Market Overview
US equity markets ended a strong week on Friday, following a whole week of earnings releases. Earnings week continues in the week ahead with 165 companies (45% of the S&P 500 market capitalization) and 12 Dow companies set to report results. Investors sentiment remain cautious in the face of the perfect storm: elevated risk of a recession, hot inflation numbers and an aggressive Fed tightening cycle. A better-than-anticipated market sentiment could help fuel a market rally. However, earnings results are still largely expected to be below long-term averages.
In the current environment, Japanese equities may provide an attractive entry point for long term investors. The Japan story could provide a diversifier for the equity allocation as the performance was more resilient than seen elsewhere in the developed world. Abe’s successor, the new Prime Minister Fumio Kishida is not expected to deviate too much from the “Abenomics” policies followed by the Shinzo Abe and could provide stability to the markets. The state of emergency that was instated during the Covid-19 pandemic was fully lifted at the beginning of October. Kishida has also announced that a stimulus package would be rolled out providing “inflation countermeasures, extra budget discussions, macroeconomic policies and rising uncertainties”. This stimulus should strengthen the Japanese equity markets. The other factor to also consider is the safe haven status of the Yen which has traditionally provided some relief during global equity market sell-offs.
New Prime Minister Rishi Sunak is unlikely to deviate from the tax cut U-turns set out by Chancellor Hunt last week, as he had already committed to some policies like raising corporate tax to 25 per cent.
Commodities, FX and Bonds
Oil prices fell last week in anticipation of further curbs due to Covid-19 restrictions in China. The world’s largest crude importer and the second-largest economy brought in around 9.79 million bpd in September. Negative prospects for the demand from China remain as Xi Jinpeng reiterated the insistence on a zero-Covid policy at the Communist Congress. The ECB is expected to hike policy rates by 75 bps at its 27th October meeting and to commit to additional tightening in the next few months. Assuming a neutral rate at 2% by the end of the year implies an additional 50 bps hike in December, with a wait and watch approach taken in early 2023.
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