Mega-Cap Tech a Safe Haven

Economic

Stocks

Summary:

Year-to-date, technology has outperformed the broader market largely given the prevalence of low leverage, high profitability and consistent earnings across many names in the mega-cap tech space. Technology serving as a haven in periods of market volatility is a distinct change to the late 1990's where the sector was the source of the volatility.

Equities have officially entered a correction. Both global and domestic stocks have fallen by at least 10% below their summer peak. Volatile portions of the market, notably small cap and early growth companies are down far more. And while large-cap technology companies have not been immune to the weakness, for the most part they have held up better than the broader market. I think this can continue as investors put a premium on higher quality, companies with the ability to generate cash-flow.

Since the summer peak, the global technology sector has outperformed and remains the top performer year-to-date (see Chart 1). Tech's resilience owes much to the fact that the mega-cap tech names tend to have low leverage, high profitability, and consistent earnings. In other words, they are high quality companies.

What investors Want

For investors old enough to remember the late 1990's, the idea of tech as a haven during periods of market volatility seems odd. These were the stocks that led the market bubble on the way up and were punished the most when the bubble finally burst in 2000. What has changed? The simple answer is the companies in this sector are more mature, less volatile, and more profitable.

One important reason that large-cap technology stocks have held up, despite the surge higher in interest rates: these companies generate strong cash flow. Contrast this with their younger, early-growth cousins. Early growth companies are down roughly 30% from the July peak. The backup in interest rates has been particularly punishing for these companies because their cash-flow is in the distant future. Put differently, a higher discount rate has a more negative impact on early growth companies than those with significant near-term cash flow.

The fact that these companies are more mature and more profitable, also means that, unlike the 1990's, many of the mega-cap tech companies trade close to a beta of one. In other words, they generally trade with no more volatility than the broader market. This is important because in the current environment investors are demonstrating a clear preference for lower beta companies and an aversion to excess volatility.

The other distinguishing characteristic of these companies: Not only are they highly profitable, but their profits are remarkably consistent. The large, ‘platform' companies have strong entrenched user bases and consistent demand. And with interest rates high and the economy likely to slow from here, consistency is becoming more important to investors.

Large Cap Tech = High Quality

Tech outperformance looks less strange viewed through a factor perspective. While the market can rally into year-end, investors are likely to prove more risk averse than they were earlier in the year. Higher rates, tighter financial conditions and the prospect for an economic slowdown have left investors with a clear preference for safety and an aversion to volatility. Our view is that mega-cap tech names offer these quality characteristics. They are highly profitable and, perhaps somewhat surprisingly, reliable.

Source: Black Rock

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Michelle

Economic

Political

US Maneuvers to Stabilize China Ties: Genuine Diplomacy Or Crisis Management?_1

Chinese President Xi Jinping and US President Joe Biden will meet on the sidelines of the APEC Economic Leaders' Meeting in San Francisco, California. The meeting comes amid several high-profile visits between the two sides in recent weeks. At first glance, these encounters indicate that relations are headed in the right direction. However, a closer look at the behavior of the Biden administration calls into question the sincerity of the US side.

On the one hand, the US has made efforts to increase its emphasis on cooperation with China. US President Joe Biden said during his meeting with Chinese foreign minister Wang Yi at the end of October that the two countries must work together to address global challenges. However, Xi's words to Biden that he hoped the US would match words with actions during their last meeting at the G20 summit in Bali have yet to be heeded.

The Biden administration has maintained the Trump-era trade war which has come at great cost to American businesses. Sanctions on China's tech sector also remain in full effect, with Biden enacting an export ban and an investment ban this past summer. Furthermore, China has been compelled to remind the US of its commitments to the one-China Principle under the three China-US joint communiqués. The Biden administration has continued to send arms and political support to "pro-independence" forces in Taiwan island, leading the BBC to declare that the US is "quietly arming Taiwan to the teeth" through the Foreign Military Finance (FMF) program - the same program the Biden administration has used to send arms to Ukraine in its proxy war there.

The US also finds itself mired in several geopolitical crises that threaten domestic and global stability. In Ukraine, the US has spent more than $100 billion provoking a dangerous conflict with Russia. US officials and Western media have reached consensus that the conflict in Ukraine is now a stalemate. US and NATO efforts to make a breakthrough against Russia vis-a-vis Ukraine's counteroffensive have failed. This has facilitated a reduction in funding for the conflict as domestic support for the proxy war wanes.

The US is also heavily invested in Israel's brutal war in Gaza where an estimated 15,000 Palestinians have been killed, including about 5,000 children. A worldwide demand has emerged for a ceasefire in hostilities. The Biden administration has opposed a ceasefire and has instead sent aircraft carriers to the Mediterranean plus additional funding and weapons to Israel. This has laid bare the US' ongoing aim to maintain and expand its hegemony in the Middle East. In doing so, the Biden administration faces grave risks to its legitimacy. Over 60 percent of US voters support a ceasefire in Gaza. Increased military involvement from the Biden administration risks damaging the US' global standing and worse, regional war.

