This Week In Markets: 11th - 15th October 2021

Okay, very good morning. It's Monday the 11th of October. Hope you had a great weekend. And before I begin the normal outlook for the week ahead, don't forget, if you are undergrad, a master's student, or a recent graduate, don't forget to check out AmplifyMe.com to access some of our latest free simulation sessions and also some content that's not publicly available in our exclusive student portal. So if Yeah, check out AmplifyMe.com if that's appropriate for you. Otherwise, just going to get straight into the briefing and talk about the things that are happening this morning. And a quick summary of what I'm going to talk about. First of all, it's Columbus Day in the US, and that does mean that actually for equity markets, things as per normal. The NYSE is open normal hours, but there is no bond market trade today. So just a point of note. But in terms of the actual charts this morning, we've got equity index futures in the center charts just a touch lower. So the DAX down 40, yes, the NASDAQ down 63, and the S&P down 14 in the futures market. In the currency space, seeing a decent lift in cable this morning, you can see here, and we're going to talk about that in a little bit more detail. Up about 50 pips this morning after some hawkish Bank of England rhetoric coming out of two MPC officials. Otherwise, yields still remain on the ascent. So the US 10-year is down around 8.5 ticks this morning, just continuing that general move higher that we've had. So putting more continuous pressure on bond prices. And then elsewhere in the gold market, pretty quiet, but oil still remains in the commodity space, very buoyant. We've had a test in the APAC session and early this morning as Europe's come in at the $81 handle, which on the weekly chart has put us back above what was quite a critical area, 80. And that does open the door technically, not just for today's session but for this week, for a more deeper run on the upside, up to around really the next resistance, not really seen, to about 84, which would be around these highs we had in October 2014 and that low back in November 2012. So still things looking very bullish in the oil market. So let's get into some of the headlines and talk about the things that are going on. I'm going to start off in a chronological order. So let's talk about the Asia region, where Japanese shares were boosted by a weaker yen. Uh, dollar-yen trading up about 50 pips this morning, and so to the benefit of the local stock index, which tends to prefer a weaker currency state given the high degree of export names that operate within that index. Prime Minister, as you can see here, Kishida has also commented that he is not considering a capital gains tax change at present. Those comments were made over the weekend, assisting some of the rationale behind that move. Otherwise, in Hong Kong, a gauge of tech equities jumped more than 3%, as you can see here, easing concerns of Beijing's crackdown on internet platforms after the food delivery giant uh, Meituan received lower than expected antitrust fine, and that came despite some continued rhetoric coming out of the PBOC that China will continue to curb monopolistic behaviors of internet platform companies. So the fact that that fine was lower than expected has come as a bit of relief. So the likes of Alibaba as well rising overnight, but also we saw coal firms moving higher, driven by supply fears and defense equities and rising tensions as well with Taiwan. So a couple things going on there in China. Separately as well, what's going on with Evergrande? It's still kind of ticking over in the background, although a lot of the emphasis from, I guess, any sensitivity to it in a broader market has dissipated quite a great deal from where we were a few weeks ago. But essentially, offshore bondholders of Evergrande Group were overnight bracing for news on more than $148 million in looming bond coupon payments after the company missed obviously those two coupon deadlines last month. But we await any updates on that, nothing seen as yet on that front. And then, yeah, moving on, let's talk about the Bank of England. I mentioned the pound is accelerating at the moment, and then in fact it's just broken out in the futures market above the high that was seen at the back end of last week. So some decent gains being seen. And what's drawing attention are comments here from two Bank of England officials reinforcing signals of the perhaps intention of an imminent rate rise in the UK to curb inflation, with one telling households to brace for a significantly earlier increase than previously thought. So who are these people? Well, here's a refresher of the current Monetary Policy Committee. And the left being the most dovish, the right being the most hawkish, so more inclined to be voting for rate increases sooner rather than later on the right-hand side, such as Michael Saunders, for example, who has dissented in terms of the QE decision for the last two meetings. And Michael Saunders suggested in remarks published on Saturday that investors were right to bring forward bets on rate hikes. And what that followed then was the governor, Andrew Bailey, warned of potentially very damaging period of inflation unless policymakers take action. And what this has meant then is that markets are almost now fully pricing in the first move by the end of this year. So we've basically gone from rate hikes in kind of May time to then February to now pricing in much more aggressively to the end of this year. Um, and so yeah, a