A Week in the Markets: 8th November

Dow Jones

5D: +1.42%, 1M: +4.55%, 3M: +3.18%, 1Y: +28.26%


It was another important week for US equities as all three major indexes reached all-time highs. For the Dow Jones it was a strong start to the week following further positive quarterly earnings results as well as promising COVID-19 updates. By midweek the Dow had hit another all-time high for a third session in a row off the back of corporate earnings continuing to abate investor inflationary fears and rumours that the Fed would start to taper back on bond purchases. By Thursday the Fed announced that the economy was now strong enough to begin cutting back on asset purchasing, seeing the Dow finish up 1.42% for the week.


The major news from last week regarding Jerome Powell’s comments has provided a bullish market outlook for US equities. The Fed has announced that the economy is now finally strong enough to start tapering their purchasing programme by $15bn/month, setting the middle of 2022 as its target for the end of quantitative easing. Moreover, the positive ADP jobs report on Friday furthered the positive market outlook as job creation rose more than expected in wake of the economic rebound from the pandemic. However, inflationary concerns may still persist. Wages have risen nearly 5% year over year which may be seen as a signal of stickier inflation. If this trend continues it could pressure the Fed into harsher taper measures and even hike interest rates earlier than expected. Although overall the bullish sentiment for US equities is likely to remain in the meantime due to strong quarterly earnings, promising jobs reports and economic confidence from the Fed.



FTSE 100

5D: +0.33%, 1M: +4.37%, 3M: +2.54%, 1Y: +23.59%


The FTSE 100 Index had its highest close in over a year on Monday despite Barclays shares falling nearly 1.1% after the departure of CEO Jes Staley. The gains did not extend into Tuesday’s session after a slump in iron ore prices took a hit on mining stocks. The FTSE 100 continued to slip on Wednesday after a stronger pound hurt dollar earners in the index including Unilever and British American Tobacco. The Index rallied on Thursday after the Bank of England decided to keep rates unchanged. The pound weakened 1.33%, which supported dollar earners in the index and the export-heavy companies. Overall, the FTSE ended the week up 0.3%, led by banks and energy stocks, and the further decline in the pound.


Looking ahead into next week, the first half of the week is relatively quiet, but for the second half, we have several economic data and earning releases coming from the UK.

On Wednesday, we have earning figures from M&S and then on Thursday we have quarter three GDP, YoY and QoQ data coming out. Market expectations are currently at 1.5%, below the previous figure of 5.5%. If the actual figure beats expectations, we could see the footsie advance as it is an indicator of stronger demand in the economy. We also have UK Manufacturing production (MoM) data release on Thursday. Market expectations again are below the previous figure. The figure could come out in line with expectations given the supply-chain issues manufacturers are facing. On the corporate side, we have WH Smith earnings coming out, revenue forecasts are above the previous figure. Actual revenue could come out in line with expectations given the loosening of COVID-19 restrictions allowing more people to travel, and seeing as WH Smith has most of its stores in train stations and airports, we could see a boost in earnings this half.



Nikkei 225

5D: +2.49%, 1M: +5.57%, 3M: +6.44%, 1Y: +21.73%


On Friday, the Nikkei 225 finished at ¥29,687.93, with a decrease of ¥182.80, representing a 0.61% decline from the previous closing. The reason for the reductions in the Nikkei comes from the losses from the earnings report in the Paper & Pulp, Railway & Bus and Real Estate sectors. Negative sentiment from the markets acted on their fears for further contractions within Japanese companies in their future performances. However, the Nikkei had a Week on Week increase by 2.49% and a Month-on-Month improvement by 5.57%. Those gains come from the country’s ruling party, the Liberal Democrats, who held on to their single-party majority with their parliamentary election last Sunday. Therefore, allowing Fumio Kishida to stay in power , creating a long-term sentiment of political stability and certainty on economic policies.


Looking Forward, the Nikkei should pursue some short-term boost by preserving Kishida's government in Japan, allowing more dovish policies. Kishida plans to achieve an economic stimulus package reaching ¥30 trillion ($263 billion) in switching from past “Neo-Liberal Policies” to a “New Capitalism” paradigm. These policies will weaken the Yen in the long term to boost exports, improve the government's public view, and have a better economic growth outlook - while redistributing a wildly unequal income range. Other subsidies include the "Go to Travel", which grants travels around Japan that could increase the earnings of the Japanese hospitality sector. In addition, other news announced by the Prime Minister which affected positively the Nikkei includes Covid-19 booster shots to begin in December, a stimulus plan of ¥100,000 ($880) in cash per person for anyone in Japan early 2022 and the opening of borders for foreigners coming into the country for short business trips, studies, or technical training. However, Japan will need to solve the supply chain and energy crisis with its global partners since it has significantly affected the operations of its exporting sector companies. This could still impair the recovery, which analysts will be able to examine next week with the Japanese PPI, Industrial Production, Core Machinery Orders, and the Tankan Index.



US 10-Year Treasury

5D: -12.4bps, 1M: -15.95bps, 3M: -15.03bps, 1Y: +63.81bps


The week started with the manufacturing PMI exceeding the expectation where the industrial leaders in the US responded positively toward the economic outlook. The US 10-Year Treasury yield hit 1.6 at the highest on Monday and fell as traders prepared for the Fed meeting. On Wednesday, the Fed announced that it would start tapering by a pullback of its $120 billion monthly bond-buying programmes later this month, in line with the market expectations. The Fed also signalled that they would not rush to raise interest rates due to uncertain inflation rates. The yield hit above 1.6 on Thursday amid the strong employment reports and the taper news announced, followed by a dive after the central bank signalled that there is no hurry to hike rates were digested. Despite the strong employment report released on Friday, the downward trend continued, closed this week at 1.455.


