HIGHLIGHTS
Stocks and bonds had their biggest intraday gain in two years, sparked by the lower-than-expected inflation data. S&P500 and Nasdaq surged by 5.9% and 8.1% respectively. The dollar had its biggest weekly loss since 2020. The treasury yields dropped significantly post-CPI. China is easing some of its pandemic restrictions, pushing up Chinese stocks and commodities as the market is pricing in a potential comeback of Chinese demand in the global economy.
Inflation Slowdown: The inflation report came out lower than expected, sending bond yield down right after the release. Markets are eyeing a smaller size rate hike in December, leading more speculation to 50bps from 75bps. However, central bankers are not expected to pivot soon as their target of 2% has not been achieved yet. It is still too early to declare victory.
Reopening Hope: China has announced the ease of its quarantine policy and other pandemic control measures. It is the first time that China starts to shift its strict isolation policy, indicating that it will potentially rejoin the global economy. It also appears that China is restocking its Strategic Petroleum Reserve (SPR) in anticipation of its reopening.
Midterm Election: The result of the midterm election is likely to have less impact on the markets compared to the past given other significant factors are happening in the backdrop such as inflation, rate hikes and company earnings. In terms of sector, the energy sector may face a larger impact as Republicans are perceived as pro-carbon than Democrats.
MARKETS
11,323.33 | +8.10% | |
S&P 500 | 3,992.93 | +5.90% |
Dow | 33,747.86 | +4.15% |
10-Year | 3.81% | -35bps |
Brent | 95.89 | -2.79% |
DXY | 106.42 | -3.94% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Morgan Stanley: Equity is oversold, especially in emerging markets like China. The forward earnings are trading likely at a trough of the recession, mainly driven by the fears about economic growth, zero-COVID shutdown policy, energy crisis and inflation. Lockdown in China is expected to end within the coming year, with the stimulus rollout and regulation easing for the technology and real estate sector.
Julius Baer: Historically, US equities tend to have below-average performance in midterm election years. The gridlock in the midterm election is likely to lead to a higher equity return as the uncertainty in policy will decrease in the medium term.
Bank of America: The gridlock in the midterm election is negative to the economy but favorable to the market. It is harder to enact new policies such as government spending, corporate tax, and regulations. Nonetheless, the impact of the midterm election will likely be overshadowed by inflation, interest rate, and geopolitical factors.
Fixed Income
J.P. Morgan: Investment Grade bonds are yielding over 6%, which provides a way to achieve similar returns with long-term equity but in a less risky way. For reference, the yield of 10Y US Treasury and US High-Yield are 4.1% and 9.4% currently, while they were 1.5% and 4.6% as of the end of last year.
Julius Baer: The reopening in China is a trade but not an investment. The real yields are making the high-grade bonds attractive.
Economy
J.P. Morgan: The relationship between wages and labor demand is indicating that the tight labor market is not necessarily causing inflation. Although the growth of wages is still increasing, there is dispersion in different sectors. Wages in goods production sectors such as mining are slowing down, while service-oriented sectors remain strong.
Standard Chartered: While the inflation report suggested that the inflation has likely peaked, Fed will need to see more signs of economic slowdown like jobs and cost pressures before it pivots. Slower pace of hikes is more likely but not an imminent pause.
KNOWLEDGE TRANSFER
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DISCLOSURE
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