couple things to be aware of here. What I would say is that, um, from a technical point of view, furlough is quite a big issue, and obviously that's just ending. And actually, in terms of the remaining Bank of England meetings that exist, um, the BoE are not going to be equipped with sufficient data to see how that is really playing out until at least the December meeting. So anything earlier than that is probably unreasonable, I'd say, in terms of, of hiking rates. The other thing is, is that the cost of living spike over the winter means perhaps caution might prevail at the Bank of England. Don't forget, you know, these massive energy prices spikes that are happening, you know, is going to create the potential, as we've seen from analysts last week commenting, of potentially a 30% rise in gas electricity bills for consumers. And so, you know, one of the things that Piers and I talked about the podcast on Friday was this idea that the Bank of England can only really control demand-side inflationary pressures where the gas issue and oil energy problem at the moment is definitely a supply-side issue. And so find it hard to see that the Bank of England can really try to, to tackle this resurgent inflation at the moment, specifically on energy themselves, where really they need to react to really other forces that are more under their control. So again, one of the main things, I guess, twofold to look out for this week Cunliffe, who sits here, who's the deputy governor and slightly more of a dovish disposition, speaks on Wednesday. And then Tenreyro, who's down here, and Catherine Mann, the new member, these three are going to be speaking. So Wednesday for Cunliffe, and then I think it's Thursday when Mann and Tenreyro speak. And so definitely keeping an eye on their commentary to see whether they kind of balance out the more hawkish rhetoric coming out of Saunders and Bailey. Quite frankly, I think it's more myself, the MPC, giving a bit of flexibility to the rhetoric at the moment to keep the market in check, that they're serious about monitoring high inflation. But I still find it incredibly difficult to see, given those aforementioned reasons about the impact that it's likely going to have on the consumer with rising inflation, that they're going to be able to just hike into that, I think, is, is unlikely. And that then brings up the second point, which is I think that sterling, which has been rising at the moment, I do feel like it is susceptible then to a bit of a pullback in time as some of that realization starts to bake in. And on an upside level, probably the area that becomes a little bit more interesting is as we get up to— looking on a daily chart here— as we get up to around the 137 $130 type area. It'll be interesting to see how we sit then, given the fact that we've been rallying really over the course of the last 12, 13 days, all the way down from a $134 handle. So I would expect that move to become perhaps a little bit fatigued up and around that, that level as we look out for the rest of the week. Again, markets generally, as I might have mentioned before, I do think tend to over interpret a lot of these comments. And I think they've— personally, I think the market's overstepped the mark a little bit in how aggressively this has been priced in. So definitely there's a lot of UK data coming out as well this week, from jobs data to GDP, and all of this will be important information for us to also define how the Bank of England are going to make their decisions going forward. All right, the other thing we've had is Fed's Daly, who is a voter She said this weekend the US labor market— and obviously this is quite a timely comment following that big miss on the headline, at least for nonfarm payrolls we had on Friday— she said the US labor market will see ups and downs as the pandemic lingers, but it's premature to judge that recovery is in peril. And she does tend to sit slightly on the, on the more dovish side. So the fact that she's saying such a comment goes to show then that it still remains on track. Most likely the Fed are going to push ahead with that announcement of tapering in November. And so some other things to be aware of on that front, you've got Goldman Sachs, they've come out and talked about a downgrading of their US growth forecast. However, I must say that is somewhat counterbalanced by the fact that they've actually, they basically downgraded '21, '22, but they've upgraded '23, '24. So I would say that this headline is perhaps a little bit sensationalist. Um, what they're basically saying is a delayed recovery in consumer spending is shifting the timeline then and making things a little bit slower now but a little bit faster later on in 2023 and beyond. As I've said, basically they said the two main challenges to growth in the medium term were slowing of fiscal support and the need for spending on services to bounce back quickly enough to offset a decline in the purchases of goods. And so I don't think this is anything too sinister, but certainly something to be aware of, especially if you're a student interviewing at GS at the moment. Um, all right, then the other thing before I get into the calendar I wanted to talk about was earnings, because earnings season actually kicks off, um, in earnest this week. We've already had about 21 actually of the S&P 500 companies who have reported already, but it really kind of unofficially starts this week because we get the big banks report. So as you can see here, really it's Wednesday, you've got JP Morgan, you've got BlackRock, and