The US bond yields rebounded, and the equity rally slowed on Monday. The US 10-year rebound from last Friday's low, and the S&P 500 consolidate gains near three-week highs. There are divergent opinions regarding whether last week’s risk rally is on sufficiently solid ground to extend into a Santa rally, or it would simply fade away. And it all depends on what matters the most for investors. The softening Federal Reserve (Fed) and other central bank expectations and falling sovereign yields are positive for stock valuations, but the chatter of potentially higher-for-longer rates, growing signs of a slowing global economy and the rising recession odds don’t offer a bright outlook for equities into the year-end. Seasonally speaking, November and December are known to be good months for the S&P 500 stocks. In the past, the S&P 500 stocks gained, on average, 1.8% in November and 0.9% in December. But this year, the picture is overshadowed by a lot of weak guidance and revenue warnings.
The chatter of weak demand and profit warnings are not great for equities but the worst news would be sticky inflation despite slowing growth and a persistently long period of high interest rates. For now, the Fed is perceived as being ‘done’ with interest rate hikes. But Powell is due to speak this week and he will probably leave the door open for a rate hike otherwise he knows that all the past 1.5-year efforts will be instantaneously thrown out of the window with everyone rushing to US treasuries – which would pull the yields lower and loosen the financial conditions and eventually boost growth and inflation. This is something the Fed doesn’t want.
And despite a series of no-rate hike news that we received over the past few weeks from major central banks including the Fed, the ECB and the BoE, the Reserve Bank of Australia (RBA) raised its rates by 25bp, as broadly expected, today. The RBA hike came as a sour reminder that there is no rule that says that a bank can’t hike rates after pausing for four meetings. Interestingly, the AUD/USD fell after the decision, along with the Australian stock markets. Today’s rate hike revived fears of economic slowdown more than appetite for higher Aussie yields – while a broad-based recovery in the US dollar and weak Chinese trade data certainly didn’t help.
Speaking of Weakness
The Chinese exports which are a good gauge of global economic health, are down for the 6th consecutive month and Iranian oil exports fell for the 2nd straight month to 1.43mbpd as demand in Asia weakened. That’s certainly why we haven’t seen oil prices react to the news of escalation tensions in the Middle East and the news that Saudi and Russia will keep their oil production curbs in place during the weekend. The barrel of crude is trading a touch above the $80pb psychological mark this morning. We revise our medium-term outlook for crude oil from neutral to negative. Last week’s persistent selloff despite a broad-based risk rally, oil bulls’ unresponsiveness to normally price-positive geopolitical developments and the fact that the market focus is shifting from supply to demand side hint that a fall below the $80pb is increasingly possible, and a verbal intervention from Saudi or OPEC won’t prevent a deeper decline in the short run. Iran’s implication in the Gaza war could be a game changer but the American crude is now in the medium-term bearish consolidation zone, and will remain downbeat below $81.50, the major 38.2% Fibonacci retracement on this summer’s rally.