2022.12.19 Weekly Note

A smaller and choppier Santa-rally, maybe…

There’s been plenty of chatter of massive rebalancing of 60/40 portfolios into year-end which makes for some very choppy trading conditions. Investor fears are now shifting from inflation to recession, but in the short-term I think the easing in inflation expectations will do much to boost consumer and business confidence. Also, with volatility looking to ease up after a full week of event risks, I think a deeper sell-off will be limited heading into year-end.

NEWSFLOW

MARKETS

• Global equity funds draw first weekly inflow after five weeks — U.S. and Asian equity funds drew a net $3.4 billion and $500 million, respectively, in inflows, but investors exited European funds to the tune of about $2.14 billion (Reuters). Real-Money Funds Dump $100 Billion of Stocks on Rebalancing — When December wraps up, sovereign wealth funds could be done selling roughly $29 billion in equities while US defined benefit pension plans would need to shift up to $70 billion from equities to bonds to meet their long-term targets and bring them back to September levels, JPMorgan estimates. “The recent equity market correction and bond rally is consistent with the rebalancing hypothesis,” said Vincent Deluard, a macro strategist at StoneX, who projects that some of the rebalancing has already happened this week. (BBG). Bigger Was Better in 2022: Global Hedge-Fund Industry Sees Split (BBG).
• The stock market is sliding because investors now fear recession more than inflation (MarketWatch). Hedge Fund Manager Netting 29% Gain Sees S&P 500 Going Nowhere — Harnisch at Peconic sees index trapped between 3,500 and 4,400 in the next 18 to 36 months (BBG). Stock Swings Will Last Into 2023, Edward Jones’ Mahajan Says — As hikes work on lag, economic softness emerges in first half, Bear markets tend to be followed by longer, stronger bull runs (BBG).
• Morgan Stanley is bullish on this Big Tech stock [AAPL] it says could rally by 64% — The bank has given it a base case price target of $175 and a bull case price target of $235, which implies potential upside of around 22% and 64%, respectively (CNBC). Apple Suppliers Accelerate Buildup Outside China, Analysts Say — India, Vietnam emerge as alternative assembly hubs after China, Effort began before Covid-19 hit world’s №1 electronics hub (BBG). Cathie Wood Boosts Tesla, Coinbase Holdings on Dip-Buying Binge — ETFs buy nearly 75,000 shares of Tesla and 297,000 of Coinbase, Ark funds have been buying both stocks since October (BBG).
• Binance’s native BNB token plunges to lowest since July as concerns mount about withdrawals, FTX ties (CNBC). Auditing firm Mazars pauses work for crypto clients (Reuters). Sam Bankman-Fried to Drop Fight Against US Extradition (BBG).

US

• Price Pressures Ease in U.S. and Europe, Businesses Say — Global economy continues to face the risk of a recession as demand weakens and business activity declines (WSJ). Retail Sales, Manufacturing Declines Point to Slowing Economy — Shoppers spent less in November on holiday-related items and autos as Fed continued raising rates (WSJ). Jobless Claims Fell by 20,000 Last Week — Proxy for layoffs hits lowest level since late September amid still-tight labor market (WSJ). Goldman Sachs Plans Thousands of Layoffs, Expects to Eliminate Some Bonuses — The bank added staff aggressively during the pandemic. Now, amid a deal-making slump, it is planning cutbacks (WSJ).
• U.S. Inflation Eased in November, CPI Report Shows — Price increases have moderated this fall from four-decade high earlier in year (WSJ). Slowing Inflation Could Intensify Fed Debate Over When to Stop Raising Rates — Officials are on track for a half-percentage-point interest-rate increase this week (WSJ). US Short-Term Inflation Expectations Retreat, Boosting Sentiment — year-ahead price outlook dropped to 4.9% in late November, University of Michigan sentiment index improved to 56.8 (BBG). Jerome Powell’s Grim Inflation Outlook Is at Odds With Markets — Fed brushes aside recent good news on prices, revising interest-rate path up and economic growth down (WSJ). Investors still expect the Fed to lower interest rates in 2023 (MarketWatch).
• White House Begins Plan to Refill US Emergency Oil Reserves — The purchase starting with 3 million barrels for February delivery follows a historic 180 million barrel release of oil from the SPR (BBG). Goldman Says Commodities Will Gain 43% in 2023 as Supply Shortages Bite — Bank forecasts raw materials will be best-performing assets, High prices are yet to lead to more supply, say analysts (BBG). Canada Economy Quickens, Upending Forecasts for Tepid Growth — Retail sales get boost in October; factory sales rise 2%, data suggest business activity and household spending remain resilient in the face of high inflation and rising interest rates (BBG).

