Summary:
Last Week Review
• Over the past week, the S&P 500 gained 1.68%, the Nasdaq gained 1.73%, and the Dow Jones Industrial Average shot up 1.96%. Tech giants started to fall; sector rotation shifted to lower-cap stocks. In a rather quiet week with not much earth-shattering economic data, market participants are still closely monitoring the name of the Treasury Secretary that new US President Donald Trump will name. The US economy was solid with lower-than-expected Initial Jobless Claims, while PMI was helped by a booming Services sector. Existing Home Sales for the month of Oct also rose in line with expectations. The market also digested the thought that the Trump administration’s policies will again bring high inflation due to tariffs, but the projected Fed rate cut in December still has a 25 bps rate cut opportunity of around 60%, although there is a 40% probability that the Fed will hold rates in place. America’s divergence from the rest of the world – manifested in the strength of the US Dollar, the relentless rally on Wall Street, and the significant rise in US Treasury yields – is becoming more entrenched by the week. The dollar has risen 8 weeks in a row and last Friday hit a 2-year high. According to TD Securities analysts, US funds in the past 13 weeks have accounted for more than 70% of all developed market bond fund inflows and nearly 90% of all developed market equity fund inflows.
• Sentiment towards EMERGING MARKETS assets is poor. The MSCI EM and Asia ex-Japan indices have fallen in 5 of the last 7 weeks. Market participants are considering whether it is a good time to Buy on Weakness. If so, the right action should have been last week as both benchmark indices saw weekly declines of around 4.5%, the steepest since June 2022. However, both were unable to recover more than 0.5%, which is an indication that investors are in no hurry to get back in. And for next year, strategists at SocGen have cut their emerging market exposure to just 6%, citing the impact of the US onshoring policy as well as relative growth, interest rates, and dynamics that all favor the US market over EM.
• COMMODITIES: Both crude OIL benchmarks rose about 6% during the week, the highest since November 7 as Moscow stepped up its attacks on Ukraine after the UK and US allowed Kyiv to strike deeper into Russia with their missiles. Analysts see this escalation of the RUSSIA – UKRAINE WAR as raising geopolitical tensions beyond levels seen during the year-long conflict between Israel and Iran. Russian President VLADIMIR PUTIN said Russia will continue to test its new Oreshnik hypersonic missile in combat and has stocks ready for use. Russia has fired the missiles into Ukraine, retaliating against US-made ballistic missiles and British-made cruise missiles launched by Ukraine into Russian territory. Meanwhile, the US imposed new sanctions on Russia’s Gazprombank as President Joe Biden stepped up sanctions to punish Moscow for its invasion of Ukraine before he leaves office on January 20. The Kremlin said the new US sanctions were an attempt by Washington to block Russian gas exports.
• The US also banned food, metal and other imports from about 30 CHINA companies over alleged forced labor involving Uighurs. China, the world’s largest oil importer, announced policy measures last week to boost trade, including support for energy product imports, amid concerns over US President-elect Donald Trump’s threat to impose tariffs.Based on ship tracking data, analysts & traders expect China’s crude imports to recover in November. Oil imports also increased in INDIA, the world’s third largest oil importer, on the back of rising domestic consumption.
• BANK INDONESIA’S DEWAN GUBERNUR’S MEETING set the BI7DRR benchmark interest rate to remain at 6.0% in order to maintain the stability of the RUPIAH which is still entrenched at levels around 15850-15900. Over the past week foreigners net sold their portfolios amounting to IDR 3.61 trillion.
This Week’s Outlook
• The US will release inflation figures, which will be closely watched by investors trying to gauge the future direction of Federal Reserve interest rates, while the start of the holiday shopping season and more retail earnings will show how consumer spending is holding up amid higher prices.
• The US will release the PERSONAL CONSUMPTION EXPENDITURE (PCE) price index, the Federal Reserve’s favorite inflation gauge, on Wednesday. Economists expect the PCE index to rise 2.3% annually in October. While the US will release November data on consumer and producer prices before the next FOMC MEETING on December 17-18, this will be the last PCE report before then. The recent stubborn inflation data has the Fed taking a cautious stance towards further rate cuts. Market expectations on whether the Fed will cut rates by another 25 basis points in December or pause amid uncertainty about the potential for rising inflation under the Trump administration.
• Investors will gain fresh insight into the health of the US consumer and retail sector in the coming week as BLACK FRIDAY marks the start of the holiday shopping season, which is likely to indicate how shoppers are coping with higher prices. A number of retailers are expected to release Q3 revenue figures and guidance for the quarter ahead.
• TRUMP TRADE is likely to remain the main driver of market activity for now. Investors betting on “buy crypto and dollars, sell foreign assets or green” are still profiting, despite a slight slowdown in momentum. BITCOIN skyrocketed close to USD 100,000, up about 50% since the beginning of October, when the market supported Trump’s victory in the US Election. The DOLLAR INDEX has gained 3.6%. Clean energy, which is not a Trump strength, is the worst performer, with the iShares clean energy ETF down almost 14%. The Mexican peso has lost more than 4%, while European equity markets are down around 3%.
• OIL prices rose around 1% on Friday, and settled at a 2-week high, as the escalation of the RUSSIA – UKRAINE WAR boosted geopolitical risk premiums. Both crude benchmarks ended the week with a gain of around 6% as Moscow stepped up its offensive after the UK and US allowed Kyiv to strike deeper into Russia with its missiles. Meanwhile, China, the world’s largest oil importer, announced policy measures to boost trade, including support for energy product imports, amid concerns over the Trump administration’s impending threat to impose tariffs.
• EUROZONE will release inflation data that will be closely watched on Friday as markets try to gauge the path of EUROPEAN CENTRAL BANK (ECB) monetary policy. Inflation rebounded to 2% in October after falling below the ECB’s 2% target in the previous month. Data on Friday showed that business activity in the bloc deteriorated sharply this month as the services industry contracted and manufacturing sank deeper into recession. The ECB has cut interest rates 3 times this year and markets are expecting a 25 basis point rate cut in December amid concerns over the region’s economic outlook. Meanwhile, rating agency Standard and Poor’s will review France’s credit rating after Fitch and Moody’s recently downgraded their outlook to negative.
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