Stronger than expected US job report added 35bps to the 2y UST yield, Middle East tensions made Oil jump by +9% WoW
Ahead of the Q3 corporate earnings starting next week with PepsiCo and US banks, China re-opening its stock markets on Tuesday after Golden Week, the markets had to digest 2 main events last week : Iran-Israel attacks and a stronger than expected US NFP September data that pushed Oil by +9% in a short squeeze market and pushed US Bond yields between +20 and +35bps on the week. The US curve remained steepening but by a mere +5bps io +20bps prior. Regional shift in Asian stocks, away from Japan and India into China due to ’whatever it takes’ economic measures taken by China in order to boost its weakened economy. Inflation in the euro zone continued to decrease, now under 2%. No doubt the last FOMC (FED) minutes will be scrutinised on Wednesday.
Equities
Asian shift from Japan and India towards ‘whatever it takes’ China
Q2 earnings releases last week (stock WoW performance) :
+++ Tesco (+1%)
- - - Nike (-8%) Levi Strauss (-8%) JD Wetherspoon (-2%)
M&A : Denmark DSV (+8%) to buy Schenker for €14bn
Asia : China stocks quoted in the US during Golden Week : Bilibili (+20%) PDD Holdings (+14%) JD.com (+18%) Futu Holdings (+49%)
Oil related : Total (+6%) BP (+7%) Shell (+6%) Exxon Mobil (+8)
Bio Pharma : Bristol Myers (+6%) on FDA validation of its Opdivo drug
Auto : Stellantis (-17%) Aston Martin (-31%)
New French Corp Tax : FDJ (-10%) Air France KLM (-12%)
Rates
US curve (2-10 years) remained steepening, just (+5bps vs +20bps) with short end US Treasuries yield (2 years) increased by 35bps. Two FED rate cuts of 25bps discounted by yearend and -90bps in 2025.
US
NFP for September was released at +254k vs +150k expected (mostly due to government workers) ; Unemployment rate at 4.1% vs 4.2% expected ; Sep ISM services 54.9 vs 51.7 prior, PMI services 55.2 vs 55.7 prior ; PMI Manufacturing 47.3 vs 47.9 prior, ISM Manuf. 47.2 vs 47.2 prior
Commodities
Crude Oil short squeeze last week (WTI +9%) on expectations that Israel will attack Iran Oil infrastructure in response to the 200 missiles Iran launched into Isreal last week
Gold remained fairly stable (Middle East tensions vs USD much higher, dollar index +2.1% WoW)
Crypto
BTC stopped its 3 weeks ascension (-6% WoW) Spot Bitcoin ETF saw $300m of net outflows last week
Nota Bene
US Money Markets continued to increase to a new record ($6.46trn)
China markets re-open on Tuesday (after Golden week)
Ahead of the Q3 corporate earnings starting next week with PepsiCo and US banks, China re-opening its stock markets on Tuesday after Golden Week, the markets had to digest 2 main events last week : Iran-Israel attacks and a stronger than expected US NFP September data that pushed Oil by +9% in a short squeeze market and pushed US Bond yields between +20 and +35bps on the week. The US curve remained steepening but by a mere +5bps io +20bps prior. Regional shift in Asian stocks, away from Japan and India into China due to ’whatever it takes’ economic measures taken by China in order to boost its weakened economy. Inflation in the euro zone continued to decrease, now under 2%. No doubt the last FOMC (FED) minutes will be scrutinised on Wednesday.
Equities
Asian shift from Japan and India towards ‘whatever it takes’ China
Q2 earnings releases last week (stock WoW performance) :
+++ Tesco (+1%)
- - - Nike (-8%) Levi Strauss (-8%) JD Wetherspoon (-2%)
M&A : Denmark DSV (+8%) to buy Schenker for €14bn
Asia : China stocks quoted in the US during Golden Week : Bilibili (+20%) PDD Holdings (+14%) JD.com (+18%) Futu Holdings (+49%)
Oil related : Total (+6%) BP (+7%) Shell (+6%) Exxon Mobil (+8)
Bio Pharma : Bristol Myers (+6%) on FDA validation of its Opdivo drug
Auto : Stellantis (-17%) Aston Martin (-31%)
New French Corp Tax : FDJ (-10%) Air France KLM (-12%)
Rates
US curve (2-10 years) remained steepening, just (+5bps vs +20bps) with short end US Treasuries yield (2 years) increased by 35bps. Two FED rate cuts of 25bps discounted by yearend and -90bps in 2025.