EUROPE

• ECB, BOE Raise Rates by Half a Percentage Point — The SNB made a similar move on a busy day for Europe’s most influential central banks (WSJ). JPMorgan lifts ECB ‘terminal’ rate forecast to 3.25% from 2.50% (Reuters). Debt-laden Italy lashes out at ‘crazy’ ECB after rate hike (Reuters). Pound Tumbles, Gilts Advance After BOE’s ‘Dovish’ Hike — Currency falls 1.8% vs dollar, five-year bonds lead gains, Sterling could extend losses, Credit Agricole’s Marinov says (BBG).
• Europe’s Top Two Economies Contract as Bloc Already in Recession — French composite PMI fell to a 21-month low in November, German activity gauge improves, still in negative territory (BBG). France Faces Higher Recession Risk as German Downturn Eases — French composite PMI unexpectedly declines on service sector, German activity points to shallower recession than feared (BBG).
• Euro-Area Consumer Confidence Increases to 5-Month High — still “remains at a very low level, well below its long-term average.” (BBG). German Business Outlook Improves on Hope of Milder Recession — Ifo expectations rise to 80 in November; economists saw 77, Downturn may be ‘less severe’ than many expected (BBG). France’s Restart of Nuclear Reactors Eases Blackout Fears — Five reactors brought online in past week nudge country clear of threshold for risk of power cut (WSJ).
• Britain’s Rail Workers Strike, Kicking Off Once in a Generation Public Sector Labor Action (Time). BA and Virgin halt ticket sales to Heathrow on strike days (BBC). U.K. Nurses Stage Biggest Ever Strike as Health System Strains (WSJ). Amazon workers will go on formal strike for the first time in the UK (CNBC). German union warns Amazon of rolling pre-Christmas strikes (Reuters). Black Friday fails to lift sales in November — Retail sales saw a surprise fall last month after Black Friday failed to give its expected boost to online shopping (BBC).

ASIA

• Beijing Crematorium’s Death Surge Points to Rising Covid Toll in China (WSJ). Reports of Beijing Covid Deaths Fuel Speculation China Covering Up Data — Crematorium staff, family say people dying of virus in capital, China is now downplaying Covid’s risks after surprise reversal (BBG). Covid outbreak throws Chinese factories and supply chains into chaos — ‘Closed loop’ system to protect employees and production likely to be overwhelmed (FT). New Covid model predicts over 1 million deaths in China through 2023 (CNBC).
• China Ramps Up Liquidity Injection Amid Bond Market Turmoil — PBOC net injects 150 billion yuan via medium-term loans, Latest liquidity support seen easing money-market stress (BBG). China Dollar Bonds Show Least Stress Since Evergrande Meltdown — Chinese offshore dollar bonds have in recent days extended one of their biggest rallies ever, after returning 6.5% in November to end 14 months of losses. Developer-dominated junk notes surged 20% last month, the biggest advance in over a decade (BBG). China May Have Created Trap for Itself With African Lending — China accounts for 12% of Africa’s $696 billion external debt, Much of African continent is seen heading toward debt distress (BBG).
• China Shows More Pragmatism — And Less Ideology — on Economy — Easing Covid-19 protocols and promoting property reflect a new growth push under President Xi Jinping (WSJ). China’s Leaders Plot Pivot Back Toward Boosting Economy — Senior officials are setting a robust GDP growth target of more than 5% for next year as they loosen Covid rules and de-emphasize ideology (WSJ). China’s 2023 Monetary Stimulus to at Least Match 2022: Official (BBG). China Calls Boosting Domestic Demand Top Economic Priority — Central Economic Work Conference met as Covid Zero dropped, Support for private sector stronger than in previous years (BBG).
• Joe Tsai Taps Morgan Stanley to Sell $260 Million Alibaba Stake — The Alibaba co-founder has filed to offload about 8% of his stake in the Chinese e-commerce giant (BBG). China’s New Iron Ore Buyer Sets Off Biggest Shakeup in Years — State buyer to take over some contracting for top steelmakers, CMRG aiming for discounts with unprecedented negotiating power (BBG). Foxconn To Sell Stake in China Chip Giant as Taiwan Reviews Deal — Taiwan company invested in Tsinghua Unigroup indirectly, Taipei government opposed the investment, report said (BBG).
• Stock Strategists Predict Asia Market Rally After Terrible 2022 — Asian equities expected to fare better than the US next year, China, South Korea and Taiwan are seen outperforming in 2023 (BBG). China’s re-opening to lift Asia equity capital market volumes from 3-year lows (Reuters). China’s U.S. audit capitulation is rare win-win — Beijing had granted it “unprecedented” access to double-check the onshore audits of New York-listed Chinese firms, a surrender by Beijing in a battle spanning over a decade (Reuters). Asia’s Best Currency Performer Won Seen as Buy Again Early 2023 — Deutsche Bank’s Choi says won may rise to 1,100 per dollar, Buy won when it weakens to 1,350–1,380 per dollar, Choi says (BBG). ‘Mother of All Pivots’ in 2023 Spurs Top Asia Fund to Eye Yen — Yen will be ‘main vehicle’ to benefit when BOJ tweaks policy, Pivot risks rising with report BOJ eyeing policy review (BBG). Wretched Year for Yen Set to Cut Wealth in Japan Below Neighbors — JCER says South Korea GDP per capita to overtake Japan in 2023, Yen is main factor, but longer term trend a cause for concern (BBG). Japan scraps pacifist postwar defence strategy to counter China threat — Tokyo to acquire counter-strike capabilities under national security strategy that seeks assertive regional role (FT).

