HIGHLIGHTS
Tech equities dropped following the hawkish Fed comments. There are pivots coming from inflation and China’s policy. The US and China are probably taking an intermediate turn for the better, which could boost confidence in the short term. The ratio of open contracts of put-to-call options on single names is at the highest in history, indicating the investors' confidence in the current rally is lower than what the price action suggested.
Oil Contango: Oil prices dropped stemming from the concerns of oversupply, high freight costs and the demand pressure in China due to more new COVID cases. The spot price is now lower than the futures price - a contango, which is a structure of bearish market. Besides, OPEC has adjusted the oil demand lower, while there is speculation that they are just paving the way to announce further production cuts.
Bullish on China: Owing to the hope of reopening and the epic rebound in stock this month, major banks are shifting to a bullish view of China equities. MSCI China is expected to rise 14% by the end of 2023. Other than the easing COVID restrictions, the remedies in the housing sector and improving geopolitical relationships have rekindled optimism for the China market.
Mortgage Rate: US mortgage rate dropped sharply from 7.08% to 6.61%, mainly driven by the change in the methodology of the average rate calculation. Freddie Mac is now using an automated underwriting system to collect data instead of surveying lenders. Mortgage rate also tracked the decline in treasury yield after the inflation was reported as weaker than expected.
MARKETS
11,146.06 | -1.57% | |
S&P 500 | 3,965.34 | -0.69% |
Dow | 33,745.69 | -0.01% |
10-Year | 3.82% | +1bps |
Brent | 87.86 | -8.37% |
DXY | 106.97 | +0.52% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Morgan Stanley: Valuations in emerging markets are at a low level. The catalysts in the next few months are stimulus in China, rollover in the dollar and deglobalization. The change of zero-COVID policy in China will be the main focus. Investors are suggested to add exposure to Taiwan, South Korea and Brazil to access the rebound in emerging markets.
HSBC: Equities dropped as the market weighed the comments from Fed, indicating interest rate hikes are not going to pause soon and they are persistent in bringing down inflation.
Fixed Income
Goldman Sachs: Fed’s continuous hawkish comments have driven the correction in bond yields, reversing almost two-thirds of the latest pullback. 2s/10s yield inversion reached 40-year lows. Markets are expecting a higher terminal rate, predicting an additional 25bps in May next year.
Standard Chartered: Absolute bond yield will remain attractive as yield premiums and nominal yields are still above long-term average.
Bank of America: Financial stress is spreading due to the high volatility of interest rates. Survey result showed that bank is less willing to lend. It is a precursor of an increase in corporate bond default typically, as weakness in revenue growth is likely to follow tightening lending conditions with a lag.
Economy
Goldman Sachs: In the US, a soft landing seems to be possible, supported by lower-than-expected inflation with strong retail sales data. In the UK, inflation is still climbing up and hitting a 41-year high. Tax hikes and spending cuts are expected to be included in the plan for fighting inflation. CPI data in Japan is higher than expected, while they are remaining their yield curve control policy.
J.P. Morgan: Disinflationary forces are at play, supported by the cooling economy and improving supply chains. Aggressive rate hikes seem to be working according to the latest inflation report. Supply chains are easing, being a disinflationary tailwind for core goods. While inflation appears to be moving away from its peak, the risk of tightening still exists.
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DISCLOSURE
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