The technically driven buying of the US 10-Year Treasury is triggered when the yield falls below 1.5, causing a fall of 5bps within an hour, contributing to the continuous downward trend. The trend may continue next week as the markets are struggling to predict how the economic data would affect the timing and size of the interest rate hike. The focus next week would again surround the CPI, the indicator for inflation and initial jobless claims, in which the initial jobless claims data is expected to be lower.



GBP/USD

5D: -1.38%, 1M:-0.88%, 3M: -2.71%, 1Y: +2.62%


The GBP/USD finished lower at 1.349, a week to week decreased by 1.38%, having the worst week since August. Bank of England’s decision not to raise interest rate surprised the markets, where investors were well-prepared for a raise of interest rate on Thursday amid the increasing inflation rate in the UK. Correspondents in Financial Times suggested that the BOE was unwilling to immediately raise the interest rate because the GDP growth is expected to be weaker in the third and fourth quarters of 2021, where supply chain disruptions and inflation have already hurt consumer confidence. The main message from BOE is the interest rate hike is coming soon, and it signals the pace of tightening would be less aggressive than markets anticipate. The GBP/USD fell from 1.369 on Thursday and hit its lowest at 1.342 on Friday, later rebounded back slightly and closed at 1.349.


Next week focus will be on the announcement of third-quarter GDP, where the decision made by the Bank of England this week suggested the data will be below the forecast. Regarding the Brexit talks, UK and France remained in a confrontation over fishing licences for French boats in the English waters. Furthermore, the negotiation continues between UK and EU on post-Brexit rules for Northern Ireland, where EU Brexit negotiator Maros Sefcovic reassured that triggering Article 16 would have serious consequences. Both talks will continue next week. The ongoing disputes between the UK and the EU raise prospects of a trade war between two sides, adding political uncertainty pressure on the pound sterling.



AUD/CNY

5D: -1.65%, 1M: +0.60%, 3M: -0.69%, 1Y: -1.31%


The AUD/CNY closed on Friday at RMB4.7357, increasing RMB0.0023, a rise of 0.05%. This represents a decrease of 1.65% Week on Week but a one-month improvement of 0.60%. The RBA has recently announced that the wage growth and inflation should take more time from the effects of Covid-19 and the lockdown – with a first interest rate hike aimed at early 2024, which was announced at the end of last week. For China, the recent easing of policies from the PBOC and growing Covid-19 cases and lockdowns in certain Chinese provinces has affected the Yuan. The current results from the Caixin Services and Manufacturing PMI shows a slight increase by 0.4 bases point but still demonstrate the impact from the supply chain bottlenecks globally.


Looking Forward, the AUD should strengthen slightly as the RBA sees a recovering economy from the end of lockdowns in Melbourne and Sydney. With more than 80% of the population vaccinated, the RBA predicts an expansion by 3% this year, increasing to 5.5% in 2022. These growing numbers should stabilise to 3% growth and 2.5% inflation by the end of 2023. However, with the economic news numbers coming this week, the RBA's report has changed its outlook with three rates hikes expected within a year and reaching 1.5% in 2023. This would also lead to a tapering starting in February 2022 from the current AUD 4 billion quantitative easings per week. Next week, the employment, unemployment, Inflation numbers will give a better direction of the RBA’s direction in the future. For China, the Yuan could go lower from its current $16 billion liquidity injection following the trend in stimulating growth, to decrease inflation from the domestic property woes and rising energy costs. In addition, growing risks have appeared on potential expansion in regulatory crackdown within the Chinese technology sector on big data and anti-trust concerns. Furthermore, fears on the impact of the corruption probe into the Chinese financial industry, property tax growth affecting real estate developers, taxes on shared prosperity involving luxury goods companies, and Macau Casinos have created additional domestic concerns for investors. Next week, China’s Trade Balance, CPI, PPI, Industrial Production, Unemployment Rate will give a better outlook in forecasting China’s economic outlook.



Brent Crude

5D: -1.17%, 1M: -0.04%, 3M: +17.11%, 1Y: +108.46%


Brent crude prices last week were dominated by supply-side news. Brent crude slipped down early in the week in advance of another OPEC+ meeting, where pressure had been mounting on suppliers to increase their production rates. BP said on Tuesday that it would ramp up its shale oil and gas business to $1.5bn in 2022, helping to send brent crude prices below $81/barrel. Further pressure from the White House called on Saudi Arabia and Russia to increase their supply to help cool oil prices. However, oil prices rallied by the end of the week back up to $82.32/barrel after OPEC+ announced plans to stick by their mere 400,000 barrels/day output increase for December.


As seen last week, supply-side factors remain an important driver of brent crude prices. Rising pressure from policymakers had dampened oil prices early in the week, however the continued resistance from OPEC+ to increase their production rate has since seen prices rally. While there was some build in inventory levels in the US early last week, longer-term structural issues are yet to be addressed and so the market should remain bullish, especially during the recent energy price surges. Furthermore, despite brent crude prices falling off earlier in the week, the $80/barrel level proved a strong support line for the oil benchmark. This suggests that it is likely that we will see more upward pressure, although breaking the $85 mark again may be difficult.



Thanks to Ben Turner, Sadia Saeed, Sam Perrett, Marco Tarchoune and Thomas Lee for your in-depth analysis!


All images sourced from TradingView.com

11 views0 comments

Recent Posts

See All