Dow Jones Industrial Average
5D: +1.58% 1M: +2.05% 3M: +1.75% 1Y: +23.38%
Despite ending the prior week in the green as its best since June and ahead of a promising Q3 earnings season, the Dow ticked down -0.7% on Monday. The market continued reacting to an extremely disappointing jobs growth report from last week amidst further inflation worries, seeing the Dow drop again on Tuesday for a third straight loss, indicating that investors had adopted a wait-and-see mindset regarding upcoming earnings. However, the latter stage of the week provided a more bullish outcome as better-than-expected Q3 earnings reports helped the US stock market hit its best day since March on Thursday. The Dow closed 1.6% up with futures gaining nearly 300 points following a slew of strong bank and healthcare reports such as JPMorgan and UnitedHealth beating revenue and earnings expectations. Further positive quarterly results from Goldman Sachs and better September retail sales helped the Dow finish above the 35,000 on Friday as it jumped 1.1% and now sits only 0.9% below its all-time high.
The earnings last week have provided a much more bullish outlook for investors this week. The strong reports, particularly from the big banks, have helped to bolster market sentiment and set a more positive tone. Combined with positive news from the FOMC about tapering starting “soon”, inflationary worries have been somewhat tempered. Now, investors will look ahead towards this week’s blue-chip earnings reports. Dow stocks Procter & Gamble, Johnson & Johnson, American Express, Intel and Honeywell are all reporting this upcoming week. Regardless of positive reports last week from the financial sector, analysts are still hesitant to insist that US markets are in the all-clear for a traditionally downtrodden October. As such, the reports will give investors a much better idea of the current state of the market. Although, so far, the initial reactions have not been too bad given concerns over supply chain issues and inflation, suggesting an optimistic outlook. The upcoming week will also see a report for existing home sales, the Philadelphia Fed manufacturing survey, Markit manufacturing and services PMI data release and the Fed’s beige book – all of which could cause ripples in the market.
Straits Times Index (STI)
5D: +1.96% 1M: +3.34% 3M: +0.69% 1Y: +25.30%
The Straits Times Index finished lower at 3,178.63 Singapore dollars after decreasing by 0.04% from the opening on Friday. However, the mood is positive with WoW increase by 1.96% and a 1-month improvement by 3.34%. The overall rally within the different indices in the Asia Pacific includes a positive reaction to the Chinese consumer price index and producer price index that were higher than the previous month. In addition, the recent decision from the Singaporean Central Bank to tighten its monetary policy on Thursday was a surprise after Singapore grew by 6.5% in the third quarter of 2021. The continuation of positive results was seen within the construction sector, which increased by 57.9% YoY, manufacture improving by 7.5% and Services Producing industries rising 5.5%.
Looking forward, the situation in Singapore economically looks to improve with the government recently announcing that Singapore was to open “vaccinated travel lanes” for vaccinated visitors from 8 major countries with more countries to come in the next 3 to 6 months. This announcement led to a more than 4% increase within the domestic catering services, including Singapore Airlines and SATS. However, despite the positive outlook, there’s still some vaccine hesitancy, leading to an average of 3,000 cases per day. It could decrease the recovery levels in the short term, which could hamper the central bank's recent hawkish move and recent announcement back to a new normal. The hawkish move includes raising the slope of its currency band, allowing the Singapore dollar to appreciate against other baskets of currencies, a monetary policy practice that set the exchange rate rather than orthodox interest rates hikes. Furthermore, it is expected that Singapore would keep their monetary policy at this level of hawkishness without any significant changes since the recent results from the wholesale, retail and transport sector decreased by 1.3% - a second straight contraction in 2021. Next week, the Non-Oil Exports and URA property Index will show how the Singaporean economy is going despite the expected negative external factors from the Global energy crisis and the supply chain bottlenecks.
5D: +1.95%, 1M: +2.87%, 3M: +2.07%, 1Y: +24.03%
The FTSE 100 ended the week with a 1.95% gain, its best weekly performance since May. This was supported by heavyweight oil, mining, leisure and banking stocks. IAG (British Airways parent company) shares gained 3.2% and intercontinental Hotels also rallied, as England relaxes its international travelling rules, making it cheaper and easier for those fully vaccinated. Other top risers included: steelmaker Evraz, who had a weekly gain of 3.75% on recovering metal demand as economies re-open from pandemic-led lockdowns. HSBC Holdings further supported the FTSE to the upside after Barclays and Bank of America raised their price targets on the stock.
