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Major market events 5th – 9th Dec.

Highlights for the week

Mon: China Caixin PMI, EZ, UK & US PMI, EZ Retail Sales.

Tue: RBA Policy Announcement.

Wed: BoC, BCB & NBP Policy Announcement. China Trade Balance, TWD Trade Balance, CHF Unemployment.

Thur: AUD Trade Balance.

Fri: ECB TLTRO III Repayment Publications. China CPI, NOK CPI ad US PPI.

Watch Q4 S&P500 EPS Estimates, OPEC+ kept oil production steady on Sunday. The tail risk here was to see additional cuts. But that’s off the table for now!

Last week the strong job creation NFP report, together with a significant increase in wages would support the argument that more work needs to be done to bring inflation back on target. The US economy added 263,000 jobs in November, well above the 200,000 consensus estimate. The other key aspect of the report was that wages grew +0.6% month on month. That’s double what was expected and brings the annual rate of wage growth to 5.1%. That’s inconsistent with core inflation heading back to target by the end of next year. Despite the impressive employment report, I remain skeptical that the FED will continue with its supersized rate hikes. I am convinced that they will slow the pace and will adopt a more prudent way and see approach. The FED is well conscious the highly leveraged financial system could break down anytime soon, regardless of the strong job market. That’s why they will play it by ear and slow down their hiking speed to gather more information on the financial system and the broader economy.

China Protests

China health authorities are starting to strike a conciliatory tone after the now-spreading protests against the stringent COVID lockdowns met a heavy police presence and social media censorship. The latest concessions have the clear intent of deterring people from hitting the streets again this week. However, given the high pressure, Chinese state media and health authorities have set the scene for a COVID-zero pivot by making the virus sound less frightening, by increasing the pace of vaccination, and by finger-pointing those local governments who take virus prevention restrictions too far. China’s conviction is now building and Fast Money is again driving the market rebound.

Source: Bloomberg

November’s surge in Chinese stocks and credit has made them among the globe’s best performers. An index of the nation’s US-listed shares climbed a record 42%, the Hang Seng China Enterprises Index gained the most since 2003, property stocks have jumped 61% and high-yield dollar bonds rose 20%. Up until now, all those bounces in Chinese assets have been an opportunity to sell, but we feel that this time is different. We are throwing here the gauntlet to Carmen Reinhart and Kenneth Rogoff. Jokes on the side, we believe these are key dynamics to watch because the ramification for markets and some assets, in particular, may become very relevant.

What about Q4 EPS Estimates?

The real question is: are analysts lowering EPS estimates more than normal for S&P 500 companies for the fourth quarter?

The answer is yes. During the months of October and November, analysts lowered EPS estimates for S&P 500 companies for the fourth quarter by a larger margin than average. Furthermore, according to FactSet, the S&P500 is expected to report a Y/Y earnings decline for Q4 2022 (-2.4%) for the first time since Q3 2020 (-5.7%).

Source: FactSet

As always, the glass can be seen as half empty, but also half full. From one side we can argue that we are now clearly heading towards, at least, an earnings recession. From the other side, we can also note that now negative earnings are fully priced in and it would be enough for the actual numbers to come up just on par with expectations to sustain market prices and probably fuel further equity gains.

$-Bloc Central Banks

RBA should hike rates again this week. Money markets are pricing a 70% chance of a 25bps increase to 3.1% and a 30% chance of keeping rates unchanged. I am convinced a 25bps hike will be the actual course of action while keeping rates unchanged would be in my opinion a big shocker. But in the great scheme of things, 0bps or 25bps does not change the substance. Bank of Canada, instead, having already lifted rates by a cumulative 350bps this cycle, may opt to lift the rates by 50bps this time around. This also looks like a close call as several analysts expect a more modest 25bps move. Regardless, of what is going to actually happen, the trend is now clear. Most of the $-bloc central banks are now slowing down the pace of hiking. In my view, this is supportive of risky assets in the short term as markets will extrapolate that the FED will act along these lines.

Market Considerations

I know, I know, I know, I know

Ain’t no sunshine, when the FEAR and GREED Index become elevated and indicates frothy markets

Source: CNN

This year, so far, the Greed and Fear Index has been a very powerful contrarian indicator. Being disciplined would mean closing the longs and waiting for more attractive entry points. But this week we will go for a compromise. We will close half of the longs on Nasdaq we opened last week and we keep the other half with a trailing stop of 5% below last Friday’s close. To partially hedge the risky asset’s book, we enter a short position on AUD$ (1/3 of the VaR on the Nasdaq Position) with a stop loss of 3.5% above last Friday’s close and with a price target of 5% below the last close.

Once more,

Have a great start to the week



All views expressed on this site are my own and do not represent the opinions of any entity with which I have been, am now, or will be affiliated. I assume no responsibility for any errors or omissions in the content of this site and there is no guarantee for completeness or accuracy. The content is food for thought and it is not meant to be a solicitation to trade or invest. Readers should perform their investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics

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