Summary:

Last Week Review

• US ECONOMIC STRENGTH DEBUNKS MARKET PARTICIPANTS’ CONCERNS AHEAD OF US PRESIDENTIAL ELECTION & MIDDLE EAST CONFLICT ESCALATION. The rally in US stocks started to feel a little shaky in the face of a series of events that were quite market-shaking, starting from the release of the 3rd quarter corporate performance report, the approaching US ELECTION, the potential escalation of the Middle East Conflict; while anxiously awaiting the US PAYROLL data for the month of Oct which will be released next week. Only NASDAQ closed with a gain last week. The Tech-dominated index rose 0.16%, while the S&P500 fell 0.96% and the DJIA plunged 2.68%. The Dow Jones index slumped on the back of falling Banking stocks, with Goldman Sachs dropping 2.27%, plus fast food chain McDonald’s shares shedding 2.97% as it faced an E. coli outbreak linked to its hamburgers. Meanwhile, bank stocks have risen in advance in anticipation of Trump’s increased probability of victory in the US election.

• As noted, the benchmark S&P 500 index is up about 22% this year, but has come off its highs in recent days. It’s reasonable if the equity is at a high valuation at the moment, making the position vulnerable to a correction if one of the short-term market events emerges that does not meet expectations. The P/E ratio of the S&P 500 index currently stands at 21.8 (compared to JCI’s 18.4 times), close to its highest level in more than 3 years, according to LSEG Datastream. The CBOE VOLATILITY INDEX, an indicator of market “skittishness”, last ticked up to around 19, after dropping below 15 late last month.

• On the upside, a number of US ECONOMIC INDICATORS further reassured the US is far from recession, as both New Home Sales and Existing Home Sales for Sept were recorded steady, suggesting the health of the property sector is safely under control. INITIAL JOBLESS CLAIMS also showed that Americans who filed unemployment claims in the last week, fell below estimates. This was coupled with increasing expansion in both the US Manufacturing and Services sectors, according to figures compiled by S&P GLOBAL PMI (Oct). Last but not least, Durable Goods Orders (Sept) declined less than expected.

• In terms of FINANCIAL REPORTS, Tesla was the first company of the MAGNIFICENT SEVEN to report results, its shares surging on Thursday after CEO Elon Musk said that he expects vehicle sales to grow 20% to 30% next year.

• The benchmark 10-year US TREASURY YIELD rose to its highest level in 3 months last week, reflecting expectations of a potentially less dovish Fed as well as the possibility of increased spending under the next president. Bets on a DONALD TRUMP victory have increased in poll markets in recent weeks, with Republicans seen favoring tariff policies that could cause inflation to heat up again.

• COMMODITIES:
Both OIL price contracts have risen 4% last week in volatile trading as markets factor in uncertainty surrounding the extent of ISRAEL’s response to the IRAN missile attack on October 1, and the outcome of next month’s US ELECTION. Regarding the CENTRAL EAST CONFLICT, Dozens of Israeli jets completed three waves of pre-dawn strikes on Saturday against missile factories and other locations near Tehran and in western Iran, but all apparently missed Iran’s energy infrastructure. Thus, the geopolitical risk premium that had built up in oil prices in anticipation of Israeli retaliatory strikes has dissipated, analysts said.

This Week’s Outlook

As always at the end of the month, it will be a week full of movement in the markets with US jobs and GDP data as well as a number of earnings reports from Tech giants. With markets in the final stretch before the US ELECTION plus the volatility of the FEDERAL RESERVE meeting in November, volatility looks set to continue.

• NONFARM PAYROLL DATA on Friday is expected to show that job growth slowed to 111,000 in October, reflecting the impact of strikes at Boeing, Textron, and Hilton Hotels; as well as weather-related disruptions from Hurricanes Helene and Milton. The UNEMPLOYMENT RATE is expected to remain unchanged at 4.1%. THE FED has signaled its intention to cut the FED FUND RATE by 25 basis points at the November FOMC MEETING after a 50 basis points cut in September, but this week’s economic data could still influence the decision. The labor data will be preceded by JOLTS JOB OPENINGS on Tuesday for Sept, followed by the usual INITIAL JOBLESS CLAIMS on Thursday which will be closely watched for any sign of weakness in the labor market.

• Other key data releases that the US central bank will be watching this week are the first estimate of third quarter US GDP on Wednesday and Personal Spending data on Thursday, as well as the highlight being the PCE PRICE index which is the Fed’s favorite Inflation measure. Economists estimate that the US economy expanded at an annualized rate of 3% in the third quarter of this year, similar to the growth rate in the second quarter. The economic calendar also features October data on consumer confidence and business sentiment, a report on pending home sales and the Institute for Supply Management will release its October manufacturing index. Federal Reserve officials will communicate ahead of the November 7 FOMC MEETING.

• EARNINGS SEASON: 5 of the “Magnificent Seven” tech stocks that have played a significant role in driving the market up over the past few years will report earnings this week. Google parent Alphabet will report on Tuesday, followed by Microsoft and Facebook parent Meta Platforms on Wednesday, and Apple and Amazon on Thursday. These companies have a huge influence on the market due to their huge market value. They together account for 23% of the S&P 500’s weight, which means the market’s reaction to their earnings results could affect the index as a whole in the days ahead.

• COMMODITIES: while traders are monitoring developments in the MIDDLE EAST CONFLICT, they are also waiting for more clarity on CHINA’S STIMULUS POLICY, although analysts do not expect the measures to provide a major boost to oil demand.

• ASIAN MARKETS:- JAPAN: Wednesday’s election and Bank of Japan decision. Prime Minister Shigeru Ishiba lost his parliamentary majority in the country’s general election. Ishiba’s Democratic Liberal Party has ruled Japan for most of its post-war history, so the market’s initial reaction to a political earthquake of this magnitude could trigger a sell-off in the Yen and Japanese stocks, as well as a rise in Japanese government bond prices. More broadly, this shock could undermine political stability and continuity, leading many analysts to say that the Bank of Japan needs to conduct monetary policy. The BOJ will set interest rates on Wednesday.

• October PMI DATA in continental Asia, especially CHINA is in the spotlight after the stimulus sentiment that was stirred up, although the impact on the market is also starting to fade. Chinese stocks edged up 0.8% last week, rallying after a tumultuous few weeks. Meanwhile, figures on Sunday showed industrial profits in China plunged 27.1% in September from a year earlier, the sharpest decline this year. Asian stocks were more broadly weaker last week, with MSCI’s Asia outside Japan index down nearly 2%, its third consecutive weekly decline. Japan’s benchmark Nikkei 225 index fell 2.7% for a second consecutive weekly decline as investors reduced risk exposure ahead of Sunday’s general election.

• INDONESIA as usual will look forward to Inflation data on the first day of November.

• CURRENCY & FIXED INCOME: BARCLAYS analysts expect, the US DOLLAR is likely to remain strong, and US interest rates are likely to remain high, creating a less favorable backdrop for emerging market assets. But with so many event risks looming, not least the US Presidential election on November 5, there may be a limit to how high Treasury yields can rise this week.

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