then Thursday pre-market you get Wells Fargo, Citi, MS, and then you've got likes of Goldman's on Friday. So in fact, there's 19 S&P 500 companies reporting, um, 4 Dow 30 components According to analysts at FactSet, the S&P 500 is expected to report year-over-year earnings growth of 27.6% for Q3. And as you would expect, of those 21 companies I said who have reported, around 71% are citing negative impact of supply chain disruptions. So I don't think that really comes as too much of a surprise to hear that on, on the their conference calls post their numbers release. Energy shares, which have soared due to this really powerful lift we've had in crude prices, um, yet higher prices could weigh on companies. Although that's beneficial for energy, it could weigh on the likes of everything ranging from transportation to consumer discretionary firms and so on. So worth just keeping that in mind for the nuances that we'll get probably through this earnings season across the different sectors that come out as we go further forward. So very much a bank focus this week, uh, and typically the market will lean on the first couple of big US tier 1 banks to really dictate the rest of how they will see the financials reporting over the period. Uh, and certainly if you're a student, this is a really good opportunity as well to jump on the investor relations page of these different banks depending on which ones you're interviewing for, So again, JP Wednesday, Bank of America, uh, MS, Citi on Thursday, GS on Friday. Just go on the investor relations page, find the earnings report, and most of these banks do a really nice top-level sheet of how individual divisions are performing, the overall bank's updated macro view and things like that, all in a short doc that's definitely worth getting yourself up to speed on. Um, all right, let's talk a little bit about the calendar for this week. As I mentioned, the bond market on holiday. But the equity market open is per normal today, but otherwise quite quiet on the calendar. And really, if I'm talking about US highlights, there's 3 things. You've got CPI Wednesday, um, you've got the FOMC minutes that evening, and then you've got the US retail sales report on Friday. So from a top level, the CPI one's probably going to be one of the main releases. Analysts at ING write that after a reopening spike in key areas We have seen the rate of price increases start to moderate, but it was— it is still faster than what we saw pre-pandemic, with higher food and housing costs particularly evident. This will keep the year-on-year inflation rates elevated, with the risk being that they'll rise further in coming months given supply chain issues and inventory shortages as we go into the key holiday season. So moderation from where we were, but still elevated. And hence the reason why I still love to view then that this is definitely fit the conditions for the Fed to commence tapering in November. Retail sales likely to be dragged lower by continued reversal in what we had have recently of a spike in vehicle prices. Outside of autos though, analysts note that figures should remain positive. Rising incomes as we go through the more reopening in the US and surging household wealth providing strong underpinnings for the data going forward. As far as the FOMC minutes is concerned, a little bit dated, you might say. Not expecting too much from there, but obviously will be looked at for any clues for details around setting us up for that taper announcement coming November meeting. Otherwise, elsewhere, jobless claims as per usual on Thursday. We are expecting that at around 335K. Last week was 326K. And then we've got the University of Michigan preliminary sentiment reading as well on Friday. From a European perspective, a few things to look out for. For one, on Tuesday we get the German ZEW Economic Sentiment for October, expected to show investor morale fell for a fifth straight month, holding its lowest level since the pandemic-fueled drop of March 2020. 20. Uh, the eurozone focus will be on Friday. If I jump down here to the bottom, um, well, there's two things really coming out of the eurozone. Manufacturing this week, um, as we get trade data on Friday, production data on Wednesday, and shortages continue to bite on the production front and expectations for yet another decline in August generally on that front. The latest Chinese trade figures They're going to be coming out on Wednesday. So not, not actually visible here on this calendar, but latest trade data coming out of China scheduled for release Wednesday, in which exports data for September is expected to continue its double-digit percentage growth with expectations for 21.8% reading. So that is it. So in summary, from the overnight news from this weekend, I would say main things to be aware of are Bank of England, So more accelerated UK rate pricing, with that then coinciding with strength in the pound, and whether or not then that actually comes to fruition. And we've got a lot of UK data coming out this week. So you've got UK jobs data coming out on Tuesday, you've got the US— UK GDP August estimate coming out on Wednesday that will help give further insight into that decision-making. And then you've got Um, the main thing, calendar events: CPI US on Wednesday, FOMC minutes that day, retail sales coming out on Friday, with the bank earnings coming out throughout the week commencing on Wednesday as well. All right, that is it. Let you guys get on with the week. Uh, thanks for listening. I'll catch you same time tomorrow. Thanks very much.