Markets Open Up
Markets opened up last Monday as investors prepared for the latest inflation data and the Midterm results. The October CPI (Consumer Price Index) came in lower than expected on Thursday, potentially signaling that the economy is finally cooling down. Markets rallied on the news, in the best trading day since April 2020. The Nasdaq alone gained over 7 percent. On Tuesday, news of crypto exchange FTX’s liquidity issues triggered a large selloff in the crypto market, with Bitcoin touching a two-year low. CEO Sam Bankman-Fried (SBF) asked for $8 billion in emergency funding to cover a shortfall due to withdrawal requests received in recent days. After days of rumors of potential acquirers and liquidity backers that never materialized, the exchange filed for chapter 11 bankruptcy on Friday, and CEO SBF resigned. Also of note last week, U.S. Mortgage rates rose to 7.14%, nearing the highest level since 2001.
Grain War is Back
On Monday, 11/4, Russia withdrew from the UN-brokered Black Sea grain initiative, an agreement on the resumption of Ukrainian grain exports via the Black Sea amid the ongoing war. The UN plan has worked effectively so far, stabilizing prices and providing food to developing countries. A prolonged trade stop would have dire consequences in emerging economies especially. Ukraine and Russia are some of the largest food exporters in the market. They are net exporters of several leading cereal crops: wheat, maize (corn), and barley. Both are also dominant exporters of sunflower oil, one of the world’s dominant vegetable oils, with Ukraine accounting for almost half of the global supply. Although this food supply-chain disruption will affect all importers, the impact will not be felt equally across the world, as emerging economies are going to be impacted the most. Some countries, such as India, rely heavily on imports of sunflower oil for domestic food supplies, and geographic areas such as North Africa and the Middle East are large wheat consumers.
Positive Signs for Economy
The week opened in positive territory as investors waited for large corporations’ recent earnings. US mortgage rates topped 7% on 30-year fixed mortgages, a level not seen in 20 years. On Thursday, the release of the last GDP report showed positive signs for the US economy, which has grown 2.6% in the third quarter, beating expectations. Big tech results came in mixed, as companies that rely mostly on consumer spending reported solid trends while advertising revenue slowed down. Next week Fed officials will gather to decide their next monetary policy. An interest-rate decision is expected on Wednesday, with experts predicting a new 75-basis-point increase. A number of labor market indicators, including the latest Job Openings and Labor Turnover Survey (JOLTS), ADP’s National Employment Report, and the October nonfarm payrolls report, will provide a recent look at the strength of the economy over the week.
The Rise of the Dragon
This week marked the beginning of the National Congress of the Chinese Communist Party, arguably the most solemn and important event in Chinese politics, where changes to the top-level leadership and to the Party’s Constitution are formally announced every five years. This year’s event will be remembered in history as the first time a third consecutive mandate was handed over to a Chinese president, paving the way for Xi Jinping’s lifetime rule. Since the Mao era, China has undergone a profound transformation of its economic and social structure, bringing it closer to a Western nation than ever before. The country’s rise to a global superpower began just 40 years ago when Deng Xiaoping’s government initiated economic reforms and trade liberalization. Deng’s goal was to energize an economy that was poor, stagnant, vastly inefficient, and relatively isolated from global markets due to Mao’s faulty economic and political policies. The move has had an astonishing effect on the country, whose GDP growth averaged 9.5% a year through 2018, a pace described by the World Bank as “the fastest sustained expansion by a major economy in history.” Notably, such growth has helped raise an estimated 800 million people out of poverty.
Markets Swinging
This past week has seen markets swinging between negative and positive territory on news of a potentially escalating war in Ukraine, continuing talks of an incoming recession, and the largest increase in core inflation in 40 years. The core CPI (Consumer Price Index that excludes food and energy) climbed 6.6% in September, showing that inflation has spread across the economy, and supporting expectations of further Fed tightening in the November FOMC meeting. Although the market initially dropped on the news, on Thursday, it ended up closing strong. On Friday, banks posted their latest results, showing resilience even in the current economic environment. JPMorgan beat expectations, though it set aside hundreds of millions of dollars preparing for the recession that CEO Jamie Dimon has been calling for months. The week ahead will be one of the busiest corporate earnings seasons, with Bank of America, Goldman Sachs, Netflix, Tesla, and others, scheduled to report their most recent results.