EQUITIES

Global equities are on a pullback, but this does come after a strong rally off the October lows — MSCI World (ACWI) almost 20% off the lows and 22% for the ex-US index (ACWX).

The broad pullback was mostly driven by US equities unable to challenge to the technically strong resistance level/trendline, but they are however back to a reasonably strong support area which has seen major pivots since May.

Developed and Emerging market indices have also pulled back to technically significant levels and looking far less bleak that US charts suggests.

Looking at US relative sector performance — Consumer Cyclicals vs Staples (XLY/XLP) and Tech vs Healthcare (XLK/XLV) and using pre-covid and crash levels as a reference point, the ratios look to be around a point where the under-peformance in the high-betas may stall.

Regional Banks (KRE), the worst hit of the US industry ETF’s last week (-5.16%) and so far this month (-11.75%) has stalled at the mid-2022 lows with a Doji print on Friday. Semiconductors (SOXX), also deserving attention given it’s strong sensitivities to the global demand, supply chains, and geopol tensions between US, China and Taiwan, also printed a Doji last week. A bullish candle (to complete a morning star pattern) to start the week would in be a fairly strong signal that the market will consolidate or even rally, into year-end.

RATES

US nominal yields (lhs) finished lower wk/wk after CPI report confirmed inflation is slowing, but sending real yields (rhs) higher…

as inflation swaps continued to slide.

Interestingly, this brings inflation breakevens back to levels seen at the beginning of Q3 and where equity markets found a bottom soon after.

COMMODITIES

Commodity prices appears to be broadly stabilizing :

• Agriculturals (Green) consolidating in the middle of its 1month range,
• Energy (Red) rallied as much as 10% off the lows,
• Precious metals (Yellow) consolidating at the high end as it benefited from the slide in yields,
• Industrial metals (Orange) consolidating lower after the China reopening rally.

CURRENCIES

Some notable observations in fx:

Weekly

• USD and JPY bounce last week as broad risk pulled back.
• EUR rally meets resistance at the Jan’22 high, and CHF also meeting some strong resistance at recent range highs.
• Bearish weekly engulfing on GBP and AUD.
• Weekly Doji prints on CAD and NZD.

• EUR and GBP 25delta 1month risk reversals rolled over last week,

• ECB’s hawkish 50bps hike has sent the US/German 2yr yield spread higher in favour of the EUR, but
• rapid hikes likely to create more stresses in debt-laden countries such as Italy which has put the BTP-Bund spread back on the widening path, and therefore a headwind to a further EUR rally.

TRADE VIEWS

US equity index charts are leaning bearish but there are some signs under the hood that the selling may fizzle out. I remain mildly constructive on equities into year-end, granted a Santa Rally this year would shape up to be much more muted than history. In FX, Short EUR GBP NZD vs. Long USD and CAD are themes I’m focused on heading into the new-year.

Wish you a warm and safe week ahead of the x’mas weekend.