Are Investors Unreasonably Overoptimistic?

Are Investors Unreasonably Overoptimistic?
  • Risk sentiment improved further in holiday-shortened week
  • European investors shrug off macro risks
  • Crypto selling halted, at least for now
  • Important data for the coming week
  • Key corporate earnings for the coming week

S&P 500   12.32% QTD and  15.50% YTD
Nasdaq 100   7.91% QTD and  27.46% YTD
Dow Jones Industrial Average   19.04% QTD and  5.90% YTD
NYSE   14.92% QTD and  9.80% YTD 

Stoxx 600   13.14% QTD and  10.04% YTD
DAX   19.09% QTD and  9.17% YTD
CAC 40   15.91% QTD and  6.63% YTD 
IBEX35   13.09% QTD and  4.39% YTD
FTSE MIB   19.09% QTD and  10.08% YTD
FTSE 100   9.48% QTD and  1.04% YTD

MSCI World Index   11.06% QTD and  15.23% YTD
Bitcoin   19.28% MTD and  62.21% YTD
Ethereum   25.00% MTD and  67.90% YTD

Note: As of 6pm EST 23 November 2022

Risk sentiment improved further in this holiday-shortened week for US investors. Ahead of Thanksgiving holiday, US stock indices closed Wednesday near their session highs, extending their gains from the day before. Investors have been thankful for signs of slowing inflation, boosting hopes that the Fed is going to stop raising interest rates soon. In addition, data has deteriorated, with some macro pointers raising recession alarm bells – and in turn, helping to reduce the upside risks of inflation for 2023. So far, growth worries have not dented investors’ insatiable appetite for risk. But as the quarter-to-date gains continue to eat into the year-to-date losses, are investors being too optimistic? Will the selling resume again or have we seen the bottom?

The peak inflation narrative has been the main macro theme driving the financial markets. Investors have chosen to ignore – for now, anyway – alarming signs about a slowing US economy. The Eurozone and Chinese economies are already on their knees, which is something that has undermined crude oil. This may come back to haunt investors in the days and weeks ahead and hurt energy stocks in particular.

After front-loading interest rate hikes, the market is now expecting the Fed to slow its rate increases from the December meeting onwards, even if comments from several Fed officials have remained more or less the same i.e., that they remain determined to bring inflation under control, even if their actions – rate increases – cost the economy a recession. However, even by the Fed’s own hawkish standards, there appears to be an agreement among the FOMC that the pace of rate hikes will need to slow down, something which was highlighted at the central bank’s last policy setting on November 1-2. According to the minutes of that meeting released on Wednesday, a “substantial majority” of officials supported slowing down the pace of interest rate rises soon. But a small number of these officials underscored the need for a higher terminal rate. However, with both CPI and PPI measures of inflation having since come in well below expectations, it is likely that those hawks will be less vocal at the December meeting.

US Jobless figures, increase in unemployment benefit claims sign of cooling labour market. US stock and bond markets are closed for the Thanksgiving holiday on Thursday, but futures will remain open.

The positive risk tone and peak inflation narrative have also been reflected in the bond and FX markets. The US 10-year yields have fallen to 3.69% from a peak of 4.33% just over a month ago. Correspondingly, the Dollar Index has slumped over 7% from its recent multi-decade highs. The GBP has been a major beneficiary of a weaker US dollar, with the cable breaking the 1.20 handle again.

In addition, the greenback has also been pressured because of soft US macro data, highlighting recession risks. The latest PMI data revealed business activity in the US continued to contract, while the weekly jobless claims data revealed people are seeking more unemployment benefits than expected, in a sign of a cooling labour market.

European investors shrug off macro risks. European stocks have not missed out on the rally, nor has the Euro, despite growth concerns over China and double-digit inflation in the Eurozone providing a major risk to the economic outlook. The latest data from Europe continued to paint a grim picture this week. The manufacturing and services PMIs for UK, France, Germany and Eurozone all remained in the contraction territory. However, they still showed some improvement, even if from a very low base. This was enough to keep the bulls happy for now, as investors shrugged off concerns that economic activity across Europe remains rooted deeply in negative territory. Unlike the US, inflation remains above 10% both in the UK and Eurozone. The soaring cost of living and rising interest rates are hurting consumer spending. Uncertainty remains elevated. German manufacturers reported another sharp decline in new orders. European Central Bank Vice-President Luis de Guindos warned that the Eurozone will likely show negative growth rates in the fourth quarter.

Crypto selling halted, at least for now. Bitcoin and Ethereum both staged a two-day rally along with stock markets ahead of Thanksgiving holiday, as bond yields continued to dip. It remains to be seen whether investors’ latest attempt to buy the dip will have any lasting impact on prices, given the elevated levels of uncertainty over the sector following the FTX fallout. Bitcoin dipped below $15,500 on Monday, briefly breaking the low it had formed earlier in the month, before rebounding towards $16,500. Just a year ago, it had hit an all-time high of $69,000. What a difference a year makes! But is the worst of the selling over? In the event of further improvement in risk appetite across the financial markets, we would expect to see crypto prices stabilise. While there’s a lot of technical damage which needs to be repaired, there is a chance that this latest recovery turns into a full-on rally. Stock markets bottomed out last month when macro concerns were at the peak. As well as crypto prices being significantly inexpensive, the other good news is that prices are also significantly oversold. If you liked Bitcoin at over $60K a year ago, you would love it at under $20K now. So, we could yet see investors being encouraged to take advantage of the latest crash.      

Key data to look out for this coming week

Friday: German Final GDP and GfK Consumer Climate.
Monday: ECB President Lagarde Speech; German Retail Sales and Import Prices.
Tuesday: German and Spanish CPI estimates.
Wednesday: Eurozone CPI Flash Estimate; German Unemployment Change, and French consumer spending and GDP.
Thursday: Final Eurozone Manufacturing PMI.

Monday: Nationwide HPI and CBI Realised Sales.
Tuesday: Consumer Credit data and Mortgage Approvals data.
Wednesday: Nationwide Housing Prices and British Retail Consortium Shop Price Index.
Thursday: S&P Global/CIPS Manufacturing PMI.

Monday: Dallas Fed Manufacturing Business Index.
Tuesday: Consumer Confidence data, Housing Price Index, Johnson Redbook Index of same store sales, and S&P/Case-Shiller Home Price Indices.
Wednesday: ADP Employment Change, Core Personal Consumption Expenditures, Annualised GDP, GDP Price Index, Chicago Purchasing Managers' Index, JOLTS Job Openings, Pending Home Sales data, Fed Beige Book and speech by Fed Chairman Jerome Powell.
Thursday: Counting Jobless Claims data, Initial Jobless Claims data, Core Personal Consumption Expenditures - Price Index, Personal Income data, S&P Global Manufacturing PMI, ISM Manufacturing Employment Index, ISM Manufacturing New Orders Index, ISM Manufacturing PMI, and ISM Manufacturing Prices Paid.

Upcoming Corporate Earning Reports

Friday: Grupo Aval Acciones y ValoresLightInTheBox HoldingPiedmont Lithium
Monday: PinduoduoArrowhead PharmaceuticalsAzek Company
Tuesday: IntuitWorkdayCrowdStrikeHewlett Packard Enterprise CompanyNetAppWiseBilibiliEasyJet
Wednesday: SalesforceRoyal Bank Of CanadaSynopsysHormel FoodsBAE SystemsDiageoCapita
Thursday: Dollar GeneralKrogerToronto Dominion BankBank Of MontrealUlta BeautyZscalerVeeva Systems

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