Gaza and Ukraine are two major geopolitical crises which are ultimately a byproduct of imperial overreach as the American economic, political and military order, what many observers have called a modern-day empire, declines in both size and influence. Easing relations with China thus presents an opportunity for the US to ease pressure on itself. China and the world at large must exercise caution when the US engages in diplomacy without making any meaningful commitments to reverse counterproductive and aggressive policies that are responsible for bringing China-US relations to a low point in the first place.

China and the US' bilateral relationship is perhaps the world's most important relationship. The meeting between Xi and Biden at the APEC meeting marks a critical juncture for the future of global stability. Issues on the agenda such as the crisis in Gaza, Ukraine and bilateral issues relating to trade and cross-Straits relations hold broad significance. The quality of the China-US relationship can change the world for the better or for the worse.

The meeting between Xi and Biden is another opportunity to set relations on the right course. Still, the intense geopolitical and domestic crises that plague the US will inevitably influence policy in Washington in the months leading up to the 2024 presidential election. The future has yet to be written, but until the US matches words with actions, it is likely that an intensification of the US' so-called "China containment" policy looms on the horizon.

Source: Global Times

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Glendon

Political

Palestinian-Israeli conflict

Russia-Ukraine Conflict

From Gaza to Ukraine, Wars and Crises Are Piling Up_1

A concatenation of crises is hardly unprecedented. Sergey Radchenko, a historian, points to the examples of the Soviet invasion of Hungary and the Suez crisis overlapping in 1956, crises in Lebanon and the Taiwan Strait in 1958 and the tumultuous years of 1978-79, when the Chinese invasion of Vietnam, the Islamic revolution in Iran and the Soviet Union's invasion of Afghanistan unfolded in quick succession. In 1999 India and Pakistan, newly armed with nuclear missiles, waged a war over Kashmir while nato bombed Serbian forces in Yugoslavia.

But America and its allies cannot intervene as easily or cheaply as they once did. Adversaries such as China and Russia are more assertive, and working more and more together. So too are non-aligned powers, including India and Turkey, which have growing clout to shape distant events and believe that a new and more favourable order is emerging. And the possibility of a war directly between major powers hangs over the world, forcing countries to keep one eye on the future even as they fight fires today.

Massively multiplayer game

The large powers are becoming more polarised on issues where they might once have pushed in the same direction. In the Middle East, for instance, Russia has moved closer to Hamas, tearing up years of careful diplomacy with Israel. China, which in past wars issued bland statements urging de-escalation, has exploited the crisis to criticise America's role in the region. With the exception of strongmen such as Viktor Orban, Hungary's leader, few Western countries talk to Russia any longer. And even dialogue with China is increasingly dominated by threats and warnings rather than by efforts to tackle joint problems like climate change. A meeting planned between Joe Biden and Xi Jinping in California on November 15th may prove a case in point, though there are rumblings of an agreement on military applications of artificial intelligence.

These are not happy times. An Israel-Hamas war in Gaza threatens to spread across the Middle East, with America and Iran facing off in the background. The Ukraine war, Europe's largest since 1945, shows no sign of ending. And Chinese jets and warships now menace Taiwan in growing numbers and with increasing frequency, with looming elections on the island likely to bring more tumult. Civil conflict in Mali, Myanmar and Sudan has worsened in recent weeks, too.

Read our coverage of the Israel-Hamas war and the Ukraine war

Massively multiplayer game

Another shift is growing convergence between America's adversaries. “There really is an axis that is emerging between Russia, China, North Korea and Iran, which rejects their version of the American-led international order,” says Stephen Hadley. He served in America's national security council in the 1970s and the Pentagon in the 1980s before becoming national security adviser to George W. Bush in 2005. The war in Ukraine has cemented the partnership between Russia and China. It is not a formal alliance, but the two countries conducted their sixth joint bomber patrol in the western Pacific in the space of just over four years in June. They followed it up with a joint 13,000km naval patrol in the region in August. Iran and North Korea have both supplied Russia with weaponry in return for military technology. The result is greater entanglement. A crisis involving one enemy is increasingly likely to draw in another.

Moreover, each crisis not only involves more enemies, but also more players in general. The leaders of Australia, Japan, New Zealand and South Korea have all attended the past two nato summits in Europe. Ukraine's counter-offensive this year could not have happened without an infusion of South Korean shells. Turkey has established itself as a key arms supplier throughout the region, reshaping conflicts in Libya, Syria and Azerbaijan with its military technology and advisers. European countries are planning more intensively how they might respond to a crisis over Taiwan. Crises thus have more moving parts to them.

That reflects a broader shift in the distribution of economic and political power. The idea of “multipolarity”—a term once confined to scholarship, and which refers to a world in which power is concentrated not in two places, as in the cold war, or in one, as in the American-dominated 1990s, but in several—has entered the diplomatic mainstream. In September, Subrahmanyam Jaishankar, India's foreign minister, noted that America, facing the “long-term consequences of Iraq and Afghanistan”—a nod to two failed wars—and relative economic decline, “is adjusting to a multipolar world”.

