Global Equities Gain, European Central Bank May Increase Rate
Last Week Review
Global equities rose 3.2% as short-term yields declined. U.S. equities led the way with a 4.6% gain, followed by an 0.9% increase in developed ex-U.S. equities and a slight gain in emerging markets. Treasury yields touched new year-to-date highs, but shorter term yields turned lower near the end of the week. For the week, the two-year yield fell 0.02% to 4.47% while the 10-year Treasury yield rose 0.20% to 4.22%. Oil prices fell modestly.
UK Prime Minister Resigns After Tax Cut U-Turn
U.K. Prime Minister Liz Truss announced her resignation following a U-turn on proposed tax cuts. U.K. government bond yields declined and it appears that global spillover risks may be contained. The Bank of England announced it will resume quantitative tightening in November but with reduced duration risk. U.K. inflation came in stronger than expected and the Bank of England still faces elevated risk of a policy mistake.
War Risks Elevated
Russia targeted Ukrainian energy infrastructure, declared martial law in an annexed Ukraine territory and began to evacuate Kherson, a Ukraine region in which it has lost ground. These actions do not mark a major escalation but highlight the ongoing risk surrounding the war. Western nations continue to combat higher energy prices. To mitigate higher oil prices following the OPEC+ production cut, the U.S. authorized the release of 15 million more barrels of crude oil from its strategic petroleum reserve — the last of the 180 million authorized last spring.
China’s National Congress Largely Maintains Status Quo
Chinese President Xi Jinping was confirmed for a third five-year term with no indication of a potential successor. There were no major changes to expected near-term China policy, with the nation appearing to stick to its zero-COVID-19 policy and Taiwan approach. There was more emphasis on food, energy and in particular technology security, implying economic decoupling from the U.S. and Europe is likely to continue.
U.S. Earnings Trend Above Expectations
Sales are on pace to rise 8.5% for the quarter year-over-year and earnings are on pace for a 1.5% increase, after 20% of S&P 500 Index companies have reported. Sales are 1.3% ahead of expectations and profits are 2.3% ahead, although earnings growth would finish below average historical levels. Banks made up the bulk of reports and their earnings have been strong overall, highlighting a generally strong demand backdrop. Earnings resilience continues to offer some support against an otherwise weak financial market backdrop. However, economic risks loom and threaten further margin pressures moving forward.
This Week Preview
Central Bank Updates Economic Growth
Last week’s Beige Book, an anecdotal report by the Federal Reserve on economic activity, hinted at a cooling economy. But another strong jobless claims number and hawkish comments from the Fed supported expectations on further central bank tightening. On Monday, we think investors will turn to developed region flash Purchasing Managers’ Indexes for an economic pulse check, along with the implications for inflation and upcoming monetary policy decisions.
European and Canadian Central Banks Expected to Increase Rates
The European central bank is expected to increase its rate 0.75% on Thursday, while the Bank of Canada is expected to announce a 0.75% rate hike on Wednesday. No rate hike is anticipated from the Bank of Japan on Friday.
Microsoft, Apple and Amazon to Report Earnings
Most of the largest S&P 500 companies are set to report this week, including tech giants Microsoft (MSFT) and Alphabet (GOOG) on Tuesday; Meta (FB) on Wednesday; and Apple (AAPL) and Amazon (AMZN) on Thursday. The results may help shape investor sentiment around earnings and near-term risk appetite.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of October 23, 2022.
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