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Market Insights – November 14, 2022

Each week, our Investment team shares its market views with you !

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Essentials

Buoyed by the soft US dollar last week, gold rebounded sharply and is now trading above USD 1,750 an ounce. The dollar will continue to drive gold price trends going forward. Assuming that the dollar’s weakness is temporary – and that it doesn’t enter a sustained period of depreciation – we think gold prices are likely to consolidate.

Crypto currencies had a tough week. FTX’s bankruptcy once again sparked fears over counterparties’ resilience. Bitcoin has broken below its USD 19,000 support level, with its next support at around USD 12,500.

After all the rumours in early November, the Chinese government finally announced that it would ease its zero-COVID measures, signalling a possible end to the policy in 2023. This comes in addition to the stimulus measures brought in to support property developers and the handshake between Presidents Biden and Xi in Bali. These developments have boosted investor sentiment and are helping to drive the strong rebound in Asian markets so far this month.

US inflation is slowing at last

US consumer prices rose by much less than expected in October – something that hasn’t happened for a long time. Admittedly, at 7.7%, the year-on-year increase is still very high, but inflation appears to have peaked in June, when it hit 9.1% year on year, and the slowdown is now well under way. What’s reassuring is that inflation is now easing across the board: first the prices of goods began to rise at a slower pace, and now inflation in the services sector has at last started to ease as well. Only rents are still very much climbing. But that trend should soon be reversed, since US property prices are already starting to fall in the wake of the sharp rise in mortgage rates.

These developments should provide some reassurance for the US Federal Reserve (Fed). But it won’t be fully at ease until the labour market starts to loosen, which would take the upward pressure off wages and reduce the risk of a wage-price spiral. US monetary policy tightening is by no means over, but the Fed will soon slow the pace of that tightening, maybe as early as at its next meeting on 14 December. It now seems less likely that the Fed will commit a major monetary policy blunder by reining in lending to such an extent that the US economy plunges into recession.

Our soft landing scenario is looking increasingly plausible, and we’re starting to see the expected effects on the markets. Last week, long-term yields dropped sharply both in the US and elsewhere in the world, and the US stock market rallied. Growth stocks saw particularly strong gains, with the Nasdaq up over 8%. Investors’ renewed confidence spread to most other global stock markets and lifted all risk assets, including high yield corporates. The US dollar appears to be the main victim of this slowdown in inflation. It may now have peaked for this cycle, since the Fed is expected to change course or pause its tightening in the first quarter of 2023. However, it’s still too early to say for sure that the dollar will lose ground and to reduce it in portfolios.

 

Europe’s stock markets outperform

Unsurprisingly, the consensus remains very bearish on both Europe’s economy and its stock markets. This pessimism is driven by the war in Ukraine, record high inflation and the European Central Bank’s aggressive rate hikes at a time when the region’s economy is slipping into recession. This has led to the longest phase of equity fund outflows in recent years.

Yet, despite all these headwinds, European stock markets have rallied recently and are even outperforming, which may seem counterintuitive. Investors had no doubt positioned themselves for a major shock followed by a brutal recession – a worst-case scenario that has not materialised. Instead, natural gas reserves have been replenished faster than expected and gas prices have fallen 70% since peaking at the end of August, which is a relief for the manufacturing sector. Consumers have also benefited from the measures put in place by governments to protect their purchasing power.

Data on real economic activity, such as industrial output and consumer spending, have so far held up better than expected. European stock markets have also outperformed thanks to their strong earnings season, particularly among cyclical companies. They were also less affected by the disappointing earnings from tech companies, which make up a smaller proportion of Europe’s stock markets than those in the US. Against this backdrop, we think it’s too early to change our contrarian positive stance on Europe, especially since European equities remain underrepresented in global portfolios.

 

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