The argument is debatable. In a recent essay, Jake Sullivan, America's national security adviser, argued that America is in a stronger position now than it was while mired in those wars. “If the United States were still fighting in Afghanistan,” he wrote, “it is highly likely that Russia would be doing everything it could right now to help the Taliban pin Washington down there, preventing it from focusing its attention on helping Ukraine.” That is plausible. But America's image is undoubtedly bruised.

A poll conducted in February by the European Council on Foreign Relations, a think-tank, found that more than 61% of Russians and Chinese, 51% of Turks and 48% of Indians expect a world defined by either multipolarity or Chinese dominance. In his final state-of-the-union speech in January 2016, Barack Obama, then America's president, insisted that on “every important international issue, people of the world do not look to Beijing or Moscow to lead—they call us.” Seven years on, things are less clear-cut.

The result of all this is a sense of disorder. America and its allies see growing threats. Russia and China see opportunities. Middle powers, courted by larger ones, but concerned by the growing dysfunction of institutions like the World Trade Organisation and the United Nations, see both. “A kind of anarchy is creeping into international relations,” wrote Shivshankar Menon, who served as India's foreign secretary and national security adviser, in an essay published last year. It was “not anarchy in the strict sense of the term,” he explained, “but rather the absence of a central organising principle or hegemon.”

That tendency has been compounded by several other trends. One is the climate crisis, which increases the risk of conflict in many parts of the world and, through the green transition, is creating new sources of competition, such as that for critical materials crucial for wind turbines and electric vehicles. The other is the accelerating pace of technological change, with artificial intelligence improving at an exponential rate and with unpredictable consequences. A third is globalisation, which knits crises together in new ways. A war over Taiwan, for instance, would cause acute disruption to the semiconductor industry and thus to the world economy.

The fourth is a rising tide of nationalism and populism, which infects attempts to solve all of these global problems. In a book published in 2021 Colin Kahl, who recently stepped down as the Pentagon's policy chief, and Thomas Wright, a senior official in Mr Biden's national security council, noted that international co-operation seized up during the covid-19 pandemic as countries rushed to close borders and shield themselves. “For all practical purposes the G7 ceased to exist,” they noted. “Pandemic politics ultimately dealt the final blow to the old international order.”

From dawn to dawn

The new world disorder is putting the institutional capacity of America and its allies under stress while stretching their military capabilities. Start by considering the institutional pressure. The cold war, Mr Hadley argues, was an “organised world”. There were global challenges, he acknowledges, but many were subsets of the larger superpower struggle. “For post-cold-war national security advisers,” he says, “it's more like cooking on an eight-burner stove with every burner having a pot, and every pot just about to boil over.”

A world in which more crises occur together poses two sorts of challenges to the leaders and diplomats tasked with managing them. One is the tactical problem of fighting several fires at once. Crises tend to have a centralising effect, says a former senior British diplomat, with prime ministers or presidents taking personal charge of issues that might otherwise be scattered among foreign and defence ministries. Even in large and powerful states, bureaucratic bandwidth can be surprisingly limited.

Diplomats, immersed in crises, often perceive that their own times are unusually chaotic. Baroness Catherine Ashton, who was the European Union's de facto foreign minister from 2009 to 2014, points out that she was dealing with the Arab spring, Iran's nuclear programme and the Serbia-Kosovo dispute at the same time. “I can remember very clearly, when the Ukraine crisis began,” she says, referring to a revolution in Kyiv in 2014, “that I just didn't know if we would have the bandwidth for all of this.”

One issue is that competition has turned to conflict. The war in Ukraine has been especially debilitating for diplomacy. Baroness Ashton recalls that when the Ukraine crisis began in 2014, her negotiating team for nuclear talks with Iran in Vienna included Russia's deputy foreign minister. She would travel to Kyiv to condemn Russia's meddling and he to Moscow to condemn the European Union. “Then we'd fly back and all sit down and carry on with the Iran talks.” Such fleet-footed compartmentalisation would now be impossible.

America's national security council is a bare-bones operation, in part because Congress is loth to fund White House staff. In an essay published in 2016, Julianne Smith, now America's envoy to nato, recalled her time as deputy national security adviser to Mr Biden when he was vice-president. “A typical day would often involve four to six hours of back-to-back meetings on anything from Syria to cybersecurity to North Korea,” followed by 150 to 500 emails per day. “My ability to plan, think beyond the next day in the office, or significantly deepen my knowledge of any single issue was virtually non-existent.”

The expectation that top officials represent their country in a crisis often puts enormous pressure on a handful of people. Antony Blinken, America's secretary of state, has spent almost every waking hour shuttling between Middle Eastern capitals over the past six weeks. He recently flew from the Middle East to Tokyo, for a meeting of g7 foreign ministers, then to India, and on to San Francisco. Mr Sullivan is also spread thinly.