Looking ahead into next week, Bank of England Governor, Andrew Bailey, is due to speak on Tuesday. Markets will closely watch the speech for any signs of early rate hikes after some BoE policymakers have been more hawkish in their rhetoric: Michael Saunders recently said households must brace for “significantly earlier” interest rate hikes. This is in the face of rising inflation that is starting to look more sustainable. However, on the other hand, there are dovish policymakers like Catherine Mann, who said she “can wait” before raising rates. Many investors are betting on earlier than anticipated rate hikes and have already priced them in. If, Andrew Bailey, starts to sound more dovish in his speech, we could see the priced in expectation wane and the pound soften, thus, supporting the FTSE 100. However, if he continues to make hawkish comments we could possibly see the sterling move more to the upside. This would negatively impact the export-led footsie shares. On Wednesday, we have CPI year-on-year data coming out, expectations are in line with the previous month figure of 3.2%. If the figure was to come out in line with expectations we could see a muted response, however, if it comes out above expectations, which could well be the case after rising food prices and supply chain issues increasing the price of everyday goods, it will further fuel early tapering concerns and negatively impact the footsie. If it is below expectations, it could alleviate some of the upward pressure we are seeing in the pound and support the footsie. On Friday, we have retail sales month-on-month figure coming out, markets expectations are at 0.4%, a higher than expected figure indicates increased economic activity and recovery, which is positive for the footsie.
German 10-Year Bund
5D: -1.2bps 1M: +11.3bps 3M: +18.7bps 1Y: +45.4bps
The German 10-Year Bund closed the week in the green with the yield falling just over 1bps. Last week was a tale of two halves, with Bund yields continuing their sharp ascent that has been seen since the Beginning of September amid rising inflationary pressures. They increased by 6.7 bps before rejecting the key level of -7.7bps on Wednesday afternoon which was the May high, the highest yield seen in over 2 years. This significant sell-off in yields in the first half of the week was likely to have been driven by the intensifying energy crisis as gas prices have exploded and oil prices have surged. As investors price in sooner rake hikes and a more extended bout of high inflation. The momentum began to change on Wednesday after CPI inflation MoM came in once again at 0%. In addition, it is likely that the large recent rise in yield on German 10-Year Bunds caused some short-sellers to lock in profits, perhaps explaining part of the reversal. This creating buying pressure and yields fell 7.9bps closing the week at -16.1bps.
Looking ahead to next week it will once again be a battle between those who view inflation as transitory spike and those who view it as more permanent. ECB President Lagarde has continually dismissed the recent surge in inflation as transitory, this position is becoming more difficult to defend as supply chain disruptions are worsening rather than normalising and as other central banks are beginning to communicate a tightening of their policy. Even within the ECB there are concerns around the “transitory nature” of inflation as ECB’s Knot last week said price surge may exceed current expectations. With no ECB member speeches next week, all eyes will be on the Euro Zone CPI and Core CPI readings coming out on Wednesday morning. Expectations are for an increase in the momentum of inflation MoM from the prior reading of 0.4% to 0.5% producing a YoY figure of 3.4%. It is my view that this number amid the energy crisis may come above the market consensus, leading another leg-up in yields on Bunds as they approach positive territory. Forty minutes after the release there is a German 10-Year Bund Auction, which will be indicator of how markets view the inflationary pressures.
US 10-Year Treasuries
5D: -3.8bps, 1M: +20.37bps, 3M: +28.1bps, 1Y: +82.92bps
The US 10-Year Treasuries experienced a downward momentum in yield from the start of this week, where the US 2-year Treasuries experienced an increase in yield. On Friday (15/10/2021), the US 2-year Treasuries yield approaching 0.4%. The US job openings reading on Tuesday did not meet the market forecast. The CPI is increasing in line with expectations, showing that the inflation rate remains high. The persistent inflation and increased customer spreading have increased the US central bank confidence to begin tapering its pandemic-era stimulus. This week's sharp increase in 2-Year Treasuries and fall in 10-Year Treasuries has shown that the market is preparing for the Federal Reserve to wind down the bond-buying programme.