US
NFP for September was released at +254k vs +150k expected (mostly due to government workers) ; Unemployment rate at 4.1% vs 4.2% expected ; Sep ISM services 54.9 vs 51.7 prior, PMI services 55.2 vs 55.7 prior ; PMI Manufacturing 47.3 vs 47.9 prior, ISM Manuf. 47.2 vs 47.2 prior
Commodities
Crude Oil short squeeze last week (WTI +9%) on expectations that Israel will attack Iran Oil infrastructure in response to the 200 missiles Iran launched into Isreal last week
Gold remained fairly stable (Middle East tensions vs USD much higher, dollar index +2.1% WoW)
Crypto
BTC stopped its 3 weeks ascension (-6% WoW) Spot Bitcoin ETF saw $300m of net outflows last week
Nota Bene
US Money Markets continued to increase to a new record ($6.46trn)
China markets re-open on Tuesday (after Golden week)
Coming up this week
Corporate earnings : US PepsiCo (8 Oct) JPM, Wells Fargo, BoNY (11 Oct) ; Europe Repsol (7 Oct) Porsche (11 Oct)
Macro : US September CPI (10 Oct) PPI (11 Oct) ; China September CPI (13 Oct)
What I have been reading lately ...
BlackRock, October 2024 - Global Outlook Q4 update
Author: BlackRock Investment Institute
__________________________________________________________________________________
Key takeaways Tactical :
· AI and US equities (We see AI creating opportunities across sectors, we get selective, tilting towards non-tech beneficiaries)
· Japanese equities (Mild inflation and corporate reforms boost earnings, yet risks from yen strength and BoJ missteps remain)
· Income in fixed income (We like quality income in short-term government bonds and credit, we are neutral long-term US Treasuries)
Key takeaways Strategic :
· Private credit (We think it will earn lending share as banks retreat, and at attractive returns relative to public credit risk)
· Fixed income granularity (We prefer intermediate credit on a risk-adjusted basis, short-term government bonds and UK gilts)
· Equity granularity (We favour emerging over developed market stocks, we get selective in EM via mega forces, in DM we like Japan)
Equities :
US (overweight) given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins.
EU (underweight) Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
UK (overweight) Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Japan (overweight) A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and Japan shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Emerging Markets (neutral) The growth and earnings outlook are mixed. We see valuations for India and Taiwan looking high.
China (overweight) We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges.
Tactical granular views : fixed income
Short US Treasuries (underweight) We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term.
Long US Treasuries (neutral) Markets have cut expectations of Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on new economic data.
Euro area government bonds (neutral) Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political developments remain a risk to fiscal sustainability.
Japanese government bonds (underweight) Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
Short-term IG credit (overweight) Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S.
Long-term IG credit (underweight) Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global High Yield (neutral) Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
EM hard currency (neutral) The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
EM local currency (neutral) Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.
UBS, 1 October 2024 - Chinese equities, CIO View
Authors: Eva Lee, CFA, Strategist ; Summer Xia, CFA, Analyst
__________________________________________________________________________________
· China delivered a surprisingly robust stimulus package, with stronger-than-expected support in monetary easing, plus property and capital market measures. This was followed by a surprise Politburo meeting which saw an unprecedented pledge to stabilize the property market.
· We see mid-single-digit upside from here, even after the sharp rally in the first week following the policy announcement. Investors should consider adding quality internet and consumer stocks to the growth side of a balanced barbell approach. This represents a notable shift from our previous defensive tilt, and acknowledges the stimulus strength. That said, investors should retain some exposure to high-yield value sectors, which should benefit from rate cuts and capital market support.
· The equity rally’s sustainability largely depends on whether Beijing can subsequently launch a strong fiscal package to support growth, and if it can execute the overall plan effectively. If forceful fiscal policies are announced in a timely manner (within October), we see a further rerating upside to our base-case scenario. Otherwise, valuations could derate back to pre-announcement levels in the absence of strong fiscal policy support.
Upside scenario : MSCI China June 2025 target: 83 . Forceful fiscal policy packages announced to support growth If a new round of forceful fiscal measures is announced in a timely manner —such as a notable scale-up in fiscal support for the property market or consumption—the market could interpret this as evidence of strong top-down commitment to stabilize the economy. In such a scenario, this could further lift the valuation rerating from our base case. The next key policy events to watch include the Standing Committee of the National People’s Congress and the Politburo meeting (both scheduled in October).