Of pens and swords

Even if diplomats can successfully spin multiple plates, the concurrence of crises presents a larger, strategic problem when it comes to military power. The current crisis in the Middle East shows that military power is a scarce resource—like diplomatic bandwidth. Even in recent years, Pentagon officials would boast that they were finally rebalancing naval power from the Middle East to Asia, after two decades of counterinsurgency in Afghanistan and Iraq. Now, under pressure of events, the trend is reversing.

When the USS Dwight D. Eisenhower and its escorts entered the Red Sea on November 4th it was the first time an American aircraft-carrier had operated in the Middle East for two years. The exercises it conducted earlier with the USS Gerald R. Ford marked an unusually large show of force. If the war in Gaza drags on or widens, American naval forces may need to choose between sticking around, creating gaps in other parts of the world, including Asia, or emboldening Iran.

Meanwhile, Western officials increasingly think the war in Ukraine could drag on for another five years, with neither Russia nor Ukraine prepared to give in, but neither capable of breaking the stalemate. As the 2020s roll on, the red lights begin to flash. Many American intelligence officials, and some Asian ones, believe that the risk of a Chinese attack on Taiwan is greatest in a window at the end of this decade. Too early, and China is not ready. Too late, and China faces the prospect of demographic decline and a new generation of Western military technology.

Even without a war, the West's military capacity will come under enormous pressure in the coming years. The war in Ukraine has been a reminder of both just how much ammunition is consumed in big wars, but also how meagre Western armouries—and their means of replenishment—really are. America is dramatically upping its production of 155mm artillery shells. Even then, its output in 2025 is likely to be lower than that of Russia in 2024.

The wars in Ukraine and Gaza illustrate these stresses. Israel and Ukraine are fighting two different sorts of war. Ukraine needs long-range missiles to strike Crimea, armoured vehicles to allow infantry to advance in the face of shrapnel, and demining gear to punch through vast minefields. Israel wants air-dropped smart bombs, including bunker busters, and interceptors for its Iron Dome air-defence system, which are being fired at a prodigious rate. But there is overlap, too.

Last year America dipped into its stockpile of shells in Israel to arm Ukraine. In October it had to divert some Ukraine-bound shells to Israel. Both countries also use the Patriot missile-defence system, which takes out planes and larger missiles. So too do other allies in the Middle East: on October 19th Saudi Arabia used a Patriot battery to intercept Israel-bound missiles launched from Yemen. Ukraine's consumption of interceptors is likely to rise sharply over the winter as Russia, having stockpiled missiles for months, unleashes sustained barrages against Ukraine's power grid.

America can probably satisfy both of its friends for the moment. In recent weeks, France and Germany have both pledged to increase assistance to Ukraine. But if either war—or both—drags on, there will be a pinch. “As time goes on, there will be trade-offs as certain key systems are diverted to Israel,” writes Mark Cancian of the Centre for Strategic and International Studies, a think-tank in Washington. “A few systems that Ukraine needs for its counter-offensive may not be available in the numbers that Ukraine would like.”

The bigger problem is that, realistically, America could not arm itself and its allies at the same time. “If us production lines are already struggling to keep pace with the exigencies of arming Ukraine,” notes Iskander Rehman of Johns Hopkins University in a recent paper on protracted wars, “they would be completely overwhelmed in the event of an actual protracted, peer-to-peer conflict with an adversary such as China.”

These challenges point to deeper tensions in American defence strategy. From 1992 onward American military planners held to what was known as the “two-war” standard. America's armed forces had to be ready to fight two simultaneous medium-sized wars against regional powers—think Iraq or Iran—rather than simply a single big war. In 2018 the Trump administration changed this to a “one-war” standard: in practice, a commitment to be able to fight either a war in Europe or in Asia, but not both at the same time. Mr Biden's administration stuck with this approach.

The aim was to instil discipline in the Pentagon and to bring ends in line with means: America's defence budget is virtually flat in real terms, while Chinese defence spending has soared. But the risk, argued critics, was that the one-war standard would tempt enemies to open a second front—which could then force America to either back down or resort to unappealing options, like nuclear threats.

Too many plates

What risks do America and its allies run by being so stretched across diplomatic and military realms? If the war in Ukraine stays an open sore in Europe and the Middle East remains ablaze, the West will struggle gravely should another serious crisis erupt. One risk is that adversaries simply capitalise on chaos elsewhere for their own ends. If America were bogged down in a Pacific war, for instance, Iran would surely feel more confident of getting away with a dash for nuclear weapons.

Even more worrying is the prospect of active collusion. European military planners give weight to the possibility that Russia might conduct menacing manoeuvres during a crisis over Taiwan in order to divert American attention and tie down its allies, preventing them from lending a hand in Asia. As in the cold war, each crisis, no matter how parochial or trivial, might come to be seen as a test of American or Chinese power, drawing each country in.

