October 29, 2023

Notable market news this past week (29-Oct-23)

Here is the Skeptivest roundup of the latest market headlines for the week

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📉 US Stocks slumped due to downbeat earnings and PCE price index report

Stocks tanked: On Friday, U.S. stocks predominantly ended in the red, with momentum waning as investors processed a tumultuous week marked by a blend of (1) earnings reports and (2) economic data (the hotly anticipated PCE report) that seemed to favor the "higher interest rates for an extended period" scenario.

• All 3 major market indexes registered steep weekly losses - S&P500 at 4,117 (-2.5%), Nasdaq at 12,643 (-2.6%), DJIA at 32,418 (-2.1%)
• The dismal performance of US equities coincides with Bitcoin's 14% weekly gain. Charlie Morris, founder of investment advisory firm ByteTree said on Friday that "Big tech is expensive, and following underwhelming results this week, the sector no longer grows fast enough to justify premium prices,".

(1) Results from Alphabet and Meta drew the most investor scrutiny as they slipped into a correction:

• Alphabet: Alphabet's cloud computing division posted a profit that fell short of expectations, sparking worries about the company's standing in a market that holds paramount importance for its future. With Google's dominant search business reaching maturity, investors are turning their attention to the cloud unit to drive growth.
• Meta: CFO Susan Li dampened the enthusiasm regarding advertising revenue when she informed analysts that ad spending weakened at the start of the fourth quarter, coinciding with the Hamas attack on Israel. She notes that a similar pattern unfolded at the start of the Ukraine war

(2.1) Release of the Personal Consumption Expenditure reading for Sep...: The Fed's preferred measure of underlying inflation rose 3.4% over last year and 0.4% month-over-month. "Core PCE", which excludes volatile food and energy categories, showed prices rose 0.3% in Sep and 3.7% from the prior year.

(2.2) ...bolstered the likelihood of a hawkish Fed ahead of the FOMC meeting next week: 

• Oxford Economics lead economists, Michael Pearce said that the core PCE figure "reflects the stickiness of core services inflation, which is still too strong to be consistent with inflation falling back to the Fed's 2% target".
• Ian Shepherdson, chief economist at Pantheon Macroeconomics, commented in a client note on Friday that this data doesn't yet meet the criteria for the Fed to declare victory. He anticipates that next week's FOMC meeting will convey a similar message: the decrease in inflation is positive but not conclusive.‍

Note on CPI vs PCE: The CPI measures the change in the out-of-pocket expenditures of all urban households and the PCE index measures the change in goods and services consumed by all households, and nonprofit institutions serving households. Read more here.

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🛢 Oil & Gas megadeals to hopefully break M&A lull

Chevron to acquire Hess: Monday saw Chevron's announcement of a $53b acquisition of energy company Hess, marking the latest major deal in a highly active industry this month. This megadeal is happening amid a significant deals dry spell on Wall Street, one of the most notable in recent memory.

This comes right after ExxonMobil's megadeal: A mere fortnight ago, ExxonMobil disclosed a colossal $60b acquisition of Pioneer Natural Resources, signifying the largest oil and gas transaction in decades.

Implications:

• ‍Revival of M&A spells good news for the global economy: This surge in activity has breathed new life into an M&A sector that had been largely inactive, with deal value dropping by approximately 30% year-to-date. This spells good news for the global economy as it signals investor confidence (hoping sparking more deals) and drives business activities.
• Signal that fossil fuel companies are still here to stay: This signals that energy giants like ExxonMobil/Chevron are not too concerned about the White House’s push to reduce emissions and invest in climate-friendly energy or the International Energy Agency’s prediction of a decline in demand for fossil fuels by 2030.

