In a speech last week, Fed chair Jerome Powell signaled that high interest rates could last through 2023. This sent the Dow Jones, the S&P 500 and the Nasdaq 100 down between 4% and 5% last week.
It is once again a time of great disappointment for stock markets, after two straight weeks of sharp declines. The economic recession is the elephant in the room: everyone feels it is inevitable but pretends not to see it.
A capitulation market could be making its way: this is the moment when investors' nerves give way. It usually comes after a phase of losses and successive failed rebounds. In fact, for several months now, investor sentiment indicators have remained very low. But paradoxically, there is a gap between these indicators and the real behavior of investors, who are having trouble weaning themselves off stocks. This is due to a combination of factors. The bond market is not a valid hiding place since it is undergoing a historic crash. Investors fear missing out on opportunities, aka FOMO.
Robust macroeconomic indicators are also masking microeconomic disorders. Typically, the resilience of consumption - which is hard to see lasting – and extremely low unemployment or the absence of a major accident on the credit market.
This sum of factors allowed the rebound that took place between mid-June and mid-August. Since then, the wind has died down. During the month of September, what did rich investors do? They moved their money into defensive ETFs and commodity and healthcare stocks. That's according to a small survey of private clients conducted by Bank of America. This clientele is currently 62.2% in stocks, 19.2% in bonds and 11.7% in cash. The American bank also addresses the subject of capitulation in the same document. From its point of view, the current bond crash will have two consequences, the multiplication of credit "events" (understand "defaults") and damage in the investments cherished by investors such as American technology, private equity and being long on the dollar (on this last point, it remains to materialize). "The real capitulation is investors selling what they like and have in their portfolio," BofA points out. However, it says that we should watch for the arrival of negative employment data. By then, the recession will have hit the fan and that should benefit the most cyclical stocks, in anticipation of the next round of economic recovery.
In other news, after the extremely aggressive fiscal measures taken in the United Kingdom in an attempt to compensate for the energy-inflationary chaos, the pound sterling fell to USD 1.035, an unprecedented level for the "cable", one of the most followed currency pairs. The fall is so pronounced that there are rumors of an emergency rate hike by the Bank of England as early as this week, outside the highly policed framework of regular meetings. This is the kind of event that is unlikely to lighten the mood among investors who hate improvisation.
On the week's agenda, there are many public speeches by central bankers who are expected to continue to issue warnings about the ravages of inflation. In case we missed it. There are several important indicators this week, including US durable goods orders and consumer confidence (Tuesday) and August PCE inflation (Friday). In Europe, the focus will be on the preliminary September inflation numbers, which will be announced on Friday.
Economic highlights of the day:
The German Ifo business confidence index and the Chicago Fed activity index are today's main indicators. All the macro agenda here.
The dollar remains strong, trading at EUR 1.0335 and GBP 0.9190. The ounce of gold struggles for direction, at USD 1645. Oil retreats, with North Sea Brent at USD 85.96 per barrel and US WTI light crude at USD 78.65. The yield on 10-year U.S. debt is tightening to 3.74%. The 5-year is at 4.04% and the 2-year at 4.25%. Bitcoin is holding up around USD 19,000.
In corporate news
* Apple announced Monday that its new iPhone 14 would also be produced in India as the company seeks to reduce its dependence on China.
* Amazon on Sunday announced two days of promotions on Oct. 11 and 12 for subscribers to its Prime service in 15 countries.
* Alphabet - Google, Alphabet's main subsidiary, said Monday that network cost sharing demanded by telecom operators was a 10-year-old idea that would affect consumers, and that the U.S. group was already investing millions of dollars in Internet infrastructure.
* Pfizer on Monday submitted to the U.S. Food and Drug Administration (FDA) an application for approval of a booster vaccine for children ages 5 to 11 with its COVID-19 vaccine specifically targeting the Omicron variant of the coronavirus.
* KKR - The consortium led by the U.S. private equity firm withdrew its A$20 billion bid for Australian health care group Ramsay Health Care on Monday due to an impasse in negotiations.
* McDonald's announced on Monday that it would raise the price of its consumer offerings in Japan by about 60 percent to cope with soaring commodity prices and a depreciating yen.
* Intel - The outgoing Italian government of Mario Draghi and Intel have chosen the town of Vigasio in the Veneto region as the preferred site for a new semiconductor plant in the country, two sources close to the matter said.
- Anglo American: JPMorgan increased the price target to 40.00 pounds sterling, from 38.50 pounds and reiterated its overweight rating.
- Aveva: Jefferies lifted the stock's rating to hold from underperform and raised its price target to 32.50 pounds sterling from 19.00 pounds.
- BAE Systems: Jefferies remains Buy with target raised from GBp 960 to GBp 1000.
- BP Plc: J.P. Morgan downgrades to neutral from overweight, targeting GBp 520.
- Chipotle Mexican Grill: Gordon Hasskett adjusts price target to $1,830 from $1,650, maintains buy rating.
- Computacenter: Citigroup upgrades from neutral to buy targeting GBp 2450.
- Costco Wholesale: Raymond James adjusts price target to $560 from $600, keeps outperform rating.
- Fedex: UBS is keeping its Buy rating. The target price is reduced from USD 232 to USD 215.
- Neurocrine Bio: Wells Fargo Securities initiated coverage with a recommendation of equal-weight. PT up 6.3% to $110.
- Planet Fitness: Raymond James upgrades to strong buy from market perform. PT up 25% to $70.
- Sotera Health: KeyBanc downgrades to sector weight from overweight.
- Unilever: Berenberg lifts recommendation to buy from hold, boosts pt to 48 pounds sterling.