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October’s good mood did not disappear in November, as equity indices continued their steady advancement, while US dollar and benchmark yields retreated. It is possible that market participants are betting on the point of maximum pessimism being already behind us, as inflationary pace has somewhat slowed and politicians and bankers have started talking about reducing the speed of interest rate hikes. Moreover, expectations rise that the upcoming recession will either be avoided, or will prove to be short-lived and mild and will not provoke a significant rise in unemployment or a sharp drop in demand, and recently announced stuff cuts by such giants as Amazon, Meta, Google and Twitter will not spoil the party.
Things to worry about
Meanwhile, consumer and business sentiment continues to deteriorate. According to The Wall Street Journal poll, 63% of surveyed economists expect a recession next year. A similar survey conducted by the Federal Reserve Bank of Philadelphia showed that US GDP is expected to decline for the next 3 to 4 quarters, and this is the longest expected decline since such surveys began in 1968.
Still, U.S. services industry activity during November picked up the pace – the ISM non-manufacturing PMI increased to 56.5 compared to 54.4 in October, which was the lowest reading since May 2020. Businesses added more workers than expected in November – nonfarm payrolls increased by 263 000, as hiring remained strong despite announcements of thousands of job cuts by technology companies. Despite strong labor market, U.S. consumer confidence decreased to the four-month low of 100.2.
European and US equity markets
Pace of inflation eases in Eurozone; China continues to suffer
Inflationary pressures in Eurozone slightly eased in November. Consumer prices rose by “just” 10.0% in November after a 10.6% increase in October (mostly due to decrease in energy prices). When one excludes food and fuel costs, inflation increased by 6.6% in November compared to 6.4% in October.
While Chinese government pursues its strict Covid-19 policies, country’s factory activity continues to suffer. The Caixin/S&P Global manufacturing PMI marked its fourth monthly contraction in a row, while the official manufacturing PMI came in at 48.0 for November, the lowest reading in seven months.
Non-manufacturing PMI, which looks at services sector activity, decreased to 46.7 points in November compared to 48.7 in October, also being the lowest reading in seven months.
Benchmark 10-year bond yields
Precious metals see some strength; oil fails to break over 100 dollars per barrel
Occasionally even precious metals have a very good month. Gold climbed over the level of 1750 dollars per troy ounce thus getting back on a more bullish track. XAU/USD 1600 is now the level, which the metal needs to hold to keep the pressure up. Silver, having cleared the 22 XAG/USD mark, is trying to prove it has finally bottomed, with the 17.50 level now being a critical support.
Oil had a volatile month. We liked it long at USD/bbl 80-85 levels for many weeks, but 100 dollars per barrel proved to be too important of a resistance. Long-term picture has not changed and we would still try to play oil / energy from the long side, now keeping in mind the “Venezuela factor” as a short-term risk.
Dollar saw some retreat against all major currencies. EUR/USD pair bounced to initial resistance area of 1.0350-1.0500, from where we see a big probability for dollar to regain its ground and push euro lower again. Similar risks we see in the USD/JPY pair, though market “listened to” BOJ and its interventions and fell by around 9% from recent highs.
High Yield bond Indexes
“So who are you, finally?”
By the end of the day, is what we are seeing a bear market rally or the end of the correction and the beginning of a new bullish trend for risky assets? We believe that in the current environment, it is not worth talking about a possible sharp reversal in the financial markets. There is a significant risk of recession and some sectors of the economy are already in it. In recent years, consumer demand has been quite actively stimulated by lending, which, in turn, was fueled by rising prices for financial instruments and real estate, but this year situation has begun to change – equity and debt markets have retreated, loans have become more expensive, and real estate prices have begun to decline.
These factors will certainly affect the demand and hence corporate profits. Financial reports of the companies included in the S&P 500 index in third quarter are already lagging behind average trends of the last 10 years: profits of 69.3% of the companies turned out to be better than analysts’ expectations, while the average level is at around 77%. Sales volumes are even more modest – only 59.3% of the companies beat analysts’ expectations. Therefore, one should not expect a V-shaped recovery and increase risks on the eve of Christmas and New Year.
Gold price, USD/oz