Asian Stocks Lead Strong Start To November

A very sharp rally for Asian equities overnight kicked November off to a solid start after October saw a firm bounce for most indices. Wall Street finished lower on Monday but still managed its best month since 1976. The FTSE rallied yesterday to take its October gains to almost three percent, whilst the DAX finished more than 9% higher for the month. As the Dow Jones posted a gain of almost 14% for last month, the S&P 500 managed an 8% rally as tech languished, the Nasdaq composite managing only a rise of less than 4%. A bit more confidence around risk this morning but the Asian put might just be a bounce from some pretty oversold levels in recent days leaving investors in a position to make a tactical stab ahead of the Fed. Or it could just be because it’s the start of the month…

More likely is a China-related story: Reports on social media that China is considering reopening its borders and ditching chunks of Covid restrictions boosted Asian trade, the Hang Seng by around 5%, led by tech with Tencent (HK:0700) +10%, Meituan +12%, Alibaba (NYSE:BABA) +7%; whilst shares on the mainland climbed around 3%. European bourses followed suit with gains of more than 1% at the start of trading on Tuesday. US futures are pointed higher this morning, too. China’s foreign ministry later said it was not aware of any such plans, but gains for China-sensitive miners and oil majors are helping the FTSE 100 extend gains to reach its best in well over a month. Despite its gains the Hang Seng is still down 33% this year.

Ocado (LON:OCDO) shares leapt 30% as it inked a robot warehouse deal in South Korea. The deal with Lotte will see Ocado create six CFCs and the terms are similar to other international deals – so burn through lots of cash building them and fees might eventually drip through in 5 years? The gains add about 3pts to the FTSE.

Saudi Aramco (TADAWUL:2222) Q3 net income more than $42bn. Closer to home BP’s underlying earnings doubled to $8bn in the third quarter. Profits rose from $3.3bn to $8.2bn, about $2bn ahead of expectations. A further $2.5bn in buybacks – equivalent to its North Sea tax bill this year but it won’t stop the government putting a tax target on BP’s back – Autumn Statement will be brutal and there is growing sense the government sees an easy win hitting big oil. Joe Biden is now calling for windfall taxes on US oil companies....BP (LON:BP) shares flat despite the numbers as uncertainty over tax situation remains. Shell (LON:RDSa) rose though and added 10pts to the FTSE.

US Earnings coming up later: Eli Lilly (NYSE:LLY), Newmont Corp, Pfizer (NYSE:PFE), Advanced Micro Devices (NASDAQ:AMD), Airbnb, Mondelez (NASDAQ:MDLZ), Uber (NYSE:UBER).

The Reserve Bank of Australia raised rates by 25bps – although in line with consensus there had been chatter about 50bps after inflation rose to 7.3%...feeds into CB slowing/pivot narrative ahead of the start of the Fed meeting today. RBA thinks inflation will now peak out at 8%.

Eurozone inflation rose to 10.7% from 9.9% a month earlier – European Central Bank boss Christine Lagarde saying in the wake of the report that there will be more rate hikes. EURUSD trades firmer against a broadly weaker dollar, climbing back to 0.9950, though still a little short of yesterday’s high, having shed about 2% since last Thursday’s ECB meeting.  ISM manufacturing and JOLTS today – look for signs of cracks in labour market ahead of Friday’s NFP to support pivot narrative.

Morgan Stanley's equity bear Mike Wilson says inflation has peaked and the S&P 500 could go to 4,150. Although another 75bps hike is expected, markets may be pricing in too many hikes...too early. Goldman Sachs (NYSE:GS)' Jan Hatzius reckons 75bps in November, 50bps in December, 25bps in February 2023, and a final 25bps in March; taking the Fed funds rate to 5%. 

I saw a tweet (not able to link to it but it’s from the usually funny @mark_dow ) to describe what a Fed pivot really means: “pretty soon we’re going to start beating you over the head more slowly, but we’re probably gonna have to do it for longer”. I think this neatly sums it up – the pivot might be a slowdown but the terminal rate will creep up. Moreover, if the Fed pviots/pauses too soon it might cause premature loosening of financial conditions, elevated inflation expectations and require a more severe reaction. 

Japan has been burning through FX reserves for little return. Finance minister Suzuki says "there are times when we announce intervention right after we do it and there are times when we don't".  See for yourself.

USD/JPY Chart

Watch out today as the Bank of England begins selling £750m of its stock of gilts at 14;15. This is the first attempt to offload the £838bn in gilts it has been holding since 2009 – let’s hope it’s a boring affair. The 10yr gilt yield is a bit higher this morning at 3.44%, but is still down by about one percentage point in the last two weeks. Sterling trades a tad off last week’s highs hugging the trend line at 1.15, supported by the Oct 5^th swing high at 1.1490.

GBP/USD Chart