Markets finished a 5-day selloff with a light trading volume, albeit the higher-than-expected Producer Price Index (PPI). Volatility index (VIX) spiked up 20% this week. Equities had experienced a setback, especially for rate sensitive stocks like banks. Treasury rallied amid the sharp drop in equities. Eyes on interest rate decision of major central banks next week.
Oil Chaos: OPEC+ announced to keep its current production level after the meeting last Sunday. Oil prices were down more than 10% this week. Russia responded to the price cap, claiming they would not sell oil to the countries which enforce it. The timing of China to retreat from its zero-COVID policy would make significant impact on the demand side. Besides, the Keystone pipeline in the US has reported an oil leak of about 14k barrels this week, the largest accident for onshore crude pipeline in almost a decade.
Rate Hikes: Although the Fed is expected to hike its rate by 50bps, Powell is likely to sound hawkish in order to cool down wage pressures and the overall job market. He has highlighted that the main driver of services sector inflation is mainly driven by wage inflation. ECB is also likely to raise rate by 50bps despite signs of Europe entering a recession.
China Spread: China announced significant changes, shifting from zero-COVID policy to living with the virus. Chinese stocks jumped sharply afterward. Infections of COVID start to increase rapidly after easing the measures. Experts are worrying that the promise of China's recovery remains uncertain as the healthcare system is fragile.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Instead of focusing on the final rate hike, investors could shift the focus to the consumers and the first cut which would be a better indicator of a bear market bottom. Consumers remain strong as personal balance sheet and larbor market is solid.
Credit Suisse: Owing to the weakening economies and pricing power, margins are expected to drop, leading to unfavorable corporate earnings. However, the consensus earnings are too optimistic and the demanding valuations are too demanding. Thus, we maintain underweight in equities.
Morgan Stanley: High yield outperformed the high-quality low-beta Investment Grade (IG) index since mid of the year. As economic data is exhibiting a slowdown in economy, which has not been set for high yield to outperform. We recommend quality and safer default-adjusted yields in IG.
Credit Suisse: Emerging market hard currency (EM HC) sovereign bonds are recommended. They have gained more than 10% since October low, which is comparable to US equity returns but with smaller risk. The spectacular returns are attributed to the drop in treasury yield and strong return component from the tighter spread above treasury yield. EM HC sovereigns are likely to outperform equities even in a slower growth environment. It is an attractive source of diversification given its still generous yield.
J.P. Morgan: The job report in November was strong at surface level, such as payroll employment beat expectation. Beneath the surface, household employment dropped for the second consecutive month and temporary employment declined, both are signs of weakness. We believe this would keep Fed on track for a 50bps hike next week.
Citibank: The rate cut cycle in the US will be a prerequisite for the recovery. A continued rebound globally would depend on large economies outside the US, such as China and Europe. China is expected to recover before the US and Europe.
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