Downside scenario : MSCI China December 2024 target: 60. Policy continuation disappoints once again
If no other fiscal package is announced at the high-level meetings in October, the market might question whether the announced monetary easing package could induce a durable rise in real demand. The lack of fiscal support could trigger MSCI China’s price-to-earnings valuation gradually reverting to the pre-announcement level at around 8.9x. Capital and property market support poorly implemented
If the actual utilization of announced property destocking policies and capital market support turn out to be slower than expected, the real estate market (in terms of prices and volumes) and the equity market could face further downward pressure. In this case, macro conditions, especially consumption growth, could stay subdued, and the pressure of equity derating could return. Re-escalation in Sino-US tensions
A breakdown of the previous trade deal, any new tariffs, a rollout of further trading restrictions between the US and China on sectors having a more broad-based adverse impact on the Chinese economy, or other issues that escalate Sino-US tensions could undermine sentiment. This could lead to a notable valuation derating, triggering potential downward pressure.
Central scenario MSCI China June 2025 target: 76. Beijing rolled out a surprisingly robust stimulus package in the last week of September. This appeared to be largely in response to the country’s broad macroeconomic weakness, and followed the Federal Reserve’s 50bp interest rate cut. The announced measures have mostly focused on monetary easing so far, including a 50bp reserve requirement ratio (RRR) cut, and rate cuts across multiple tenors. More property easing measures were also announced, including existing mortgage rate cuts, a lowering of the secondary home purchase downpayment requirement, and a lift in the loan-to-value (LTV) ratio for the previously announced CNY 300bn in relending facilities to purchase property inventories. As for capital markets, new tools were introduced to support liquidity, including a CNY 500bn People’s Bank of China (PBoC) swap facility to facilitate stock purchases by financial institutions, and a CNY 300bn relending facility to help finance corporates’ share buybacks. These measures were followed by a Politburo meeting which pledged to “stop the property market from falling”, an unprecedented show of support at such a high-level meeting. That said, no further details to achieve this objective were unveiled, as of writing.
Corporate earnings : US PepsiCo (8 Oct) JPM, Wells Fargo, BoNY (11 Oct) ; Europe Repsol (7 Oct) Porsche (11 Oct)
Macro : US September CPI (10 Oct) PPI (11 Oct) ; China September CPI (13 Oct)
What I have been reading lately ...
BlackRock, October 2024 - Global Outlook Q4 update
Author: BlackRock Investment Institute
__________________________________________________________________________________
Key takeaways Tactical :
· AI and US equities (We see AI creating opportunities across sectors, we get selective, tilting towards non-tech beneficiaries)
· Japanese equities (Mild inflation and corporate reforms boost earnings, yet risks from yen strength and BoJ missteps remain)
· Income in fixed income (We like quality income in short-term government bonds and credit, we are neutral long-term US Treasuries)
Key takeaways Strategic :
· Private credit (We think it will earn lending share as banks retreat, and at attractive returns relative to public credit risk)
· Fixed income granularity (We prefer intermediate credit on a risk-adjusted basis, short-term government bonds and UK gilts)
· Equity granularity (We favour emerging over developed market stocks, we get selective in EM via mega forces, in DM we like Japan)
Equities :
US (overweight) given our positive view on the AI theme. Valuations for AI beneficiaries are supported as tech companies keep beating high earnings expectations. We think upbeat sentiment can broaden out. Falling inflation is easing pressure on corporate profit margins.
EU (underweight) Valuations are fair. A growth pickup and European Central Bank rate cuts support a modest earnings recovery. Yet political uncertainty could keep investors cautious.
UK (overweight) Political stability and a growth pickup could improve investor sentiment, lifting the UK's low valuation relative to other DM stock markets.
Japan (overweight) A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and Japan shareholder returns. Yet the drag on earnings from a stronger yen and some mixed policy signals from the Bank of Japan are risks.
Emerging Markets (neutral) The growth and earnings outlook are mixed. We see valuations for India and Taiwan looking high.
China (overweight) We are modestly overweight. Major fiscal stimulus may be coming and prompt investors to step in given Chinese stocks are at a deep discount to DM shares. Yet we stay ready to pivot. We are cautious long term given China’s structural challenges.
Tactical granular views : fixed income
Short US Treasuries (underweight) We don’t think the Fed will cut rates as sharply as markets expect. An aging workforce, persistent budget deficits and structural shifts like geopolitical fragmentation should keep inflation and policy rates higher over the medium term.
Long US Treasuries (neutral) Markets have cut expectations of Fed rate cuts and term premium is close to zero. We think yields will keep swinging in both directions on new economic data.
