S&P500 came back to its highest since September and most Treasuries have erased their early losses. Market sentiment has been boosted by the less hawkish announcement from Fed, indicating a higher likelihood of slower rate hikes. All eyes on the labour market and inflation data next week which central bankers weigh whether to slow the magnitude of the rate hikes. Investors are awaiting more clues about the Fed’s December interest rate decision as the FOMC minutes did not provide clarity.
China RRR: The resurgence of COVID cases in China is likely to delay the reopening plan. However, China authorities continue their policies to revive growth, such as monetary, fiscal and credit. A cut of bank Reserve Requirement Ratio (RRR) is expected after the State Council signalled this week.
Hawkish ECB: More hawkish comments from ECB members relative to Fed is driving the EUR/USD up. November inflation data which will be coming out next week is the key for the interest rate decision. According to a poll from Reuters, about 70% are expecting 50bps while 20% are expecting 75bps.
Asia Markets: Hong Kong, South Korea and Taiwan stocks have dropped this year due to the reliance on China’s economy. At the same time, Indonesia and India markets show resilience as they are domestic-demand driven. Indonesia is considered an inflation hedge and the benchmarks have hit record highs recently.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Earning forecasts for 2023 are 10% to 20% too high. Bear market ends when earnings expectations bottom, but not ends with the final rate hike. We are not optimistic about the stock markets next year. It is important to look at the actual magnitude of the economic slowdown versus the earnings expectations.
Citibank: The impact of the rapid rise in the fed fund rate cannot be underestimated. Economy will be weakened with the jump in yields, and we expect a 10% down in earnings next year. We will overweight equities during the trough of the recession, and look for stronger signals in risky assets next year.
Morgan Stanley: Investors should prefer bonds over stocks when the tightening cycle matures and yield curve inverted at its maximum level, which may have occurred last week. Bond yields are deemed attractive because the bond market has discounted a higher terminal rate and the probability of inflation staying above the 2% target in the coming year.
BNP Paribas: Real yields have jumped higher and nominal yields are offering attractive carry. 5Y yields in both US and EU have reached post-financial crisis highs. Taking advantage of the incremental yield will be crucial in generating returns in the coming year.
Credit Suisse: The performance of Asia bond markets is likely to be worse than 2008 financial crisis. However, 60% of the YTD losses are attributed to sell-off in US treasuries on account of the Fed tightening and high inflation. The rest of losses are mainly due to the surge in dollar, fund outflows and sell-off in China property sectors.
Standard Chartered: The likelihood of US and Eurozone recessions is still high, supported by the lower-than-expected PMI data. Corporate downgrade remains the biggest risk to equities as central banks keep tightening even at a slower pace.
J.P. Morgan: The latest economic data is showing consumers are resilient amid high inflation environment. Retail sales jumped, even on an inflation-adjusted basis. Although consumers’ excess savings are running down from pandemic, the weakening inflation and low unemployment could increase the growth of real wage and consumer sentiment, strengthening consumer spending.
BNP Paribas: As policymakers claimed that significant progress has been made since the last 75bps hike, it suggests a slower pace of hikes is possible. We expect a 75bps hike in December, 50bps in February and 25bps in March, and terminal rate will reach 3%.
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