MORAM week in the markets

The Week in the Markets – 19th November 2023

The big winners of the week have been small caps, with the Russell 2000 emerging as the top-performing index in the US. Regarding sectors, notable performers included REITs, Utilities, Financials, Consumer Discretionary, and Materials. The European indices also demonstrated strong performances, with Sweden, Germany, Spain, and Poland standing out among the countries.

To explain these movements, the key player of the week was the U.S. CPI released on Tuesday. It decreased to 3.2% from the previous 3.7% (compared to the forecasted 3.3%), reducing the likelihood of further interest rate hikes. The futures curve is already discounting rate cuts in May. This has led interest rate-sensitive sectors (REITs, Utilities, Consumer Discretionary, etc.) to rebound strongly, along with small businesses, which are more sensitive to any crisis. In essence, the market behaved in a Pivot mode this week, anticipating a potential economic downturn (the economy remains weak – as evidenced by a weaker-than-expected labor report – but markets always look a few months ahead, and what they’ve started to anticipate is a scenario of rate cuts. This movement is not only expected in the U.S. but will likely extend to Europe and other countries as other central banks tend to follow, albeit with some delay, the movements of the U.S.

As is customary in these types of weeks, the U.S. Dollar weakened against other currencies, as did bonds, with TLT rising and yields falling, particularly the 10-year U.S. Treasury, which declined by 4.5% during the week.

In the UK, CPI was also below expectations at 4.6% vs. the expected 4.8% YoY, and the inflation rate for the Eurozone reported its lowest figure since July 2021 (2.9% YoY growth). Both this data and the FED pivot horizon helped European markets to shine this week.

Despite recovering ground on Friday, oil ended the week with losses following the Thursday labor report. Increased inventories also played a role, although these data, under the new reporting system, need to be scrutinized as post-publication adjustments have become quite frequent (especially in most official data reported by the U.S. administration).

In the crypto space, there was little volatility this week. The SEC once again delayed its decision on the Bitcoin ETF, but beyond a slight correction, the market seems to believe that it will eventually happen, given the significant rise in recent months, especially for other cryptocurrencies that have a high beta vs. BTC.

On a broader scale, perhaps the most significant event was the visit of Xi Jinping, the President of China, to the U.S. to ease tension between the two superpowers. While the U.S., despite a now seemingly probable soft landing, cannot hide that its economy shows clear signs of slowing down and has faced more challenges than usual in recent debt placements. Meanwhile, both China and other countries (Saudi Arabia, etc.) have been reducing their exposure to the US debt, making it a point of the summit to try to change China’s recent investment appetite. Additionally, they reached agreements on various issues (military equipment, fentanyl production, etc.). It’s clear that the two global superpowers will never be strategic allies, and issues like Taiwan could escalate tensions. Nevertheless, it is positive that for the first time in many years, Xi Jinping visited American soil.