Uncertainty Looms Large Next Week

Uncertainty Looms Large Next Week as companies contributing to 48% of the S&P 500’s weighting will release earnings. (Markets+ UK +Oil+ Gold)

US equities were weaker Thursday, S&P down 0.8%. US10yr yields are up 10bps to 4.23%, the highest since June 2008.

The US yield-to-equity correlation is very harmful to stock pickers. It will remain negative as core inflation remains high. The FOMC’s strategic bias is for more rate hikes now and fewer later when fighting inflation and will continue to bite so long as inflation remains sticky.

Central banks may not be even halfway through the intended process. The fed has only just achieved neutral interest rates and, in all probability, will hike to 5% against an r* of 2.5%.

Philadelphia Fed chief Patrick Harker had his turn at the hawk’s rostrum, indicating the fed is likely to raise interest rates above 4% and keep them there while at the same time leaving the door open for more if needed.

The breakout yesterday through the 4% level on the US 10yr held and, in fact, marched higher, ending the day at 4.23. I am unsure how much more the doves can take, as this is likely causing some pain.

Large-quality mega-caps deliver this earning season, so the EPS wipeout remains on hold. But Technology companies are up next, and things could get mighty rocky.

Risky asset uncertainty will loom large next week as companies contributing to 48% of the S&P 500’s weighting will release earnings. In addition, China may release September economic data and Q3 GDP following the conclusion of the party congress. I do not think anyone is optimistic either; hence, the pre-weekend direction of travel lower would make sense.

Gilts little changed as UK PM Truss announced her resignation after 44 days in the role, the shortest tenure of any British PM. A replacement PM could be confirmed as early as Monday, and the FT reports that Rishi Sunak has emerged as an early favourite.

A weekend vote will see the conservatives select 2 finalists, with a replacement due to be announced by 28 October. You would have to expect any successor to be more measured with fiscal policy announcements and better understand market machinations.

Indeed, another eventful day in UK politics proved the primary driver of outright European government bonds. Thursday started with a selloff, given overnight turmoil, then saw a recovery following dovish BoE headlines and a spike in anticipation of Liz Truss’s resignation. However, the lack of an immediate successor disappointed expectations,

Peripheral spreads tightened following surprisingly solid auctions in France and Spain and a rebound in the Italian political climate – almost a shining example of stability compared to the British soap opera.

OIL

With several key Fed members taking turns at the hawk’s pulpit this week arguing for even higher interest rates, it blunted optimism from China’s reduced quarantine hopes. And while several “just in case” trades were likely put on yesterday, this flow has since faded as there have been no follow-up clues as to whether or when China will even marginally loosen the zero-covid policy.

Everyone is pining for a China-reopening-driven commodity boost, but we are not there yet.

Critically, the vulnerability of oil prices is not merely a function of a recessionary outlook, which in itself is a function of monetary tightening. It is also a consequence of system deleveraging as the dash for cash becomes a bigger priority rather than what direction markets are moving.

GOLD

With US 10-year yield sticky above 4%, precious metals continue to trade lower as speculative traders are more than happy to add shorts as US rates go up. Indeed, that is one of the clear-cut trades.

—Stephen Innes