %, 3M: +17.01%, 1Y: +30.12%


As the 31-years high inflation rate reported in the USA, markets are raising their bets of faster monetary policy tightening by the Fed, pushing USD to a 16-month high. With a higher interest rate in developed countries like the USA, riskier assets' attractiveness gets lower, especially those in emerging economies like Turkey. On Thursday, Turkey's lira reached its all-time low of 9.97 against the dollar. The currency has lost about 25% of its value this year after a series of interest rate cuts, causing the country to suffer from currency depreciation and high inflation. While the economy had a record 21.7% year-on-year growth in the second quarter this year, the lira depreciation indeed pushed up the cost of living in Turkey. TRY/USD finished this week at 9.965.


Despite a series of interest rate cutting from September and October, according to a survey, the central bank is expected to have a further cut from 16% currently on next Thursday. In the fourth quarter of 2021, lira has already weakened more than 10% against dollar, and the downward trend is predicted to continue amid the strengthing of dollar and further interest rate cuts in Turkey. On the positive side, the weakened lira has boosted Turkey's exports and tourism, recorded a surplus for the second month in the current account. It is also reported that the trade deficit was narrowed by 47.5% year-on-year basis in September. On the political side, the involvement of Turkey in the illegal migrant crossings from Belarus into the European Union would add more uncertainty to the currency.



Gold

5D: +2.62%, 1M: +5.63%, 3M: +4.84%, 1Y: -1.09%


It was a booming week for gold, and it would seem the bulls had the Midas touch. Wednesday’s heavy CPI data spooked the market and forced investors into other safety assets as hedges against inflation. As a result, this helped gold to rise as much as 2%, hitting its highest level since mid-June. Gold then settled down after the initial rise as investors sold off profits, before rallying again slightly on Friday to finish up 2.62% for the week.


Looking ahead, gold sentiment is bullish. This is due to both fundamental and technical factors. From a technical perspective, gold importantly surpassed the $1835 an ounce level. This had been the top range for 6 months and, as can be clearly seen midweek, the breakout helped to spark a major bullish sentiment. From a fundamental standpoint, the gold rally has come as a result of renewed inflationary concerns with US CPI data revealing that inflation has risen 6.2% from last year. Since gold prices move in-line with inflation as a hedge against it, as well as conversely to the strength of the dollar, this provides a positive outlook for holders of gold. As such, Societe Generale analysts have adjusted their gold outlook, increasing their predictions that gold will push back up to $1,950 an ounce in the first quarter of 2022. However, gold prices could fall back if inflationary concerns force the Fed into earlier rate hikes. This is because higher rates would push up bond yields. Subsequently the opportunity cost of gold rises, making it a less attractive investment. Although, in the meantime, Central Banks have reassured markets that interest rates would remain low.


Thanks to Ben Turner, Sadia Saeed, Sam Perrett, Marco Tarchoune and Thomas Lee for your in-depth analysis! All images sourced from TradingView.com

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