Here we are, saying thanks and goodbye to the excellent month of November for both bond and equity markets. US bonds rallied, and the bond yields melted starting from the end of October remember, and the melting bond yields offered to the S&P500 one of its biggest gains for a month of November. The index rallied more than 9% in November, is up by more than 10% since the end of October and Nasdaq 100 gained nearly 12% last month and is up by 15% since its October dip. Note that yields are one – and an important – part of the valuation story because when the return for low-risk assets decline, the valuations of riskier assets automatically move up. But there is also a fundamental leg to the US equity story.
Hot off the press from the US Bureau of Economic Analysis pointed at a 3.3% growth in total corporate profits during Q3, reaching an annualized rate of almost $3.3 trillion. This figure falls just short of the previous all-time peak of $3.3 trillion recorded in Q3 of 2022. And the significance lies in the fact that this profit increase demonstrates the adaptability of US companies to the post-COVID operating landscape of elevated wages and increased borrowing costs.
The debate now is, will such a strong month of November spoil our Santa rally, or the US stock markets will continue to extend gains in December? Looking at the aggregate company fundamentals, there is no reason for the rally to stop suddenly, unless shocker data pops up – like very bad jobs data or a very sharp decline in growth numbers to below-average levels. And even then, a part of the bad data would be tamed by soft Federal Reserve (Fed) expectations, right? And my past 10-year experience in the stock markets reminds me that valuations are never too high. Of course, over the past decade, the market was constantly navigating in the zero-rate regime and that’s changed since last year but it still feels like you are never thin enough, you are never rich enough, and the equities are never valued enough.
But looking at the technical indicators, US equities are now in overbought territory; they have been purchased too fast and in too short period of time and that a minor correction would be healthy in the next few sessions. But the latter doesn’t rule out a further rally when the overheated technical indicators cool down. A Santa rally is still on cards, if the Fed members continue not to mention to rapid fall in US yields to justify a more hawkish policy stance.
Good news is, inflation falls. Yesterday’s PCE data confirmed that the US PCE index fell from 3.4% to 3.0% in October, and core inflation eased from 3.7% to 3.5% – as expected. The fact that the data came in line with expectations gained little traction among bond buyers, as such we saw the US 2-year yield rebound past its 200-DMA and consolidate there this morning.
Better news is: inflation in Europe came in softer than expectations. Inflation in Eurozone fell to 2.4% in November from 2.9% printed a month earlier. It was also much better than a fall to 2.7% expected by analysts! Core inflation also eased more than expected to 3.6%. The EURUSD fell below 1.09 and losses could extend to 1.08/1.8020 region including the 200-DMA and the major 38.2% retracement on the October-November rebound.
Now, inflation can be a bit tricky and tends to make unexpected comebacks. Europe isn’t completely out of the woods yet, as the jobs market remains robust, and the European Central Bank (ECB) remains cautious. However, one of the major drivers of inflation in Europe, the Russian gas nightmare, is gently over as the region has taken massive steps to prepare for this winter season: it reduced its dependence to Russian gas to only 12%. That’s a big drop from the 40% before the Ukraine war.
Moreover, OPEC seemed kind of overwhelmed with events this week, as the group announced an additional 1mbpd cut that will be shouldered by cartel members, on top of the 1mbpd cut that Saudi will extend to next year. But the latter was nowhere near appetizing to get the oil bulls running. The barrel of crude fell to $75pb and should continue finding sellers into the 200-DMA, near $78pb.