Fear and Loathing

Beware of Enthusiasm and of Love 

Fear and loathing in the Middle East is clouding a pretty picture being painted by the bond market. Stocks slipped in Asia to a week low and Chinese shares declined to their lowest since before the pandemic, whilst European indices have opened lower again after three straight days of heavy losses. The FTSE 100 fell more than 1% for each of the last three sessions. The S&P 500 notched its first down week in three, losing 2.4%, and regional bank stocks fell sharply on Friday, whilst tech stocks were caught up in the vicious bond market moves. Tesla dipped 15% for the week on soft earnings, Nvidia fell 9% on a White House chip ban and the Nasdaq lost 3.2% for the week.  In short it’s a tricky time for investors – bond rout + major geopolitical worries + earnings season uncertainty. Dow futs gapped up at the Sunday open but have come off 150pts since to test the 33,200 area, cash called to open 100pts lower barely above 33k. 

Yield Climbs, Gold shines, Crude Slips. 

The US 10yr yield topped 5% for the first time since 2007. The yield curve is becoming way less inverted – the 2s10s spread narrowed to just -14 bps from -108 bps in July. The 2s30s spread dis-inverted. Gold rallied handsomely last week and despite a gap lower at the open overnight it’s largely holding gains around the $1,976 area after a failed tilt at $2k late on Friday. Crude oil is lower, giving back some ground with it apparent that there is limited if any supply disruption for now. The question is what happens next - escalation tails are getting fatter.  

A Conflicted Market 

US secretary of defence Lloyd Austin warned about “the prospect of a significant escalation of attacks on our troops and people” in the Middle East. The US is redirecting one of two carrier strike groups, which had been ordered to head to the eastern Mediterranean, to the Persian Gulf.  

The European Central Bank is expected to pause and await new information on inflation and growth risks, whilst US and Japanese inflation data will be the focus for traders at the end of week looking to see what the Federal Reserve and Bank of Japan may do next. Tomorrow is all about the flash manufacturing and services PMIs. 

Oil not showing particular stress this morning now as it looks to test the 21-day EMA. Geopolitical risk premium remains but always a difficult one to trade once this becomes pronounced, though you’d tend to think it will support pricing for a while. 

Earnings Extravaganza 

It’s a huge week for earnings on Wall Street with around a third of the Dow Jones industrial average reporting Q3 numbers, whilst Big Tech gets an outing with Microsoft, Meta, Alphabet and Amazon due to report. European banks are due to report - +11% YTD for the Stoxx banks index. In London, Barclays, Lloyds, Standard Chartered and NatWest are due up this week – peak rates, but what about the mortgage market? Looking to see in particular what the housing market is doing to Lloyds and what investment banking looks like for Barclays. 

ARK: Survival Devolved 

LOLO: “As a result of ARK’s portfolio concentration during the Federal Reserve’s rate hiking cycle, ARK ETFs have accumulated Capital Loss Carryforwards (“CLCFs”) that will offset net capital gains that otherwise would have been distributed and taxed. Instead, the net gains have been reinvested in the same or new securities on a tax-free basis.”  

Down 28% in the last three years – don't worry folks, you can write it off against your tax liability. That is one selling point being touted by Ark. Cathie Wood says people don’t realise the value of those CLCFs! No, because for a 0.75% fee they thought they’d be up!