De-Risking into the Weekend?

Friday the 13th 

Ominously, Friday 13th. Israel’s military continues to prepare for its big operation to wipe out the terrorists Hamas. The IDF issued statement telling Gaza City civilians to evacuate to the south for their own safety. “You will be able to return to Gaza City only when another announcement permitting it is made”. The UK will deploy a Royal Navy task group to the eastern Mediterranean and conduct surveillance missions. The US is stepping up diplomacy, hoping to get Arab states to pile pressure on Hamas to release hostages. The US thinks it can block Iran’s access to $6bn in funds it doled out to the regime, currently held in Qatar. Meanwhile three Jewish schools in north London have told parents they won't be opening today, citing safety concerns. Hamas supporters whose loyalty to their adopted nations is at best suspect, at worst outright hostile, taunt Jews and across the West with impunity. 

Stocks Off the Chopping Block? 

Stocks opened pretty well; flat in Europe on Friday after indices trimmed weekly gains during Thursday’s session as the dollar regained some poise and bond yields retraced a bit higher after tumbling in recent days after US consumer prices rose more than expected in the month of September. The FTSE 100 is stable around the 7,650, whilst the DAX started to decline about 0.3% in early trading at 15,380 and the CAC was off a touch just under 7,100.  Anyone want to be short crude this weekend? Could see some de-risking into the weekend given the situation in the MidEast. The funny thing is we could see some haven bid for bonds trim yields further and this could be net positive for stocks. 

Persistent Inflation Not Enough to Hike? 

US CPI inflation rose 3.7% vs 3.6%, but core was down to 4.1% from 4.3%. We saw super-core at +0.6% MoM which was not so great. Yields ticked up and took the dollar with them. Market pricing for a Nov hike remains at about 10%, up a bit at 33% for one in December. Still market is pricing in cuts worth around 75bps next year. Goldman: “We do not expect today’s CPI report to affect the outcome of the November FOMC meeting, for which we expect unchanged policy. Recent commentary by Fed officials has also sent a strong signal that the FOMC is likely to keep the funds rate unchanged.”  

China Stagnating in the Background? 

The 10yr Treasury note yield to 4.70% from around 4.55% before the print. This put some bid into the dollar, with DXY futures bouncing off the 105.30 area to clear 106 where it is this morning. The Nasdaq and S&P 500 both declined by around 0.6% as yields pushed up again, narrowing weekly gains to around 1%. Big banks start reporting today. Overnight Asian shares have tracked broadly lower with soft figures from China. Consumer inflation was flat and producer prices declined more than expected. China’s CPI came in at 0.0% yoy vs forecast 0.2%, PPI fell 2.5% yoy vs f/c -2.4%. Trade data showed exports declined 6.2% yoy vs f/c -7.6%, while imports also fell 6.2%. Meanwhile, president Biden is said to be considering closing a loophole that gives Chinese companies access to US chips through units located overseas.  

Your shooting is good. Do it again. 

BofA: "Take out your Magnificent 7 from S&P 500 this year and index would be 3890 right now. Funnily enough, that’s pretty much where everyone thinks it should be.” The Magnificent 7 stocks are at new high accounting for 30% of S&P 500 market cap and trading 30x PE vs rest of S&P 500 at 16x – they note parallels with Europe’s own luxury Magnificent 7 - LVMH, L'Oreal, Hermes, Dior, Richemont, Kering, Ferrari – which as a collective is now in a bear market. They had traded at 36x whilst rest of Stoxx 600 was at 13x. Since the peak this year, China worries and rates have seen them derate to 25x whilst Stoxx 600 has not derated – what if this happens to the US 7?   

Oil Supply Squeeze? 

On oil shocks they note that given the events of last week crude has “barely moved” and this means “maybe geopolitics don’t spiral, or maybe oil is sending recession signal”. Meanwhile, official EIA data showed US stockpiles rose by more than 10 million barrels last week, the most in eight months. Output hit a record high 13.2mn bpd. Despite this oil prices firmed off the Fib support as the US imposed its first sanctions on the owners of tankers carrying crude priced above the $60 price cap, a move that may see supply squeezed further.