Updated: Oct 30, 2022
Hundreds of S&P500 companies have reported earnings this week. S&P500 was up more than 3.5% this week, despite the mega-cap tech names FAAMG (i.e. Facebook/Meta, Apple, Amazon, Microsoft, Google/Alphabet) all dropping sharply after releasing their earnings. Investors are cutting their exposure to equity amid the tech chaos and the coming Fed meeting next week. Treasury yield dropped due to the weakening economic data like housing and manufacturing. Treasury yield curve inverted as 10Y yield dropped below 3M yield.
Weak Yen: BoJ is sticking with its low-rate policy amid the intervention of the government. Although the result is aligned with the consensus, it has disappointed speculators who bet on an adjustment of monetary policy. Yen dropped more than 1% against the dollar. BoJ predicts the inflation will cool down to below 2% while the inflation in Tokyo just hit 3 decade high at 3.4%.
Negative Gas Prices: The spot price of natural gas dropped to negative this week, as there was a supply glut suddenly. The weather in Europe is a relief of the short of supply, as the degree is higher than normal during late October in the previous years. It has affected the demand side. Net flow into Europe is only down 12% YoY, including Russia cut, which is less than the drop in demand. It implies that the inventory is building up and leading to negative gas prices.
China Measures: The People’s Bank of China (PBoC) has been supporting the yuan since last month. The specter of extreme measures is increasing as the currency hovers at the weak end. It is likely that China is intervening in FX markets like Japan. Investors are concerned that the aggressive measures will drain the foreign reserves in China and lead to stronger capital control.
*Data as of market close. 5-day change ending on Friday.
VIEW FROM THE STREET
Morgan Stanley: Earnings are bad enough to reset expectations for 2023. As there is still uncertainty in earnings, investors are suggested to focus on companies with a realistic discount of expectations and sustainable fundamentals. It is unwise to chase bear market rallies purely based on macro factors.
UBS: For global equities, we prefer capital protection strategies like investing in healthcare and consumer staples. Technology, industrial, and growth are the least recommended. In terms of region, UK and Australia are preferred compared to the US.
Morgan Stanley: Historically, the 2Y treasury yield peak usually surpassed the actually terminal rate during the tightening cycle. It is because investors tend to oversell bonds in the final phases of fear about the monetary policy. 2Y treasury yield is still below the terminal rate now, implying there is still upside potential for it.
Standard Chartered: The potential events that may cause a spike in volatility include sovereign default risks in emerging markets, illiquidity in corporate bonds, and the BoJ policy. Investors are suggested to diversify and balance the preferred assets with more than one single hedge.
J.P. Morgan: We do not expect the housing market to collapse amid the moderating US home prices. First, the inventory of new and existing single-family homes is below long-term average. Second, leverage in the housing market is still less than half of the 2007 figures.
Standard Chartered: The market is pricing in 4.8% Fed terminal rate, aligning with the Fed’s forecast of 4.75%. Fed is expected to pivot after at least 2 to 3 months of sustained decline in inflation.
Citibank: Although the official would describe it differently, driving up unemployment is US public policy. The market is not bottomed yet as no bear market associated with recession in this century has bottomed before the decline in jobs and profits.
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