Then there are the surprises. Western intelligence agencies have their hands full watching China and Russia. Few expected Hamas to throw the Middle East back into turmoil as it did on October 7th. Civil wars and insurgencies in the Democratic Republic of Congo, Mali, Myanmar, Somalia and Sudan have all been neglected, diplomatically, even as Russian influence in the Sahel continues to grow. Meanwhile on November 10th dozens of Chinese ships circled Philippine vessels, blasting one with water cannon, as the latter attempted to resupply an outpost on Second Thomas Shoal in the South China Sea, which China claims as its own. If the confrontations worsen, the terms of America's defence treaty with the Philippines may oblige it to intervene.

Amid disorder, strategists talk about the importance of “walking and chewing gum”. It is a uniquely American metaphor that once referred to performing two trivial activities at once, and now explains the importance of geopolitical multi-tasking. Others are available. In his forthcoming book, “To Run the World”, Mr Radchenko, the historian, quotes Zhou Enlai, China's premier, identifying America's predicament in 1964: “If there were just a few more Congos in Africa, a few more Vietnams in Asia, a few more Cubas in Latin America, then America would have to spread ten fingers to ten more places…we can chop them off one by one.”

Source: Economist

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FastBull Featured

Daily News

[Quick Facts]

1. NY Fed October finds softer inflation expectations in October.

2. U.S. CPI is expected to be affected by how health insurance costs are calculated.

3. OPEC: The oil market remains strong despite negative sentiment.

4. Guindos: Eurozone inflation may temporarily rebound, though its prevailing direction is downwards.

5. British Prime Minister reshuffles cabinet.

[News Details]

NY Fed October finds softer inflation expectations in October

The New York Fed's latest consumer expectations survey reported softer inflation expectations in October overall, despite rising expectations for future gasoline price increases, while the outlook for employment and personal finances was basically stable. Respondents expect inflation to fall to 3.6% after a year, down from 3.7% in September, to 3% after three years, unchanged from September, and to 2.7% after five years, down from 2.8% in September. Expected increases in home prices were unchanged at a modest 3% in October, while expectations for future gasoline price increases were revised up to 5% from 4.8% in September, according to the report. The survey found little change in consumers' views of the job market outlook, with fewer people expecting the unemployment rate to rise next year and slightly more people expecting to lose their jobs over the next 12 months. The report also said that households' views of their current personal finances have improved, with a "mixed" view of their situation a year from now.

U.S. CPI is expected to be affected by how health insurance costs are calculated

Changes in the way the U.S. government estimates health insurance costs are expected to slightly boost the CPI, reversing the trend that inflation has eased in recent months. The U.S. Bureau of Labor Statistics made some adjustments to the way the category is tabulated in the October CPI report released on Tuesday. In addition to routine changes in the source data, the new methodology will smooth out some fluctuations and reduce the lag in time of the index. The new calculation is expected to put upward pressure on the overall CPI, at least in the short term. It will also boost supercore services inflation, which excludes energy and housing.

OPEC: The oil market remains strong despite negative sentiment

OPEC said on Monday that oil market fundamentals remain strong. At the same time, it slightly raised its forecast for global oil demand growth in 2023 and maintained its forecast for 2024. The price of Brent crude has fallen back to around $82 a barrel from a yearly high of close to $98 a barrel in September. While supply cuts by OPEC and its allies as well as the conflict in the Middle East have provided support for oil prices, concerns about economic growth and demand are still weighing on them. OPEC's monthly report, however, said that while "negative sentiment has been overstated," "recent data confirms strong growth trends in main global economies and healthy oil market fundamentals." OPEC raised its forecast for world oil demand growth in 2023 to 2.46 million barrels per day (bpd), an increase of 20,000 bpd from the previous forecast. The demand forecast for 2024 was unchanged from last month.

Guindos: Eurozone inflation may temporarily rebound, though its prevailing direction is downwards

European Central Bank (ECB) Vice President Luis de Guindos said in a speech on November 13 that the euro area economy would remain subdued for now but should strengthen again, and there are signs that the labor market is weakening. "We expect a temporary rebound in inflation in the coming months as the base effects from the sharp increase in energy and food prices in autumn 2022 drop out," Guindos said. "But we see the general disinflationary process continuing over the medium term."

Energy prices remain a major source of uncertainty amid heightened geopolitical tensions and the impact of fiscal measures, as do food prices, which could also come under upward pressure due to unfavorable weather conditions and the broader climate crisis. In this highly uncertain environment, where geopolitical shocks are coming in fast, I think we have to be very careful in our communication, so I wouldn't prejudge the future path of interest rates, and it's too early to talk about rate cuts, Guindos said.

British Prime Minister reshuffles cabinet

British Prime Minister Rishi Sunak announced on November 13 to reshuffle the cabinet, with the interior minister, foreign minister, health secretary, and other positions changed.

Sunak fired interior minister Suella Braverman while appointing James Cleverly as interior minister and former PM David Cameron as foreign minister.

