Head of Equity Strategy
Summary: US equities rose yesterday to the highest close since 9 September despite US leading indicators for October delivered the biggest m/m decline since March 2009, if we exclude the pandemic, suggesting the US economy is deteriorating and getting closer to a recession. This is adding more evidence to our prediction that corporate earnings will fall next year making 2023 another troublesome year for equities and investors.
An echo from the past
US leading indicators for October came out yesterday at -0.8% m/m which is worst m/m change, excluding the pandemic, since March 2009 when the global economy was stuck in a global credit and banking crisis. Stretching out the perspective and smoothing the indicators, the 6-month average sits at the same level as in December 2007 when the US economy officially entered a recession that eventually continued and amplified into the Great Financial Crisis. As we recently wrote in one of our equity notes, the Eurocoin Growth Indicator (tracking real time GDP in the Eurozone) is already indicating that the European economy is in a recession, and now the US leading indicators are suggesting the US economy is close to being in a recession.
The difficulty in these type of analyses is that recession dynamics change from time to time because the global economy is a complex system. This means that leading indicators fitting prior recessions well will intrinsically have difficulties getting the next recession right. In any case, we can say the economies in the US and Europe are slowing down rapidly due to the interest rate shock, and unless China pulls out a white rabbit successfully kickstarting their economy it will be difficult to avoid a recession. The next question is then what type of recession we get. Is it going to be shallow and short-lived, or is it going to be deeper and longer? Regardless of the severity of the recession the declining leading indicators are adding evidence to our prediction that corporate earnings will fall next year making 2023 another troublesome year for equities and investors.
Have the bears lost interest?
S&P 500 futures rallied 1.3% yesterday on no significant new news and the theme basket gainers were predominantly the best performing baskets over the past year if we exclude semiconductors. In other words, it was a momentum driven session yesterday and took the S&P 500 futures to the highest level since 9 September. As we have discussed in our Saxo Market Call podcast the bears are sitting on solid gains for the year if they have been long energy, short bonds, and equities, and as such that there is little incentive for the bears to take a lot of risk in last five weeks of the year. This could lean the sentiment in favour of the bulls and could push equities higher despite the economic picture looks increasingly more negative as discussed above.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
