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October was much friendlier to the markets than September with volatility decreasing and Bloomberg screens flashing green. It seemed that market participants were tired of inclusive negativity, geopolitical stress, persistent inflation, harsh monetary policies and decided to give themselves some rest. US and European equities rose significantly and bond yields retreated, while dollar index steadied. Still, markets do treat these developments as a necessary pause, cautiously awaiting for more bad news from many possible sources.
Manufacturing activity saw a sharp decline in Eurozone indicating recession in the sector as demand is being dent by the cost of living crisis. S&P Global final manufacturing PMI decreased by two points to 46.4 in October thus reaching the 29-month low. New orders decreased at a rate seen only during the worst month of pandemic with index dropping sharply to 37.9 points compared to 41.3 in September. Eurozone’s inflation for the month accelerated to 10.7% according to Eurostat. No positive news came from China either, as both factory and service activities continued to contract in October. With zero-Covid tolerance policy, new outbreaks in industrial hubs were met with the reintroduction of movement restrictions.
European and US equity markets
US manufacturing activity, which accounts for 11.9% of the economy, grew at its slowest pace in nearly 2.5 years – the ISM’s manufacturing PMI decreased to 50.2 in October, which is the lowest reading since May 2020. Due to Fed’s aggressive monetary policy some industries are already seeing early signs of decreasing demand. In October employment decreased in information technology, financial, professional business services, education and healthcare industries, though overall labor market remained resilient with private employment increasing by 239 000 jobs in October compared to 192 000 jobs a month ago.
Benchmark 10-year bond yields
Apart from USD/JPY October was quite a calm month for major currency pairs. Euro and pound sterling tried to gain some ground after emotional September with GBP/USD looking like being close to at least some short to medium term bottom. EUR/USD managed to hold the 0.9550 support zone we mentioned last time and for a moment we saw the pair trading over parity. Still, bigger picture does not suggest that the major bottom is in place for the common currency.
We said before that one intervention is rarely enough, and we again saw Bank of Japan at work with USD/JPY climbing over 150 mark. It seems that this time market participants will “listen” to the central bank, which is trying to tell that the pair is now a bit “too far” from the “appropriate levels”, hence USD/JPY 152-153 zone could potentially become a medium-term top.
High Yield bond Indexes
As we mentioned last time, we liked our long oil trade near 85 dollars per barrel, aiming to see prices moving above USD/bbl 100. So far we saw oil prices bounce off the support zone and climb closer to our upside targets. Although overall picture does look clearly in favor of higher prices in the long run, risk is that the more time it takes to get above 100 dollars per barrel, the “heavier” the trade becomes. In other words, if we don’t see Brent prices climbing to USD/bbl 105-110 within next couple of weeks then the risk of re-visiting USD/bbl 80-85 zone increases. Gold still looks vulnerable and we are focusing more on silver, ready to add to our long positions should we see prices falling through XAG/USD 18 level.
Gold price, USD/oz
In line with market expectations, major central banks continued to raise key rates, though Bank of Canada, decided to be less aggressive than most anticipated, while Fed tried to appear spookier, sending equity markets south. As we said last time, Jerome Powell mentioned positive real yields “all along the yield curve” as one of his goals and that means that Treasury yields should at least hit 5% mark. Bond markets had those hikes priced in weeks before, so we did not see overly sharp moves in prices. It appears that market wants to see central banks deliver on their aggressive promises (at least for this year), as we see yields moving into opposite direction for some bonds and maturities. Again, we are comfortable with buying short term Treasuries at 4.50-4.75% level and EU govies closer to 2.50% yield and are awaiting at least some consolidation in the near future.