On the same day, a number of other government officials resigned or were dismissed. After that, Sunak made more personnel adjustment decisions. According to the new cabinet list, former Health Secretary Steve Barclay was appointed as Environment Secretary, Victoria Atkins as Environment Secretary, John Glen as Paymaster General, and Richard Holden as Conservative Party Chairman and minister without portfolio.

[Focus of the Day]

UTC+8 10:00 U.S. Treasury Sec Yellen Speaks

UTC+8 15:00 U.K. ILO 3-Month Unemployment Rate (Sept)

UTC+8 17:00 European Central Bank Chief Economist Lane Speaks

UTC+8 17:00 European Central Bank Governing Council Member Centeno Speaks

UTC+8 17:30 European Central Bank Governing Council Member Villeroy Speaks

UTC+8 20:30 Bank of England Monetary Policy Member Dhingra Speaks

UTC+8 21:30 U.S. CPI YoY (Oct)

UTC+8 21:45 Bank of England Chief Economist Pill Speaks

UTC+8 01:00 Next Day: European Central Bank Governing Council Member Villeroy Speaks

UTC+8 01:45 Next Day: Chicago Fed President Goolsbee Speaks

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Thomas

Forex

There’s a noticeable lack of a unifying theme in the forex markets today, largely attributed to an empty economic calendar across European and North American regions. Both Australian Dollar and British Pound are seeing a rebound from their recent downturns, particularly noticeable in currency crosses. However, the continuation of this momentum hinges significantly on impending economic data releases. Key reports to watch include Australian consumer and business confidence, along with UK employment data set to be unveiled tomorrow.

Dollar is trailing closely behind as the third strongest currency for the day. Meanwhile, Japanese Yen has seen a slight stabilization from its earlier steep selloff. However, Yen’s recovery is relatively modest and is confined to a select few currencies. The Japanese currency still seems poised to challenge its multi-decade low against Dollar, but market participants may reserve their major trading decisions on USD/JPY until release of US CPI data tomorrow.

Swiss Franc finds itself at the bottom of the performance chart today, facing additional downward pressure due to the resumed rally in EUR/CHF. Similarly, New Zealand Dollar and Canadian Dollar are also among the weaker performers, further weighed down by Aussie’s rebound against them. Euro, in contrast, presents a mixed picture, showing signs of vulnerability in several pairings except against Swiss Franc.

Technically, EUR/GBP is worth some attention in this quiet session. Firm break of 0.8715 minor support will argue that rebound from 0.8648 has completed after rejection by 0.8752 resistance. Fall from 0.8754 would then be seen as the third leg of the corrective pattern from 0.8752, and target 0.8648 support again. Nevertheless, in this case, strong support should emerge around 0.8648 to contain downside to complete the consolidation, and finally bring resumption of whole rise from 0.8491.

In Europe, at the time of writing, FTSE is up 0.63%. DAX is up 0.19%. CAC is up 0.29%. Germany 10-year yield is down -0.0221 at 2.697. Earlier in Asia, Nikkei rose 0.05%. Hong Kong HSI rose 1.30%. China Shanghai SSE rose 0.25%. Singapore Strait Times dropped -0.91%. Japan 10-year JGB yield rose 0.0192 to 0.877.

ECB’s de Guindos foresees temporary inflation rebound, December forecasts crucial for policy assessment

In a speech today, ECB Vice President Luis de Guindos said the central bank expects “a temporary rebound” in inflation in the coming months as base-effect drops out of calculations. However, he emphasized that ECB foresees the overall disinflationary process to continue over the medium term.

De Guindos highlighted the unpredictability surrounding energy prices due to geopolitical tensions and fiscal policy impacts, along with the potential upward pressure on food prices resulting from adverse weather events and the broader climate crisis.

Despite a marked decrease in inflation, de Guindos warned that it is expected to remain high for an extended period, with persistent domestic price pressures. “We will therefore ensure that our policy rates will be set at sufficiently restrictive levels for as long as necessary,” he affirmed.

Emphasizing the ECB’s data-dependent approach, de Guindos stated, “Our future decisions on policy rates will continue to be taken on a meeting-by-meeting basis.” He added that the ECB’s December meeting, armed with fresh macroeconomic projections and additional data, will be crucial for reassessing the inflation outlook and necessary policy actions.

Japan’s wholesale inflation eases to 0.8% yoy, continued downward trend

Japan’s corporate goods price index, a key indicator of wholesale inflation, exhibited a significant slowdown in October, underscoring a continued trend of easing price pressures.

The index increased by just 0.8% yoy, falling short of the anticipated 0.9% yoy and marking its first dip below 1% since February 2021. This latest figure also represents the 10th consecutive month of slowing wholesale inflation.

The deceleration in the CGPI can be largely attributed to decreases in the prices of specific commodities. Notably, costs for wood, chemical, and steel products experienced declines, reflecting the broader impact of reduced global commodity prices.

Export price index saw an uptick from 0.5% yoy to 1.0% yoy. Import price index showed a lesser decline, moving from -15.5% yoy to -12.5% yoy.

