Pictet North America Advisors

2021 Weekly Views — October 11

Pictet North America Advisors 2021 Weekly Views — October 11
Pictet North America Advisors

2021 Weekly Views — October 11

Pictet North America Advisors 2021 Weekly Views — October 11

Market update

Earnings kick off

The S&P 500 closed the week at 4,391.34, +0.79% higher. The Dow Jones closed at 34,746.25, +1.22%, with the Nasdaq higher by +0.09%. The volatility index VIX closed the week at 18.77 down from 21.15. The Euro Stoxx 600 gained +0.97%.

The 10-year UST closed at 1.61% up from 1.46% a week before. The yield curve steepened with the yield spread between the 3-month and 10-year UST at +154bps. Corporate Bond spreads: Investment Grade remained unchanged at 121bps and High Yield widened 2bps at 386bps. German 10-year Bunds yield closed at -0.15% up from -0.22% a week ago. In Europe, Corporate Investment Grade spreads widened 2bps at 98bps and High Yield widened 18bps at 329bps.

The US Dollar Index (DXY) appreciated +0.03% last week and closed at 94.07. The Euro closed at 1.1569 (-0.23% weekly); the Yen depreciated -1.07%, closing at 112.24 and the Swiss Franc appreciated +0.39%, closing at 0.9275. Gold closed at $1,757.13 depreciating -0.22%. Oil was up with Brent closing at $82.39 (+3.92%) and WTI at $79.35 (+4.57%).


Debt ceiling
Senate Majority Leader Schumer and GOP counterpart McConnell sealed a deal to raise the statutory debt ceiling by $480bn. The amount would support the treasury to meet obligations through December 3rd, matching the same day that the current temporary government spending bill runs out. While it averts an immediate crisis, it rests assured that the bipartisan battle over the debt will be again on the calendar just as Congress confronts the deadline to keep the government open. At that time, Democrats will likely try to get an infrastructure bill as well as a tax and spending plan through the House and Senate. If we add the decision on Fed’s Chair Powell reappointment, it will be an eventful end of the year.

Jobs report
The US economy added 194k jobs in September, below consensus 500k forecast. Notable job gains occurred in leisure and hospitality, in professional and business services, in retail trade, and in transportation and warehousing. Employment declined in public education over the month (employment decreased by 144k in local government education and by 17k in state government education). August was revised higher, from 235k to 366k, putting the two-month average at ~280k. The unemployment rate dropped to 4.8% (vs. consensus of 5.1% and down from 5.2% in August), while the participation rate fell to 61.6% vs. consensus of 61.7%. Wages rose 0.6% m-o-m, above +0.4% consensus. The workweek inched up to 34.8 hours (vs. consensus of 34.7 hours). 

Central banks
The Reserve Bank of New Zealand announced a rate hike of 25bps to 0.5%, the first in seven years. Economists expect the benchmark rate to reach 1.50% by the end of 2022 and 1.75% by the end of 2023, according to a Reuters poll. Poland’s Central Bank unexpectedly raised rates by 40bps to 0.50% for the first time in 9 years. The move follows Czech Republic, Hungary and Romania. Inflation in Poland hit 5.8% y-o-y in Sept., its highest rate for 20 years.

Economic data
The revised Euro Area composite PMI came in at 56.2, in line with the Flash release but with input prices rising the fastest on record. In the US, ISM Non-Manufacturing PMI came out at 61.9 vs. 60.0 forecast, while the composite PMI came out at 55. In the UK the Services PMI came out stronger than forecast at 55.4 vs. 54.6. China’s Sept. Caixin services PMI was strong, coming in at 53.4 (ahead expectations at 49.2 and up from 46.7 in Aug.). German industrial production fell by 4% in August m-o-m, with the production of autos declining by a significant 17.5%, underlining the supply difficulties facing the industry. Overall, industrial output in August was 9% below pre-pandemic levels. Industrial production in France was more solid, rising by 1% m-o-m in August, but was still 3.9% below pre-pandemic levels.


Q3 earnings season
The Q3 earnings season begins this week with S&P 500 companies looking to match the 24.1% profit growth projected for the quarter. An increase in profit would be the fifth quarter in a row and rank as the longest streak since 2005. The Financial sector will kick off the season with BlackRock and JPMorgan Chase on Wednesday; Bank of America, Citigroup, Morgan Stanley and U.S. Bancorp on Thursday and Goldman Sachs and PNC Bank on Friday. Other notable expected announcements will come from Fastenal, Delta Air Lines, Taiwan Semiconductor, UnitedHealth, Walgreen or Alcoa.

State of the market
The equity market sell-off that started in Sept. extended into Oct., making this correction in line with the average figure, both in terms of magnitude (5%) and length (about 1 month). 10-Yr US treasuries have not been helpful for protecting portfolios in 2021 in the face of equity drawdowns (inflation pressures and expected Fed monetary policy tapering). The market correction started at a time when bullishness had already started to reverse, both among institutional and private investors. Investors had already put protection in place after robust year-to-date returns. Volatility has so far remained quiet. Earnings revisions have been curbed ahead of the reporting season. Europe is doing slightly better than the US and Japan. In the US, earnings upgrades have been driven by commodity-related sectors. 2022 earnings growth is expected to range between 7-9% in DM equities. In terms of guidance, Q3 has been positive and better than average, mainly helped by communication services, industrials and IT. On the other hand, the amount of negative guidance has significantly increased over the past five quarters however, it is still far below average.

Gas prices
Gas futures in Europe eased from €160 on Wednesday to €102 at the end of the week after Vladimir Putin commented “let’s think through possibly increasing supply in the market”. Once Gazprom replenishes domestic storage, supply to Europe should jump significantly next month. European gas storage is slowly increasing, largely due to an increase in flows from Norway. Regarding Nord Stream II, the pipeline is completed and now requires approval from the authorities, expected to be completed by May 2022 at the latest.

What to watch

Monday:  US Columbus Day; China Foreign Direct Investment YTD (Sept.)
Tuesday:  IMF World Economic Outlook; Europe ZEW Survey (Oct.); US House to vote on Senate-passed measure extending debt ceiling
Wednesday:  US CPI inflation (Sept.); Germany CPI and HICP inflation (Sept.); China Trade Balance (Sept.); Europe Industrial Production (Aug.)
Thursday:  Fed’s William Speech; China CPI & PPI (Sept.); US PPI (Sept.); US Initial Jobless Claims
Friday:  US & China Retail Sales (Sept.); US University of Michigan’s consumer sentiment Index (Aug.); European Council Meeting; China NBS Press Conference

Investment team ― Pictet North America Advisors