HIGHLIGHTS
S&P500 dropped 1.6% this week, making the year-to-date loss around 25%. There are some dip buying and short sellers covering after a significant drawdown on the equity market after the release of the higher-than-expected inflation data. Volatility was high this week as the benchmark index wiped out a 2.4% loss and closed 2.6% higher. It was a historical moment as the market has not experienced such an extreme movement in both directions in one day since 1990. The focus will be on US housing market data next week. Mortgage rates jumped sharply to a 20-year high of almost 7% but housing prices are still climbing. The consensus of the coming release of housing data is a decline after the bounce in August.
CPI: Core CPI hit a 40-year high, supporting a big rate hike from Fed in the coming meeting. Overall and core CPI raised by 6.6% and 8.2% respectively. The big increment is mainly driven by living, food and medical cost, and energy costs dropped. Equities and bond prices declined sharply after the release. Market is fully priced in a 75bps hike with the expectation of 4.85% before Q1 in 2023.
BoE: The emergency bond-buying program of BoE is planned to end on Friday. The act was mainly aimed to prevent pension funds from being caught up in market turmoil. The U-turn on fiscal policy and the purchasing activities of BoE are expected to ease the potential chaos in the coming weeks.
Chip Makers: Semiconductors stocks have dropped in recent weeks due to cyclical slowdown and geopolitical tension. The chipmaking industry got in the middle of the war between the US and China. Major players like TSMC have cut their spending target and lowered the earning forecast for the coming quarter. The US has announced new restrictions on exports of advanced chips to China, undermining the revenue of chipmakers in 2023.
Sacking the Chancellor: Kwasi Kwarteng, the UK Chancellor was fired on Friday and will be replaced by Jeremy Hunt, the former foreign and health secretary. Kwarteng is the shortest-serving chancellor since 1970. The position of the prime minister is still at risk due to the low credibility and continuing unstable market condition, while firing her own finance minister (Chancellor) cannot solve the issue.
MARKETS
10,321.39 | -3.11% | |
S&P 500 | 3,583.07 | -1.55% |
Dow | 29,634.83 | +1.15% |
10-Year | 4.01% | +13bps |
Brent | 91.63 | -6.42% |
DXY | 113.31 | +0.45% |
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Equity
Goldman Sachs: Although equities in the US experienced a further decline, history suggested that a drawdown of 25% or higher would deliver a 27% of forward one-year return. Those who stay the course have been rewarded. It is hard to catch the perfect timing of the bottom but those who join early to this recovery would see favorable returns over time.
Citi: Historically, S&P500 average returns have been positive in the 4th quarter. However, the recession odds have raised to 70% which poses a challenge to the rally. It would be seen as a counter-trend if there is a rally. The equity markets usually bottom in the middle of the recession but not before it. Investors are suggested to be defensive in stock picking. High-quality dividend growth stocks are recommended.
Standard Chartered: Equities have reached this year's new lows and the volatility index is close to this year's high. Equities are likely to rebound temporarily even if there is only a modest improvement in economic data. Such rebound is still considered a bear market rally until the Fed shifts focus from fighting inflation to supporting growth.
Fixed Income
Morgan Stanley: Investment Grade spreads have been relatively stable amid the high rate environment. As the spread is wider, the gap between those who have locked their financing in prior low rates and who need financing going forward has provided opportunities in income-oriented investments such as private credit and distressed debt.
Standard Chartered: The 10Y Treasury yield jumped to 3.92% after the CPI data was released. We expect it will continue testing the technical resistance of 4%. The rise in yield should be considered as an entry point, especially for the high-quality bonds, namely DM IG corporate bonds and Asia USD bonds.
Economy
Citi: The pace of job growth is slowing down while the decline in the unemployment rate is back to 3.5%, implying a tight labor market that shows a little easing in inflation pressure.
Commodity
J.P. Morgan: There is a supply-demand imbalance stemming from the production quota cut from OPEC+ and the sanctions from the EU and G7. Because of the supply pressure, reopening Venezuela may be a possible option to release supply.
Goldman Sachs: After the OPEC+ announcement of the production quota cut of 2 million barrels per day, the US decided to release 10 million barrels from SPR (Strategic Petroleum Reserve) in November.
KNOWLEDGE TRANSFER
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DISCLOSURE
This newsletter is meant for informational purposes only and is not investment advice. Always consult a licensed investment professional before making important investment decisions. Advertising and sponsorship do not influence editorial content or decisions. Market Hedwig is not responsible for the promises made or the quality or reliability of the products or services offered in any advertisement.