RBA’s Kohler warns of bumpy road ahead in tackling inflation

In a speech, Marion Kohler, Acting Assistant Governor of RBA, remarked that decline in inflation is expected to be a “more gradual process than previously thought.”

This outlook stems from the current economic environment characterized by “still-high level of domestic demand” and “strong labour” alongside other cost pressures. These factors contribute to the prediction that inflation will hover just below 3% by the end of 2025.

The Assistant Governor pointed out that the recent trend of declining inflation has primarily been “driven by lower goods price inflation.” In stark contrast, “domestically sourced inflation” – especially in the services sector – has shown resilience, being “widespread and slow to decline.”

Kohler also underscored the nuanced challenges in the next phase of controlling inflation, which she anticipates to be “more drawn out than the first.” This outlook aligns with experiences in other advanced economies that have faced similar inflationary patterns.

Furthermore, she cautioned about the potential for unforeseen challenges, citing the recent increase in fuel prices as an example of supply shocks that could unpredictably influence headline inflation.

Kohler emphasized the uncertain nature of the journey ahead in managing inflation, stating, “the road ahead could be bumpy.”

New Zealand BNZ services fell to 48.9, contraction with economic angst

New Zealand’s BusinessNZ Performance of Services Index experienced a notable dip in October, falling from 50.6 to 48.9, a level indicative of contraction in the sector. This decline also positions the index well below its long-term average of 53.5.

Activity and sales experienced a significant drop, moving from 50.9 to 47.4. There was also a downturn in employment, which decreased from 50.5 to 49.3. New orders and business fell as well,from 53.9 to 51.9. On a more positive note, stocks and inventories saw an increase, rising from 48.0 to 51.1, and supplier deliveries edged up slightly from 49.7 to 49.8.

Despite these declines, the proportion of negative comments in October decreased to 58.2%, a reduction from 61.8% in September and 63.9% in August, indicating a slight improvement in business sentiment.

BNZ Senior Economist Craig Ebert said that “combined, the PSI (48.9) and PMI (42.5) paint a picture of economic angst. This counsels caution around GDP for Q3, after it posted a surprising gain of 0.9% in Q2”.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0663; (P) 1.0678; (R1) 1.0700; More…

Intraday bias in EUR/USD stays neutral at this point. On the downside, break of 1.0655 minor support, and sustained trading below 55 4H EMA (now at 1.0664), will argue that the rebound from 1.0447 has completed with three waves up to 1.0755. That came after rejection by 1.0764 cluster resistance (38.2% retracement of 1.1274 to 1.0447 at 1.0763). In this case, intraday bias will be turned back to the downside for 1.0447/0515 support zone. Nevertheless, strong bounce from current level, followed by decisive break of 1.0764, will bring stronger rally to 61.8% retracement at 1.0958 next.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Rise from 1.0447 is tentatively seen as the second leg. Hence while further rally could be seen, upside should be limited by 1.1274 to bring the third leg of the pattern. However, break of 1.0447 will resume the fall to 61.8% retracement of 0.9543 to 1.1274 at 1.0199.

Article Source： ACTIONFOREX

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Michelle

Economic

Commodity

Slower-than-expected consumer adoption of electric vehicles (EVs) in 2023, wavering economic growth in China since the pandemic, and burgeoning lithium and cobalt supplies have sent prices of both metals lower, even as producer/hedger interest in futures contracts has expanded dramatically.

China is the biggest market for EVs, while lithium and cobalt are used in the manufacture of EV batteries. Since their 2022 peaks, cobalt prices have fallen by over 50%, from $40 to $16.50 per pound; meanwhile, the price of lithium hydroxide has fallen nearly 75%, from $85 to $23 per kilogram.

Battery Metals Prices are Falling. Will Demand Catch up to Supply?_1

Open interest (OI) – the number of unsettled futures contracts – in both lithium hydroxide and cobalt has increased significantly amid the price declines, stretching out well into 2025, which is more than typical in the metals complex. As of the end of October 2023, Lithium and Cobalt futures had OI as far out as March and December 2025, respectively. These futures curves point toward only a modest hope of recovery in cobalt prices, with December 2025 contracts pricing at around $20.68 per pound, compared to $16.50 for November 2023. It was a similar story in lithium, with March 2025 contracts closing in October at $26.85, compared to $23.83 for the November 2023 contract.

Neither the steep decline in prices over the past 18 months, nor the modest expectations for a recovery in prices over the coming 18-24 months have prevented either contract from seeing dramatic growth in aggregate OI. Indeed, OI has soared to nearly 10,000 contracts for lithium hydroxide and to around 20,000 for cobalt in recent months.

Battery Metals Prices are Falling. Will Demand Catch up to Supply?_2

Part of the reason for the strong growth in OI may have to do with the needs of producers/hedgers to manage their price risk. Both cobalt and lithium have seen explosive growth in global production in recent decades, as well as strong increases in battery use. This is especially the case for lithium, whose mining production has grown 20-fold from 6,100 metric tons in 1994 to 130,000 by 2022.