The initial jobless claims release on Thursday are better than expected, where the claims sank to a new pandemic low and fell below 300,000 for the first time in a year and a half. On Friday, retail sales figures showed a surprise increase despite reports of wide spreading shortage, exceeding the market expectation, which is a good indicator that consumer spending is rising. The economic performance released at the end of this week has moved the yield upward on Friday, closing at 1.574. The key economics release to look at next week would be the Building Permits, Philadelphia Fed Manufacturing Index and Crude Oil Inventories.
5D: +1.97%, 1M: +4.48%, 3M: +4.48%, 1Y: +12.81%
The Chinese Yuan Offshore / Japanese Yen finished lower at ¥17.754, decreasing by 0.03% despite an increase of 1.97% WoW and a one month raise of 4.48%. The Yen suffered a three-year low as its worst week since match 2020. It lost its status as a haven currency from the rebound sentiment within the rest of Asia Pacific economies. For the Chinese Yuan, the recent stable CPI, higher PPI and higher exports in September has raised a positive outlook in the region. Lastly, the recent comments from the PBOC asking banks to keep loans to the real estate industry to curb the contagion from the domestic debt crisis has improved confidence from the crisis spreading.
Looking forward, the recent PBOC comment that the producer price inflation should persist at a higher level in the short term but should soften at the end of the year. This comes from short term pressures from imported inflation and the global energy crisis. Furthermore, the PBOC will use all appropriate policy tools to keep liquidity extensive such as cutting the bank's reserve requirement ratio and keeping the interest rates until mid-2022. These dovish stances should forecast lower GDP, Industrial Production, Retail Sales and Housing Prices results next week. This comes to support from the recent issues around the property market, consumer caution from the delta variant outbreak starting mid-July and the domestic energy shortages, which has affected the manufacturing activity output. For Japan, the Yen kept going lower from uncertainty around the October 31st general elections after the acting Prime Minister Fumio Kishida dissolved the parliament this week. His comments around implementing a “New Japanese Capitalism” around ideas of less neoliberal economic policies and more corporate profit redistribution to stakeholders. Lastly, the Yen could suffer even more after the elections as an economic recovery package of 10 trillion Yen is planned to be spent to follow the greatly interventionist stance from countries worldwide to improve their economy to pre-covid levels.
WTI Crude Oil
5D: 3.86%, 1M: 14.87%, 3M: 15.69%, 1Y: 102.70%
Oil continued its climb last week, with US WTI prices hitting seven-year highs. The 3.5% surge on Monday sent prices up to $82/barrel and remained above $80 into Tuesday. This came as a continuation of demand rebounding from pandemic-related slowdowns combined with lacking supply levels. The market surged again on Thursday after the International Energy Agency (IEA) announced that rising natural gas prices could boost oil demand for power generators. Prices were then further exacerbated by comments from Saudi Arabia, dismissing calls for additional OPEC+ supply. However, it stabilised slightly after US government data showed a third straight weekly rise in domestic inventories. Stocks rose by a surprising 6.1m barrels, heavily outperforming the 702,000 barrels expected by analysts. Moreover, production edged higher and reached 11.4m barrels/day helping to alleviate some of the pressure building in the market, although oil still ended the week at a remarkable $82.66.
Despite rising production, oil price rises are showing no sign of slowing down as demand is set to jump by 500,000 barrels/day amid record gas prices. The IEA have warned that the power sector and heavy industries will continue to switch to oil from more expensive sources of energy. As a result, their global oil demand forecast for 2022 has increased by 210,000 barrels/day bringing total demand up to 99.6m barrels/day, which is slightly above pre-pandemic levels. Meanwhile, US shale producers have failed to properly invest in output, with production remaining well short of the 13m barrels/day record in 2019. Supply-side issues have been further exacerbated by Saudi’s insistence to support the decision from OPEC+ to stick with its 400,00 barrels/day a month production increase. Although, pressure from the White House has ticked up recently. With retail gas prices at seven-year highs, discussions with oil and gas producers about fuel costs could help alleviate high prices. Overall, oil prices will seemingly continue to rise, with Goldman Sachs commodity analysts suggesting that this is not just a transient winter shock, and the fundamentals support the view of higher prices than we have seen since 2014.
Thank you to Ben Turner, Thomas Lee, Sam Perrett, Sadia Saeed & Marco Tarchoune for your in-depth analysis!
All images have been sourced from TradingView.