Week in the Markets 3rd December

The Week in the Markets 27th Nov – 3rd December 2023

Another week where the trend initiated since early November with the US CPI report and the FED meeting continues.

In equities, small caps once again lead the week, with the Russell 2000 closing the week breaking the resistance at 1820, paving the way for a continuation of the small caps rally in the coming weeks. The notable detail is that mega caps, which have been driving the indices this year, had a negative performance this week. The S&P500 reaches yearly highs. By industries, Real Estate gains another 5% and enters positive YTD territory. The idea that we may have reached the peak of interest rates and that the main option now is to start lowering them as early as March favors companies with higher debt. By countries, the top performers of the year continue to have a very good performance (Poland, Mexico, Spain, Brazil, and Italy), with Chile and New Zealand joining them this week. On the contrary, China is having a tough year, losing another 3%, as official indicators underscore concerns about the country’s fragile recovery.

It’s a bad week for commodities despite the OPEC+ summit’s announcement of additional voluntary cuts to its oil production in 2024. Saudi Arabia will lead with one million barrel cut and Russia will increase 200k (from its 300k now). In fact, the US is already producing more than Saudi and Russia combined. The WTI chart is starting to look concerning. For Natural Gas, European inventories drop to 95% after a few cold days. However, the forecast for the first half of December is not as cold as expected, and fundamentals remain poor.

In other assets, same “FED pivot” trend continues and gold reaches historic highs at Friday’s close, and November marks the best month for bonds in the last 38 years Bitcoin hits new yearly highs and is already approaching $40,000.

Macro Data

  • US Data: GDP QoQ surprised upside5.2% (4.9% expected), previous 2.1% (June) and US Consumer confidence: 102 (101 expected) previous 99.1

  • Eurozone CPI: +2.4% in November, down from 2.9% in October and below expectations for 2.7%. Core inflation, which excludes food and energy costs, dropped to 3.6% from 4.2%. Separately, the jobless rate held steady at a record low of 6.5%.

  • China PMI: 49.4 fell to a below-consensus 49.4 in November from 49.5 in October, marking the second consecutive monthly contraction.

Powell’s comments helped push the yield on the benchmark 10-year Treasury note down to nearly a three-month low of 4.21% in intraday trading on Friday. (Bond prices and yields move in opposite directions). The market now expects 5 rate cuts of 25 basis points each between March 2024 and January 2025.

In addition, a significant data point is that the Fed’s Reverse Repo continues to plummet. This decline indicates that fewer players are using the overnight repo to park their cash (as the interest offered by the Fed for this overnight investing is no longer attractive), and this money seems to be flowing into bonds and equities.