OPEC+ Cut Sends Indexes Down
The market fell in the second half of the week, following two consecutive strong days to kick off the last quarter of the year. The OPEC+ decision to cut oil production by 2,000,000 barrels daily on Wednesday renewed concerns of raising inflation in Europe and the US, sending major indexes down and energy prices up. Then Friday’s strong employment report sent the market further down as investors brace for further Fed tightening. The coming week’s focus will be on (guess what?) inflation. On Wednesday, the Bureau of Labor Statistics (BLS) will release the Producer Price Index (PPI), which will show if production, transportation, and storage costs are finally trending down after the Fed’s aggressive tightening of the past quarter. On Thursday, the Consumer Price Index (CPI) will also provide an updated view of the effects of the Fed’s economic policy. Consumer prices are projected to have increased 0.2% last month, compared with a 0.1% gain in August and a flat reading in July. On Friday, Retail sales will tell if consumers’ demand has also been slowed down by increased borrowing and living costs.
September Effect Resurfaces
History repeats with the ghost of the September Effect resurfacing as the worst-performing month on average. This is the worst September since 2002, with the S&P 500 declining 9.21%, culminating in the YTD return to –23.87%. What might surprise the average investor is bonds, represented by the Barclay US Aggregate and Long Treasuries YTD, have also posted losses of -14.61% and -28.84%, respectively. The market attempted to find its footing early in the week from the prior week’s decline. Still, it was subdued by recession fears with a rise in wholesale inventories, a slowdown of the housing market, and the Fed’s unwavering rate hike of three-quarters of a percentage point. History has shown that investors’ emotional tendencies often impact rational decision-making during stressed markets. If history repeats, the October Effect ahead tends to be net positive months. The coming week is filled with third-quarter key economic releases, including factory orders, jobs, and the state of the consumer. Critically more important in the weeks ahead are third-quarter company earnings releases and their forward guidance heading into 2023.
Markets Rocked by Fed Message
Markets were rocked by the Fed’s message “will keep at it until the job is done,” referencing the commitment to returning inflation to its 2% objective. As a result, the S&P 500 posted a loss of -4.63% bringing the YTD loss to -21.61%. Bond markets also declined by -1.56% bringing the YTD loss to -13.75% (while Long-term Treasuries have declined by -26.80% YTD). There is visible weakness in the U.S. economy with a slowing in the housing market and the Leading Index posting a -0.3%; however, the jobs market with lower jobless claims and improving retail and manufacturing continuing to post positive results as a headwind to the Fed’s effort to fight inflation. With housing prices falling by approximately 6% this year and equity markets declining by 20%, the wealth of U.S. households is definitely taking a hit and may eventually trickle down to lower demand.
The coming week will be filled with another week of headlines, with Fed Chair Powell speaking on Wednesday, followed by the release of critical housing data, GDP, and wholesale inventories.
Green Danger Ahead?
With the Inflation Reduction Act and the European Climate Law, the West is pushing to exit oil and natural gas to prevent severe climate change and reduce dependence on foreign suppliers. As a result of the new laws and economic incentives, electric vehicle (EV) sales are expected to dominate the car market for the years to come. And the battery industry will grow along with it. Common lithium-ion batteries in use nowadays are made of various combinations of metals that include Lithium, Cobalt, and Copper: Lithium is mainly extracted from underground ponds in Australia, Chile, China, and Argentina. The process is very water-expensive and often causes damage to the land and trouble to the local communities; Cobalt is mainly extracted in the Democratic Republic of Congo (DRC), which supplies about 70% of global production. Unlike mines in developed nations, where heavy machines accelerate operations and safeguard workers, human hands dig up much of the cobalt. Often children’s hands. Mining and refining metal is an energy-intensive business, and the energy used often comes from coal and other fossil fuels. Therefore, the push to quickly abandon fossil fuels brings several hidden costs.
ECB Raises Key Rate 0.75 Points
The EURUSD wavered around parity for most of the week and recovered some ground on Friday after the ECB (European Central Bank) decision to raise its key interest rate by 0.75 points. Over the years, heavy reliance on cheap Russian gas has exposed the nations in the Euro area to wide energy cost swings. The spike in prices in the past year has hit households and businesses across the continent with unbearable utility bills that were quickly followed by a general increase in goods prices (as businesses adjusted to larger production costs). Both Demand and Sentiment have been suffering as a result, as highlighted by McKinsey [https://www.mckinsey.com/business-functions/growth-marketing-and-sales/our-insights/survey-european-consumer-sentiment-during-the-coronavirus-crisis]. In its July survey, more than a third of respondents reported spending on nonfood discretionary items decreased due to the pricing pressure. And consumption could fall even more in the winter, as energy takes an even larger portion of consumers’ budgets.