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☕️ Quick fire happenings to note

🌏 Global macro

• China's 1 trillion yuan sovereign bond issuance: The highest legislative body in China has granted approval for a 1 trillion yuan ($137 billion) issuance of sovereign bonds. This allocation is aimed at aiding the restoration of regions affected by this year's floods and enhancing urban infrastructure to better withstand future calamities. This means the government's headline deficit-to-GDP ratio will increase to 3.8% from 3% this year. However, this 0.8% GDP budget boost pales in comparison to the magnitude of prior stimulus that China had used during past downturns.
• Robust US growth: The US economy experienced its strongest growth in nearly two years last quarter, propelled by surging consumer spending. The preliminary government estimate reported a 4.9% annualized GDP growth rate, more than double the second-quarter pace, with personal spending surging by 4%, its most significant increase since 2021. The sustainability of this trend will be assessed in the coming months.
• US Treasury Yields looking attractive: Janet Yellen, the US Treasury Secretary, contends that the recent rise in longer-term yields is a result of a robust US economy rather than the upswing in government borrowing. However, critics have highlighted the substantial growth in the federal deficit as a significant factor contributing to the surge in yields. Regardless, the increase in yields to levels not witnessed since the financial crisis is prompting owning longer-dated bonds to look a lot more attractive than other asset classes.
• Bill Ackman ends bet against US Treasuries: Billionaire hedge fund manager Bill Ackman has closed his Treasury short position (placed in Aug) after making a profit of about $200m. Ackman stated that he sees too much global risk to maintain a short position on bonds at their current long-term rates. He also believes that the economy is slowing down more rapidly than recent data may indicate.
• A new Speaker takes the helm: On the fourth attempt, Republicans united and unanimously elected Trump aligned Louisianan Rep. Mike Johnson as the Speaker of the House. Mike Johnson will need to handle President Biden's proposal for a $106b funding package, which encompasses allocations for both Ukraine and Israel, as well as another one for $56b dedicated to addressing domestic priorities.
• ‍ECB holds interest rates: ECB President Christine Lagarde introduced the first pause in interest rate hikes since June 2022. This provides some respite to the highly indebted Italy, which country's credit rating may soon be downgraded to junk.
• Vanguard not pursuing a bitcoin ETF: “Just like we don’t use gold as an asset class for our clients. It’s not that people can’t invest in there. We look at asset classes as what belongs in a long-term portfolio, what has intrinsic values, what has cash flows to it. And those are the asset classes we steer people towards,” - CEO Tim Buckley

🏦 Individual stocks

• ‍S-REITs mostly reported decline in distributions due to higher interest rates: Mapletree Industrial Trust reported a 1.2% decline in DPU (for Q2 FY23/24) compared to previous year. Frasers Centrepoint Trust reported a 1.2% drop in DPU (for 2H FY2023) compared to the previous year. More S-REITs earnings coming up in the following week.
• Amazon stock price surges: Amazon.com Inc. announced revenue and profits that exceeded the forecasts of analysts, thanks to increased sales in its retail division and cost reduction efforts. While Amazon Web Services' 3Q revenue slightly missed expectations, CEO Andy Jassy noted that the business is showing signs of stabilization. Newly secured contracts recently coupled with growing demand for generative AI is expected to be strong growth tailwinds for the division. Following his remarks on Thursday, the stock surged by approximately 5% in after-hours trading.

🇸🇬 Singapore related

• Q3: Layoffs rise, but job market grows in Singapore: Retrenchments increased by 900, going from 3,200 in Q2 to 4,100 in Q3, with the majority of this rise attributed to the wholesale trade sector. However, the Manpower Ministry reported that the overall unemployment rate remained mostly consistent at 2% in Sep - suggesting that retrenched workers were able to find new employment quickly. Also, labour market continued to expand for the eighth straight quarter.
• Sep condo resale prices rise, volume drops 18.4% amid Hungry Ghost month: Resale prices increased by 0.8% in Sep, a slower growth rate compared to Aug's 1% rise. Resale transactions decreased by 18.4%, with approximately 738 units sold in Sep, down from 905 units in Aug. Property analysts attribute this fall to the lunar seventh month (hungry ghost month) and increasingly cautious sentiments among foreign buyers.

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