Investors continued celebrating the "resurrection" of China and good news on the state of the US economy gave equities a further push higher. Hang Seng is now the best performing major equity market index on a year-to-date basis with a 35% gain and the S&P500 moved close to its record high, with a late rally on Friday. Bonds and defensive sectors like healthcare were sold-off, in a clear sign of significantly improved sentiment. All this came in a week where Oil prices jumped by about 10% and Iran was being drawn into a possible war with Israel, with unknown consequences. Investors seem to also forget that the US elections are coming up in exactly one month, and this will be a major market-moving event. It is not the time to be complacent and change strategy. It could be perhaps an opportunity to build defenses for those who do not own enough.
The US labor market, which has now been highlighted by the FED as the main focus, showed renewed strength. After a series of lackluster summer months which included a late-July recession scare, the September nonfarm payrolls rose by 254k, well-ahead the consensus of 140k and this was the highest headline since March. Meanwhile, July and August were also revised higher by a combined 72k. The unemployment rate fell 0.1pp to 4.1% vs consensus for an unchanged reading. The job gains were strongest in construction, leisure/hospitality, healthcare, and government, with the latter three accounting for 70% of gains. Some analysts noted that September's strength could be mostly attributed to seasonality and the resolution of multiple labor strikes, though storms and strikes flagged as possible disruptors for the October's report. All in all, the recent scenario of "Goldilocks" gained more momentum and fans.
Eurozone inflation fell below ECB's target of 2%, for the first time in almost three years. It was announced at 1.8%, as expected. Before you take the champagne out, we should point that due to the base effect, the CPI is expected to move higher again in the coming 2-3 months, perhaps as high as 2.5%. The monthly change of the CPI was a negative 0.1% (i.e. prices fell) and if we get a monthly -0.1% in the next few months, the CPI is still set for a rise to 2% or slightly higher. Hence, it will take significant positive surprises and steeper monthly negative changes for inflation to remain below 2%. However, the ECB knows that and will be most probably cutting rates again next week. Core inflation fell 0.1pp to 2.7% y/y, also matching expectations.
As already mentioned, the bond market responded swiftly to the good labor market data and yields spiked higher. The ongoing tension between Israel and its neighbors, which had led yields to new lows, now appears to be forgotten and traders sold bonds aggressively. The USD yield curve rose by more than 25bps for the week and now the market has priced out the December rate cut, despite Chairman Powell's recent quidance for two more rate cuts this year. The 10-yr US yield is back above 4% and the German equivalent iss trading at 2.25%. The whole EUR yield curve is now back above 2%, confirming our view that the recent lows were not sustainable. The EUR yields are now moving back again to buying territory, ahead of the ECB meeting next week.
The Q3 corporate earnings season is starting this week in the US. Traditionally, it is the major banks and financial institutions that commence the process and it is always interesting to get their initial "feeling" about the health of the US consumer and corporates. Already, JPMorgan has guided lower for its net interest income calling market expectations "too ambitious" a few weeks ago. For the overall market, consensus estimates for the quarter's growth stand at 4.5% , however this has moved down in the last two months, as it stood at 7.8% at the end of June.
Chart of the Week : October is a tricky month ahead of US elections.
October has traditionally been associated with major market crashes (1929-1987-2008), but is also usually a month which finally provides very good returns. However it does so in a rather volatile way. This year is more "special" as it is a US election year (early November). The above chart shows the average performance trajectory of the S&P500 throughout any given calendar year. The red line shows the average of all years where we can see that the market moves in a volatile manner sideways only to recover towards the end of the month. The brown line shows the average S&P500 trajectory only for the election years. Here we observe that the drawdown and volatility is higher, and then eventually we get a nice rally heading into the year's end. Of course, another conclusion we can draw from the above chart is the big divergence of the current trajectory (pink line) with the long-term average and the more volatile fashion in which the S&P500 has moved so far in 2024.
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 : FactSet
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