Much of this increased production has been directed to the battery sector. As recently as 2012, only 23% of lithium was used to make batteries. Today, it is 80%.

Cobalt's growth in production hasn't been as fast as lithium's but has still seen a spectacular 10-fold increase from 17,000 metric tons to over 190,000 between 1994 and 2022. Battery usage has grown from around 25% to around 35% of cobalt use in the United States.

The recent declines in lithium and cobalt prices have been mirrored in other metals. Both aluminum and hot-rolled coil steel prices have fallen by around 50% since their respective highs in 2021 and 2022. Both metals are closely connected to the pace of growth in China, which has disappointed expectations for strong growth following the country's sudden reopening from COVID-19 lockdowns late last year. That said, not all is gloomy in China when it comes to the prospects for battery metals: EVs accounted for nearly 40% of vehicle sales in China so far this year.

While EV sales have disappointed expectations in the U.S., prompting some automakers to delay investments in lithium battery plants, sales continue to expand. In 2020, there were only 50,000 EVs sold in the U.S. per quarter. That figure has now grown to over 300,000 per quarter. Moreover, the revolution in battery technology continues apace. Since 1991, the cost of storing one kilowatt hour of electricity in a lithium battery has plunged by over 98%, from over $7,500 to around $100. That number ticked higher in 2022 from 2021, perhaps owing to the surge in lithium prices between March 2021 and May 2022.

However, the recent 75% drop in lithium hydroxide prices, as well as the more than 50% decline in cobalt prices, might set the cost of lithium battery storage back on its downward trend, fueling greater adoption and ultimately a renewed surge in demand. The main question is can any renewed rise in demand keep pace with growing supplies.

Source: CME Group

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Glendon

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NY Fed Finds Softer Inflation Expectations in October_1

The expected path for inflation softened on balance in October amid rising expectations for future gasoline price increases and a largely stable outlook for employment and personal finances, the Federal Reserve Bank of New York reported on Monday.

Respondents to the bank's latest Survey of Consumer Expectations project inflation a year from now will stand at 3.6% from September's 3.7%, with inflation three years from now seen at 3%, the same level as the prior month, while five years from now inflation is forecast to stand at 2.7%, from September's 2.8%.

The New York Fed found that last month the expected rise in home prices remained at a historically tepid 3%, while survey respondents marked up the projected price of future gasoline price rises to 5%, from September's 4.8%.

The survey found little movement in how consumers view the outlook for the job market, with fewer people expecting higher unemployment next year and a small gain in those who expect to lose their jobs over the next 12 months. The expected path for spending held steady in October at 5.3%, a level well under the 7% the survey found a year ago, while the projected rise in household income was at 3.1% in October, from 3% in September.

The report also said there's been an improvement in how households viewed their current personal financial situation, with a “mixed” view on how things will be a year from now.

The New York Fed's report is most closely watched for its readings on inflation expectations, and it arrives at a time when some data has been spitting out a conflicted outlook for price pressures at a critical point for central bank monetary policy.

The relative stability of New York Fed expectations data contrasts with that seen in the University of Michigan Consumer Sentiment Survey. It found in November a rise in year-ahead expected inflation to 4.4% from 4.2% in October, with five-year expected inflation up to 3.2%, from October's 3%. Those numbers followed large increases in the University of Michigan October survey, which led the survey authors to say the gains are “no fluke.”

The Fed closely watches inflation expectations data because officials believe the expected path of price pressures exert a strong influence on where inflation stands now. Over the last year and a half the Fed has aggressively raised rates in a bid to cool high inflation. It left its rate target steady at its policy meeting at the start of the month as inflation pressures have ebbed. But it kept alive the prospect of more action should inflation not fall further on the path back to 2%.

Fed Chair Jerome Powell said in his press conference after the Federal Open Market Committee meeting that expectations remain “well anchored,” adding “it's just clear that inflation expectations are in a good place” and “there's no real crack in that armor.”

In comments on Friday, Powell acknowledged “inflation has given us a few head fakes” and he reiterated again the Fed will hike rates again if deemed necessary to control inflation.

LPL Financial Chief Economist Jeffrey Roach said, "investors should focus on the more encouraging and more robust survey out of the New York Fed," which he said draws on a bigger sample base and does more to fully capture consumer behavior than the Michigan survey.

By and large, economists are still expecting inflation to move lower albeit at a slow pace. The Philadelphia Fed said on Monday in its latest quarterly Survey of Professional Forecasters that economists expect inflation measured by the personal consumption expenditures price index, the central bank's preferred price pressure gauge, will still be over 2% through 2024, and stand at an annualized 2.3% by the final quarter of that year.

Another major test for inflation readings looms on Tuesday. The government will report on the October consumer price index, Stripped of food and energy, the core CPI is seen up by 4.1% in October, matching September's reading, while overall price pressures are seen moderating.