César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
A far stronger-than-expected US employment report for September pushed bond yields to new 16-year highs last week and raised the possibility of a November interest rate hike by the Federal Reserve. Non-farm payrolls increased by 336,000 last month, exceeding the consensus estimate for 170,000. The jobless rate held steady at 3.8% and hourly wages rose 0.2% on the month – a readout consistent with a solid job market rather than one that is overheating. The robust data fuelled investors’ concerns that rates will stay higher for longer, supporting the dollar and sending 10-year yields up to almost 4.89% before closing the week at 4.8%. This week, we will be watching US producer and consumer price data, due on Wednesday and Thursday respectively, to give markets direction. Political uncertainty around a new Speaker of the House of Representatives and spending bill is not helping the US fiscal outlook at a time of high debt issuance and with the US national debt topping USD 33 trillion. In markets, the S&P500 finished the week with a 0.5%1 (in USD) rise and the Nasdaq gained 1.6%2, but the Russell 2000 US small cap index closed down 2.2%3 (In USD). We are underweight small caps, which are more sensitive to rates than large caps as they have a higher share of floating debt.
In the Middle East, Hamas launched a multi-front assault on Israel at the weekend, ramping up tensions in the region. The oil price will be an indication of potential economic disruption. With supply already tight, any increase in production would be crucial. The events in Israel prompted a move into safe-haven assets, with the US dollar strengthening. We will watch to see whether the conflict extends to other parts of the region. Israel and Lebanon’s armed group Hezbollah, which is backed by Iran, exchanged artillery fire on Sunday. The potential for a wider conflict raises the importance of keeping gold as a hedge in portfolios.
This week marks the kick-off of US third-quarter earnings results, with several big banks reporting. With risks increasing in markets, US banks are expected to post lackluster results. The earnings season will show whether, despite the challenging macro conditions, companies can continue to grow. If they can, that would be supportive for equity markets. The recent corporate news flow has highlighted the importance of cash flow: the experiences of a French manufacturer, whose shares plunged last week on a cash flow warning, and a UK bank, forced into a financing deal at the weekend, show accidents can happen. With higher yields and equity markets under pressure, a diversified portfolio between bonds and equities makes sense.
