For starters, the holiday season is coming up, but it is also the part of the year when markets traditionally perform the best. Then again this year has not been very compliant with historical patterns, we have to note. But what makes these last two months even more interesting is that we have the US elections next week. A Trump re-election will provide on a daily basis, grandiose statements about China, threats about 100% tarifs, not to mention his views on geopolitics and just about everything, as he will not even be officially the President until mid-January. We are definitely not going to get bored and US equities will probably like the outcome, in the short-term at least. A Harris election could be met with immediate selling in equities, as it is still unclear what her economic agenda will look like or even who her trusted advisors will be. The threat of her "communist" past resurfacing could haunt investors. But in Harris win, Europe and China will heave a sigh of relief, as they believe they can handle the current vice president better than Trump.
What is certain is that both Presidents-to-be will face a balooning fiscal deficit. The markets will be keen to know what their approach would be to contain it, without killing the economy. The US bond market has already started to price that a "Liz Truss" episode could erupt again, when bonds sold-off massively in the wake of measures announced that would have made the UK fiscal situation even worse. Massively indebted countries like the US and parts of Europe (France for example) rely heavily on international creditors who finance their governments. Those creditors, of course, give the "benefit of the doubt" to global powerhouses like the US and do not really worry whether they will get their money back. But the trillions that circulate in speculative funds can create volatility and even topple governments, as it happened in the UK or force countries into bankruptcy as Greece vividly remembers. We believe that fiscal deficits will be a major market theme of 2025. The FED seems to have pulled out the soft landing , or in other words bringing inflation down with no major damage to the economy (yet). Will the new US administration manage the same on its part when it comes the deficit ?
The US bond market, as already mentioned, sold-off last week. Investors and traders have been taking positions against the US government debt, which caused the 10yr yield to move higher by about 30bp in a mater of days, and trade closeto 4.30%. This is the highest level since July and about 70bp higher than the low in early September. A further big rise in long-term yields will start causing problems again, not only in the equity markets but also to borrowers, mortgage holders, not to mention commercial real estate (again) , at a time when leverage is significant. It is tempting to use the current levels and above to build more positions in the highest quality corporate bonds, as companies like Microsoft, Apple or Nestlé are by far more safe than some governments ...
Equities also corrected, despite the accomplishment of fresh record highs for the S&P500, during the week. The S&P500 lost 1% and Small Caps even more (-3%), but Nasdaq managed to finish flat thanks to the Tesla excitement and Nvidia's new record closing. European shares also dropped by about 1% on average, as Q3 corporate results were uninspiring. We have to note that consumer names made a come back, despite worse-than-expected results by Kering (owner of Gucci), L'Oreal and Mercedes Benz. This is encouraging and temporarily confirms our view that their shares must have bottomed, as mentioned in our previous weekly review. Volatility will remain very high.
The October Eurozone Composite PMI remained below the neutral rate of 50, suggesting that Eurozone growth in early Q4 remained weak. It rose by just 0.1 points o 49.7, which was however in line with expectations. The Services PMI declined by 0.2 to 51.2, which is an 8-month low, implying ongoing expansion, but with waning momentum. The Manufacturing PMI rose by 0.9 to a 5-month high indicating that broader activity in the sector continues to contract but at a somewhat slower pace than before. We should note that up to recently Services was the bright spot but they seem to have rolled over in the last few months. This is not good for the economy but it s very good for inflation, as services’ prices have been keeping core CPI sticky and away from 2%, while consumer goods are already in deflation.
US labor data sent a mixed signal and are considered to be still "contaminated" by natural disasters (hurricanes) and strikes (Boeing). In particular, the weekly Initial claims for unemployment insurance fell 15k to 227k, below consensus expectations (242k). Despite claims in hurricane-impacted states still remaining elevated above the pre-storm baseline, broader-based declines in other states such as New York (-2.7k), Pennsylvania (-1.5k), Texas (-2k) and California (-1.5k) also contributed to the fall in the headline. More worrying were the Continuing claims number which rose to 1897k, the highest number in the last three years.
China announced more measures, which did not move the markets much. But local Chinese equities posted a positive week (+1%) despite the negative sign in global equities. On Monday the PBoC cut interest rates again by 25bp and authorities offered more incentives for corporate buybacks. It is now evident that the Chinese government has targeted the local stock market as a way to boost sentiment and increase consumer spending through the "wealth effect" ie people tend to spend more when their investment portfolios have increased in value significantly. The Standing Committee of China's National People's Congress will hold its next meeting on November 4-8, according to press reports, one week after it was originally planned, most probably because they would want to be aware of the US elections result before meeting. Significant measures or more details might be announced at that meeting.
Just a few days after their meeting various ECB members spoke at various forums, in a rather dovish tone. Mr. Centeno (Portugal) said he is open to accelerating the cutting pace to 50bp and even Mr. Holzmann (Austria), who is regarded as the most hawkish member, sounded more optimistic, saying disinflation in the Eurozone is faster than expected. President Lagarde said she is hopeful to achieve the 2% inflation target sooner than thought and the central bank doesn't need all CPI components to reach 2% before cutting. Then, the French central bank chief Villleroy said that there is risk that inflation undershoots, which marks the first time since before the pandemic that we hear the fear of low inflation being mentioned. It could be that the ECB wished to pass the message to the market that rates will be cut again at the next meeting, as the overarching feeling after the ECB press conference was that there is no real desire to cut more now.
Chart of the Week : Forecasts are changing in favor of Trump winning, one week before the elections.
The above chart and forecasts are taken from The Economist. It all started with the first and last horrible debate between President Biden and Mr. Trump, where the mental ability of the former was seriously contested. In the weeks that followed, the probability of a second Biden presidency dropped to just 25%, according to this forecasting model. When Mr. Biden dropped out of the race and Mrs. Harris took over, the chances became again closer to 50% for each candidate. Throughout the summer Vice President Harris had a 55/60% average probability to win, but this had dropped significantly in a matter of weeks, and especially in October. This particular model now assigns a higher probability to Mr. Trump to be elected for a second time. Of course they are both close to the 50% line and eventually the final outcome will be the product of last-minute changes in various states that matter. We will know in one week.
Disclaimer
• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.
• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.
• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.
• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.
• Sources: Chart of the Week : The Economist , Photo: https://www.hava.io/blog/are-you-monitoring-everything
Commentaires