The economic sentiment indicator in the euro area rose one point to 93.7 in November, following eight consecutive months of declines, beating forecasts of 93.5. Economic sentiment, however, remains close to its lowest level in two years, as rising borrowing costs, stubbornly high inflation, the prospect of an economic recession next year, and a deepening energy crisis in the winter months weighed on sentiment. Preliminary estimates indicated that the annual inflation rate in the euro area eased to 10% in November, from a record high of 10.6% in October, beating market forecasts of 10.4%. Costs of both energy and services slowed while prices for food, alcohol and tobacco rose at a faster pace.
The number of job openings in the United States (US) dropped by 353,000 to 10.3 million in October, in line with market expectations and indicating that demand for workers is starting to moderate, amid a softer economic outlook and higher interest rates.
The Caixin China General Manufacturing purchasing managers’ index (PMI) unexpectedly edged up to 49.4 in November 2022, from 49.2 in October, above market forecasts of 48.9. However, this was the fourth consecutive month of declines in factory activity, amid a new wave of COVID-19 cases and tough curbs in many parts of the country.
DOW LOSES AS FACTORY OUTPUT DECLINES
The US’s Dow Jones lost 300 points on Thursday, and the S&P 500 and Nasdaq both crossed into negative territory, as weak manufacturing data sparked concerns of a recession. This news put a dent in the optimism around less aggressive interest rate hikes from the US Federal Reserve (Fed). This market movement came hot on the heels of a somewhat dovish speech by Fed Chair, Jerome Powell, on Wednesday, where he signalled that it might be appropriate for the Central Bank to slow its monetary policy tightening. On the corporate side, Okta jumped almost 20% after the software company issued an optimistic full-year outlook. On the flip side, cloud software company Salesforce tumbled 10% on headlines suggesting that co-CEO Bret Taylor is stepping down.
Shares on the London Stock Exchange ended Thursday lower, with the benchmark FTSE 100 closing around the 7,550 level, as declines in energy and financials offset gains in utilities. Investors continue to analyse the latest remarks from the Fed in the US. Education and learning materials company, Pearson, shed over 5%, and was the biggest laggard on the FTSE 100 after its downgrade to ‘neutral’ by investment firm, Exane. Rolls-Royce Holdings fell 4% in spite of Barclays initiating stock coverage with an ‘overweight’ rating.
European equities rose for a second straight session on Thursday, with the regional STOXX 600 and the domestic DAX 40 index each rising around 0.5%, closing near levels last seen in early June, driven by sharp gains among technology stocks. Investors welcomed the Fed Chair’s comments and China’s softening stance on its zero-COVID policy.
SOFTER DOLLAR SEES GOLD REBOUND
Gold rose toward $1,780/ounce on Thursday, hitting its highest levels in two weeks, after the dollar weakened on the Fed’s more dovish stance. The Fed seemingly confirmed market expectations that it would deliver a smaller 50 basis point rate hike this month, after raising rates by 75 basis points in the last four meetings. Market pricing also indicated that the federal funds rate will peak below 5% in May 2023.
Brent Crude futures jumped 2% to trade near $89/barrel, extending gains for a fourth consecutive session on prospects of a recovery in demand and further supply cuts from the extended Organization of the Petroleum Exporting Countries, OPEC+. China also signalled a softening of its Coronavirus rules following significant street protests earlier this week. This has sparked hopes that the world’s top crude importer could start reopening its economy while offering an upbeat outlook for oil demand. In addition, the latest Energy Information Administration (EIA) report showed that US crude inventories slumped by nearly 13 million barrels last week, the biggest drop since June 2019.
Copper futures rose above $3.60/pound from the two-week low of $3.57 touched on 21 November, as measures to stimulate construction and industrial activity coincided with looming supply concerns. Authorities in top consumer China lifted a ban on equity refinancing for listed property developers, shortly after the country’s top banks extended $162 billion in fresh credit lines for the sector. Additionally, the People’s Bank of China cut its reserve ratio by 25 basis points after rapidly rising COVID-19 cases in the country drove the government to trigger strict lockdowns and business curbs. Concerns of upcoming shortages also supported copper futures, which are currently hovering nearly 15% above the 20-month low of $3.20 hit in July.
GREENBACK RETREATS ON FED COMMENTS
The dollar index extended losses, falling over 1% to below 105, its lowest level in nearly five months, after fresh data showed personal consumption expenditure (PCE) inflation slowed in October and factory activity shrank for the first time in over two years, strengthening the case for the Fed to slow the pace of interest rate increases. On Wednesday, Powell said that “slowing down at this point is a good way to balance risks,” and that the Fed could moderate the size of rate hikes as soon as December. Powell, however, warned that controlling inflation “will require holding policy at a restrictive level for some time.” Traders now await the jobs report due out today, for a further update on the health of the labour market. The yield on the US 10-year Treasury note, which is seen as a proxy for global borrowing costs, consolidated around 3.6%, a level not seen since late September, as the narrative started to change from inflation and tightening to slowing growth and the likelihood of a policy pivot. The Fed’s preferred inflation measure, the US Core Personal Consumption Expenditures Price Index, eased to 5%, in line with expectations, in the latest signal that inflation could be peaking.
The euro kicked off December by topping $1.05, a level not seen since late June, extending a 5.5% gain in November and marking the best euro performance since September 2010. The common currency has benefited from a fall in the US dollar on the back of a dovish Fed. The European Central Bank (ECB) remains committed to raising interest rates to tame price growth, while analysts stay divided on whether the ECB will hike borrowing costs by 75 basis points, for the third time, when it meets in December or will opt for a smaller 50 basis point increase.
The pound hovered at $1.20 after also gaining more than 5% in November, as the dollar retreated. On the 29 November, the Bank of England (BoE) started selling bonds bought during the turmoil period of Liz Truss’s government, after Chancellor Jeremy Hunt restored UK fiscal credibility by outlining a £55 billion package of tax increases and spending cuts in the Autumn Budget Statement. The next BoE monetary policy decision is due on 15 December and most investors expect a 50 basis point rate hike, although some suggest a 75 basis point increase is appropriate.
The pound started the day trading at 1.2252/$ and 1.1649/€.
Written by Citadel Global Director, Bianca Botes
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