Euro area government bonds (neutral) Market pricing reflects policy rates in line with our expectations and 10-year yields are off their highs. Political developments remain a risk to fiscal sustainability.
Japanese government bonds (underweight) Stock returns look more attractive to us. We see some of the least attractive returns in JGBs.
Short-term IG credit (overweight) Short-term bonds better compensate for interest rate risk. We prefer Europe over the U.S.
Long-term IG credit (underweight) Spreads are tight, so we prefer taking risk in equities from a whole portfolio perspective. We prefer Europe over the U.S.
Global High Yield (neutral) Spreads are tight, but the total income makes it more attractive than IG. We prefer Europe.
EM hard currency (neutral) The asset class has performed well due to its quality, attractive yields and EM central bank rate cuts. We think those rate cuts may soon be paused.
EM local currency (neutral) Yields have fallen closer to U.S. Treasury yields, and EM central banks look to be turning more cautious after cutting policy rates sharply.
UBS, 1 October 2024 - Chinese equities, CIO View
Authors: Eva Lee, CFA, Strategist ; Summer Xia, CFA, Analyst
__________________________________________________________________________________
· China delivered a surprisingly robust stimulus package, with stronger-than-expected support in monetary easing, plus property and capital market measures. This was followed by a surprise Politburo meeting which saw an unprecedented pledge to stabilize the property market.
· We see mid-single-digit upside from here, even after the sharp rally in the first week following the policy announcement. Investors should consider adding quality internet and consumer stocks to the growth side of a balanced barbell approach. This represents a notable shift from our previous defensive tilt, and acknowledges the stimulus strength. That said, investors should retain some exposure to high-yield value sectors, which should benefit from rate cuts and capital market support.
· The equity rally’s sustainability largely depends on whether Beijing can subsequently launch a strong fiscal package to support growth, and if it can execute the overall plan effectively. If forceful fiscal policies are announced in a timely manner (within October), we see a further rerating upside to our base-case scenario. Otherwise, valuations could derate back to pre-announcement levels in the absence of strong fiscal policy support.
Upside scenario : MSCI China June 2025 target: 83 . Forceful fiscal policy packages announced to support growth If a new round of forceful fiscal measures is announced in a timely manner —such as a notable scale-up in fiscal support for the property market or consumption—the market could interpret this as evidence of strong top-down commitment to stabilize the economy. In such a scenario, this could further lift the valuation rerating from our base case. The next key policy events to watch include the Standing Committee of the National People’s Congress and the Politburo meeting (both scheduled in October).
Downside scenario : MSCI China December 2024 target: 60. Policy continuation disappoints once again
If no other fiscal package is announced at the high-level meetings in October, the market might question whether the announced monetary easing package could induce a durable rise in real demand. The lack of fiscal support could trigger MSCI China’s price-to-earnings valuation gradually reverting to the pre-announcement level at around 8.9x. Capital and property market support poorly implemented
If the actual utilization of announced property destocking policies and capital market support turn out to be slower than expected, the real estate market (in terms of prices and volumes) and the equity market could face further downward pressure. In this case, macro conditions, especially consumption growth, could stay subdued, and the pressure of equity derating could return. Re-escalation in Sino-US tensions
A breakdown of the previous trade deal, any new tariffs, a rollout of further trading restrictions between the US and China on sectors having a more broad-based adverse impact on the Chinese economy, or other issues that escalate Sino-US tensions could undermine sentiment. This could lead to a notable valuation derating, triggering potential downward pressure.
Central scenario MSCI China June 2025 target: 76. Beijing rolled out a surprisingly robust stimulus package in the last week of September. This appeared to be largely in response to the country’s broad macroeconomic weakness, and followed the Federal Reserve’s 50bp interest rate cut. The announced measures have mostly focused on monetary easing so far, including a 50bp reserve requirement ratio (RRR) cut, and rate cuts across multiple tenors. More property easing measures were also announced, including existing mortgage rate cuts, a lowering of the secondary home purchase downpayment requirement, and a lift in the loan-to-value (LTV) ratio for the previously announced CNY 300bn in relending facilities to purchase property inventories. As for capital markets, new tools were introduced to support liquidity, including a CNY 500bn People’s Bank of China (PBoC) swap facility to facilitate stock purchases by financial institutions, and a CNY 300bn relending facility to help finance corporates’ share buybacks. These measures were followed by a Politburo meeting which pledged to “stop the property market from falling”, an unprecedented show of support at such a high-level meeting. That said, no further details to achieve this objective were unveiled, as of writing.
