Market Review 11/2023

In November, market participants were presented with a somewhat premature Santa rally. The unexpected optimism, as we see it, is based on three main factors: the completion of the cycle of rising interest rates (of which market is certain of), the “soft landing” card that global economy is seemingly playing out (most favorable scenario as considered by market participants) and good company earnings reports (in Q3 the S&P 500 companies showed revenue growth of 4.7%, which was the first positive quarter since last fall). As a result, the S&P 500 added 8.92% to its value in the last month of autumn (+18.97% YTD), while the Nasdaq 100 rose by 10.67% (+45.78% YTD). The information technology and the real estate were the best performing sectors. Overall, the stock prices of 452 companies of the S&P 500 index rose in November, while the prices of 53 fell. At the same time, the top-10 companies that contributed most to growth remained largely unchanged: “the magnificent seven” plus JP Morgan, Salesforce and Berkshire Hathaway. Mrs. Market’s dependence on these “gorillas” remains to be an unsolved problem.

Good outlook for the bond market

Bonds had a good month with long U.S. Treasury yields falling by 60 basis points, and the main question the market is asking is the timing and depth of interest rate cuts. Judging by futures contracts on the Federal Reserve rate, the market expects the first interest rate reduction in March, which will start the cycle of softer monetary policy lasting until February 2025. The market expects the base rate to reach 3.75-4.00% at the end of the cycle, 150 basis points below current level. If we consider that the Fed will meet 8 times until February 2025 (we do not take December 2023 into account), the market sees the rate being cut 6 times by 25 basis points. Such expectations are favorable for both the U.S. presidential elections and for many U.S. corporations, which will have to start refinancing their debt issued at low pandemic rates. Given this factor, the market’s expectations regarding interest rates look quite reasonable. Everything suggests that near-term low in bond prices is in place and any short-term dips should be used as a buying opportunity.

European and US equity markets

Gold is unable to hold on gains

We saw gold prices finally piercing through the XAU/USD 2050 resistance and accelerating during thin Asia trading hours to all-time record high of 2136 dollars per troy ounce. However, the rally proved to be short-lived, as prices fell all the way back to resistance area. Time will tell if this breakout was “real” or was just a bull trap, but one thing is clear – gold prices are unlikely to stay at current price levels for long.

November was a difficult month for the U.S. dollar. Last time we mentioned the 1.0720 level as a possible trigger for larger EUR/USD move upwards and this is exactly what happened. The pair even managed to test the 1.1000 mark, but ended autumn on a slightly weaker footing. Recent developments have not changed our longer-term positive outlook for the dollar, but certainly we would like to see more evidence that we are on a correct path. Any weekly / monthly close below EUR/USD 1.0500 would now suggest that this scenario is back in play.

European and US equity markets

Major economies still showing mediocre results

Contrary to expectations, Chinese production showed a surprising recovery in November – the Caixin manufacturing PMI climbed to 50.7, a notable improvement compared to the preceding month’s reading of 49.6. Still, this contrasted with official government PMI data, revealing a downturn in manufacturing activity, with index being flat at 49.4. A noteworthy factor bolstering manufacturing activity was the improvement in local new business orders as it partially mitigated the continuing decrease in demand from overseas markets. With data presenting a mixed picture, there are ongoing appeals for additional policy support to bolster economic growth. It is also anticipated that China’s exports decelerated in November, as outbound shipments were likely to exhibit a 1.1% decline compared to the same month of the previous year, following a 6.4% decrease in October. On the other hand, there was a notable expansion in Chinese service sector activity, surpassing expectations and recovering from earlier slowdowns observed earlier in the year. The consistent application of stimulus measures by Beijing played a crucial role in boosting local demand, contributing to this positive trend – in November, the Caixin China services PMI recorded a decent recovery, rising to 51.5 from October’s 50.4.

Gold price, USD/oz

U.S. manufacturing continued to show a restrained activity marked by a further decline in factory employment. Hiring slowed down and layoffs increased, providing additional evidence that the economy was losing momentum after experiencing robust growth in the previous quarter. The ISM reported that its manufacturing Purchasing Managers’ index remained unchanged at 46.7. This marks the 13th consecutive month in which the PMI has stayed below 50, signaling a continued contraction in the manufacturing sector. Meanwhile, the U.S. services sector experienced an upturn, driven by heightened business activity. However, new orders remained stagnant, and a measure of input inflation decreased, reflecting the delayed effects of higher interest rates.

The widespread decline in Eurozone manufacturing showed a modest alleviation last month; however, the sector continued to be firmly entrenched in contractionary territory – HCOB’s final manufacturing PMI showed a reading of 44.2 in November. The decline in business activity suggests that the bloc’s economy is likely to contract again in the current quarter, primarily due to ongoing challenges in the dominant services industry. Inflation dropped more than anticipated for the third consecutive month, intensifying speculation about potential rate cuts in the early spring, contradicting the explicit guidance provided by the ECB.

High Yield bond Indexes

Source: Bloomberg and Signet Bank

No flies in the ointment

We can say that markets are approaching Christmas and New Year in a good mood and with moderately optimistic expectations for 2024. After a very successful November, it would be logical to see at least some pullback in the upcoming weeks. Long Treasury yields may return to 4.50% and the S&P 500 index may test the 4400-4420 support level. At the same time, the level of 4630 points remains very important for the bulls. Overcoming it will open the way to storming the historical highs and strengthen the probability of a move to 5500+ levels. Still, such a scenario will be possible only if the long-term rates continue to fall to 3.75-3.85% and / or if there is a sudden economic boom. In the case of a shallow recession, a rise in the index to such levels is highly unlikely. Equity markets will be worse off in the event of stagflation. In this scenario, central banks would be forced to keep rates at current levels or even raise those, which would hurt both corporate earnings and debt service costs. However, such a scenario is still unlikely and is highly dependent on commodity prices, primarily oil, the growth of which has so far been restrained, among other things, by the reduction in demand from China.