Futures fell this morning as fears of faster inflation and global recession continue to rise, threatening to push the S&P 500 to a new closing low for the year. A hawkish Fed pushed indexes down last week and sparked concerns that even more losses are on the way. What started off as a third-quarter rebound has turned into a flop for tech investors. The Nasdaq tumbled 5.1% last week after losing 5.5% the prior week, marking the worst two-week stretch for the index since it plunged more than 20% in March 2020.
Rising fears about future economic growth weighed heavily on Canadian equities as well last week, pushing the TSX sharply down. The energy subgroup of the TSX came under significant pressure, falling more than 5% as underlying energy prices fell. The decline was the largest drag on the overall index, as WTI fell below the US$80 per barrel mark for the first time since January.
The British government has set out a massive package of tax cuts for the country, reducing levies on both households and companies in an effort to boost long-term potential of the economy. The government hopes its program, including regulatory reforms, will boost the economy and stave off a recession that the BoE says has already begun. The cost of the package (£161 billion over the next five years) prompted a selloff in both the pound and UK government bonds, with investors and economists worried about Britain’s already sizable debt burden. The pound is quickly approaching parity with the USD and hit a record low earlier this morning. The BOE previously tried to prop up the pound on Black Wednesday, using rate hikes and currency purchases when sterling crashed out of the Exchange Rate Mechanism (a system linking a number of European currencies). That defense, which took place 30 years ago this month, ultimately failed.
Not only the pound but the yuan as well. China has intervened and made it more difficult to bet against the yuan with derivatives, increasing support for the currency as it slides toward the weakest level against the U.S. dollar since the global financial crisis. The People’s Bank of China (PBOC) said it will impose a risk reserve requirement of 20% on currency forward sales by banks. The decline of the yuan is accelerating due to central bank divergence between the dovish PBOC and and an aggressively hiking Federal Reserve. China’s push-back mirrors that of Japan, with both seeking to limit the damage from their weakening currencies, with the risks that further declines may lead to ever more capital outflows and drag down the region.
Hurricane Fiona, the most powerful storm of this year’s hurricane season, hit eastern Nova Scotia early Saturday as one of the strongest systems ever to hit the region, knocking out power, toppling trees and forcing residents to flee. Across the province, 414,000 households were without power, or about 80% of Nova Scotia Power’s customers. This comes after the storm hit Puerto Rico last week, leaving the country without power. As of yesterday, power had been restored to more than 825,000 of the island’s 1.5 million households and businesses. Power companies expect to restore power to as many as 64% of their clients by today and 77% by Wednesday.
Russian men and their families flooded the border over the weekend as speculation grew that Putin may soon bar men from leaving the country. Reports of hours-long lines at the main airport in Moscow and at land crossings into Kazakhstan and Georgia arose over the weekend as the Kremlin ramps of efforts to conscript more men for their invasion of Ukraine. In his speech last week, Putin announced that the Kremlin would be mobilizing 300,000 military reservists to serve in Ukraine.
Giorgia Meloni has claimed victory in Italy's election, and is on the verge of becoming the country's first female prime minister. Ms. Meloni, leader of the Brothers party of Italy, will form the country's most right-wing government since World War Two. Ms. Meloni's workaholic, nationalistic, hard-hitting, social-media-savvy approach set her apart in a political landscape criticized for being constituted by tired old men. The new prime minister will have her work cut out for her - Italy's debt is nearly 150 per cent of GDP, one of the highest in the world and likely unmanageable in a country suffering population declines, zero growth in GDP, and recession prone.
In a major shift, Apple will begin assembling its flagship iPhone 14, which launch earlier this month, in India as the U.S. technology giant looks to shift some production away from China. Apple, which long made most of its iPhones in China, is seeking alternatives as Xi Jinping’s administration clashes with the U.S. government and imposes lockdowns across the country that have disrupted economic activity. iPhone assembler Foxconn will be manufacturing the devices at its Sriperumbudur factory on the outskirts of Chennai. The Cupertino giant has been manufacturing iPhones in India since 2017 but these were usually older models. This time with the iPhone 14, Apple is manufacturing its latest model in India for the first time, close to the device’s launch.
Brookfield Asset Management Inc. said its board has unanimously approved the distribution of 25% of its asset management business and the current company will split into two publicly-traded firms. The parent will be renamed Brookfield Corp. and will own 75% of the asset manager, which will take the name Brookfield Asset Management Ltd. There will be a meeting of shareholders on Nov. 9 to vote on the proposal.
Oil is lower again with Brent sliding below $85 and WTI below US$80 as the U.S. dollar continued to surge and mounting recessionary concerns threatened global demand. Global oil benchmarks are at the lowest levels since January. Crude is on track for a substantial quarterly slump as leading central banks including the Federal Reserve raise interest rates aggressively to fight inflation, hurting the outlook for energy demand and sapping investors’ appetite for risk.
With the greenback hitting record highs, most other commodity markets from copper to wheat were also lower as risk assets began the week softly. Copper, often seen as a bellwether of global growth, hit its lowest since July as investors bet on sharp slowdowns in the US, and more demand turbulence in Europe amid the energy crisis. The weak yuan also adds to growing list of demand headwinds for China, the world’s top copper consumer, which is already dealing with a slump in the property sector and its strict Covid Zero policy. Even gold which is a traditional safe haven in times of economic distress, is having its own issues. The precious metal has slumped over the past month in the face of the greenback’s relentless gains and hawkish moves by central banks. Bullion has entered a bear market, trading at a level 20% below its record high in 2020.
Fixed income and economics
Canadian corporate bond yield spreads wrapped up one of their most volatile weeks in recent memory with the asset class wider between +5 to +10 bps as a yet another risk-off cloud descended upon markets. The riskiest segment of the investment grade spectrum was particularly weak as BBB’s continued to cheapen in the long end while higher credit quality paper sold off in the belly. Infrastructure and autos were the largest underperformers with both sectors wider by +8.0 bps while REITS (+7.0 bps), pipelines and airports (both +6.0 bps) rounded out the ignominious podium. No space was immune to the selling with even the relative safety of telcos, utilities and legacy bank depos all seeing average spreads cheapen by +4.0 bps. Not all is grim in our domestic corporate bond landscape though --- CAD denominated paper continues to outperform their American counterparts on the year by +7.3% ending Friday. Mind you, both markets are in the red overall though with Canada’s -9.7% total return actually looking somewhat acceptable versus the -17.0% performance of U.S. investment grade paper.
Goodbye TRINA? After serving as the pseudonym for the better part of the past decade as to why investors climbed aboard the equity cruise line while throwing bond assets overboard (“There Really Is No Alternative”), it appears we’re going to have to tell her to make some room at the dinner table. The S&P 500’s earnings yield stood at 5.28% compared with a 5.24% payout for investment grade bonds last Wednesday with the 0.04% differential marking the narrowest since 2009. When comparing the inherent risk between the two asset classes, the inadequate compensation being offered by equities is making this heavyweight bout virtually one-sided and portends the likely continued weakness in stocks over the near term. Note that even 10-year Treasury yields (yes, fully guaranteed government paper) offer a higher rate of return than the dividend yields of the Dow, S&P 500 and the TSX composite right now. This trend is unlikely to cease until the hawkish tones at central banks starts to abate sometime in mid-2023.
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