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Weekly Market Update (October 23, 2022)


The market experienced a violent reversal this week. Equity has its best week since June, while treasury yield suffers a tremendous drop. The shock in the treasury market is mainly driven by the expectation of a slowdown of the pace of rate hikes as the Fed showed concerns about overtightening. The treasury yield with short duration got the hardest hit as they are more sensitive to policy changes. Volatility stays high as the timing of the policy pivot is still uncertain.

Truss Quit: Truss resigned after the chaos she made during her short tenure as prime minister in the UK. During the 44 days of her tenure in the office, UK 10Y gilt has increased by 83bps. The new leader will be decided over next week. The tax cuts included in the mini-budget in September have been largely reversed. It has calmed the volatility of the assets in the UK.

Yen: Japanese yen jumped again after the first government intervention. It has pumped up by 2.7% and reached 146.23 on Friday, after its earlier new low at 151.95. The market is speculating that the reversal is caused by government intervention again but no official comments are made by the authorities yet. Other than Japan’s side, the rally could also be driven by the weak dollar and lower treasury yield.

Fed: The Fed will discuss the time to slow the pace of hikes in the coming meeting. 75bps is still expected in the November meeting. Market participants are betting on either a 75bps or 50bps hike in the December meeting. A forecast from Fed is indicating the rate will be at 4.4% this year and 4.6% next year, which represents the pace of hikes will slow down to 50bps in December and 25bps early next year.

NOPEC Bill: No Oil Producing and Exporting Cartels (NOPEC) bill was proposed to the Senate, which allows the U.S. to sue OPEC for antitrust behavior and market manipulation. The bill has gained more support after the decision of the OPEC+ oil production quota cut while some suggested that it may not be the best timing to pick a fight with OPEC+ amid the energy crisis.

China: President Xi mentioned there is no change to the Zero-Covid policy. Investors are disappointed as they were expecting further loosening. The market is still waiting for a Xi Jinping pivot, which is not less important than the Fed pivot in terms of its impact on the global economy. A liquidity crisis is happening as there are not enough dollars in the system, supported by the shrinking Fed reserve and the strong dollar. China as an exporting country is holding up a lot of liquidity. When it lifts the zero-Covid policy and releases the China demand, not only it will boost its domestic growth but also the global economy.

Oil: China is under-consuming by 1.5 million barrels per day now. The oil prices will shoot up when China reopens. This could potentially be one of the reasons that China is not reopening as China's leadership is also worried about inflation, and they have not built enough energy inventories yet. Be reminded that China had an energy crisis last year, in which they ran out of coal and electricity, and they made Bitcoin illegal as it consumed too much energy. Thus, China is not expected to reopen until they stockpile enough energy reserves to get through the inflation.





S&P 500















*Data as of market close. 5-day change ending on Friday.



Bank of America: According to the survey earlier this week, investors are holding 6.3% cash in their portfolio, which is the highest in more than 20 years. The result also indicates that 49% of the investors are underweight equities. Despite the pessimistic sentiment in the markets, equity funds are still having significant inflows. US large-cap and value had inflows while small-cap and growth saw outflows. In terms of sector, energy and technology had the biggest inflows while materials had the largest outflows.

Morgan Stanley: The operating margins of the US largest companies are 150-200bps higher than the average of the last 10 years. There are headwinds to profit which are driven by slow growth, demand skewing toward services, and reversing pricing power. Such risks have not been priced in the 2023 consensus yet.

Standard Chartered: Equities are oversold and due for a technical rebound suggested by the technical indicators for markets such as China. It is considered a short-term bear market rebound unless the expectation of the Fed rate and bond yield peak.

Fixed Income

Morgan Stanley: Short-duration treasury bonds are attractive as the yield is 2.5 times higher than the dividend yield of the S&P500. As economic growth will probably slow down next year, the income provided by treasury bonds is decent.

Goldman Sachs: Government bond yields continue to elevate further. UK long-duration gilt demonstrated some stability this week despite the strong inflation data in September, implying that some risk premiums are embedded in the assets in the UK. High-quality short-duration bonds, including both government and corporate bonds, are good opportunities for investors to capture higher yields without taking on undue credit risk and interest rate risk.

Standard Chartered: The 10Y treasury yield jumped beyond 4% this week, which is mainly attributed to the strong inflation data in the US and the weak housing and mortgage data. The rise in yield is considered an opportunity to stock up on quality IG corporate bonds.


Morgan Stanley: Many investors wrongly believe that inflationary forces are not structurally changed and will return to stagnation soon when low inflation and low growth support low interest rates. This has underpinned the forward inflation expectations.

Goldman Sachs: US economy has made progress on the path to the soft landing. Fed is not likely to pivot from its policy at the moment. For households, they are benefiting from the employment environment. For the government, its debt has benefited from the Fed, who is the new buyer in recent years. Although more debt may cause the interest burden to increase rapidly, this is not a concern for Fed to deter the tightening plan.

J.P. Morgan: Retail inventories have recovered due to the stockpiling early this year. However, the sales remain static. It may be a headwind for GDP growth as both consumer and inventory spending will be lowered, but it is favorable to inflation as the upward pressures on goods prices will be alleviated.


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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.


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