Symax Fintech Daily Market Insights 30.10.23

No end in sight. Israel sent troops and tanks into northern Gaza in what Benjamin Netanyahu called “the second stage” of the war against Hamas. Limited internet and phone coverage were restored to Gaza, where the death toll rose. Joe Biden called for increasing the flow of aid into Gaza in a phone call with the Israeli PM. BB

The Federal Reserve’s preferred inflation gauge accelerated in September and consumer spending ramped up, keeping the door open for another interest-rate hike this year to stem price surges.

• Core PCE, which strips out volatile food and energy components, rose 0.3% last month. Inflation-adjusted consumer spending jumped 0.4%, driven by goods and services. 
• Over the past year,core inflation fell to 3.7%, the lowest level since May 2021, but still above the Fed’s 2% target.
• Separate data out earlier this week showed US economic growth accelerated to a knockout 9% annualized pacein the third quarter, fueled by consumer spending.

• The rub: While wages and salaries rose 0.4%, real disposable income fell for a third straight month, meaning consumers are saving less to support their buying habits.
• Demand for big-ticket items is softening. Shoppers are increasingly  shunning boats, refrigerators and other expensive goods, some companies say.
• Wall Street still anticipates the Fed will keep rates steady when it meets next week. Stocks sputtered and the S&P 500 entered a correction after sliding 10% from its July peak. Haven asset gold surged above $2,000. BB

Israeli forces are expanding their activity on the ground in the Gaza Strip, a defense spokesman said, as Gaza lost internet and phone service and Israel stepped up airstrikes. An IDF spokesman also advised people not to pay attention to reports that a hostage deal is near. Meanwhile, only about 2% of needed humanitarian aid is reaching Gaza. BB

When President Joe Biden was blamed for stoking inflation with his $1.9 trillion super-sized 2021 stimulus, his team argued that actually the price surge was a global phenomenon, so that couldn’t be true. For a time, it was “Putin’s price hike” — food and energy cost more thanks to turmoil from Russia’s Ukraine invasion.

Now, it’s bond yields that are surging, driven — many would argue — partly by concern with the US budget deficit, which is swelling even amid a strong economy.

Worries are such that a few bond market players say the Treasury next week may have to scale back an expected bump in longer-term debt sales.

But Treasury Secretary Janet Yellen waved away that angst in remarks Thursday at a Bloomberg event in Washington:

“I don’t think much of it is connected to that — this is a global phenomenon in advanced countries. We’re seeing yields go up in most” such economies, she said.

And indeed, yields have gone up across markets. Though because US Treasuries are the global benchmark, that was bound to happen regardless of the cause.

For his part, Federal Reserve Chair Jerome Powell says a heightened focus on deficits is a “candidate” for contributing to higher yields.

Yellen said the main driver here is US economic resilience, something Powell also highlighted last week. That in turn “suggests that interest rates are likely to stay higher for longer,” the Treasury chief said. She added that “we have to put forward fiscal plans that will keep the deficit manageable,” and “the higher the interest-rate path the more that we need to do.” (Click here to read the full transcript on the Terminal.)

But it’s still possible yields come down in time, Yellen said. Many of the underlying trends that held them low pre-pandemic are “still in force,” such as demographics, she said. And Powell indicated that sentiment among bond buyers is something that could shift in time.

How investors respond to the Nov. 1 debt-issuance plan from the Treasury will offer a good gauge of that sentiment. BB

General Motors and Stellantis NV are said to have agreed to provide 25% wage increases to United Auto Workers members, matching the same offer by Ford to possibly end a historic six-week strike in which the union held the industry to account for sacrifices made during the financial crisis. The GM proposal is also said to include cost-of-living increases over the more-than-four-year contract. The UAW strike began Sept. 15 and grew to include more than 45,000 workers from GM, Ford and Stellantis at eight assembly plants and 38 parts-distribution facilities in 22 states. The walkouts have cost the auto industry billions of dollars, with Ford’s deal earlier this week ramping up pressure on its Detroit rivals to finish their negotiations and get back to work. —David E. Rovella BB

The electric-vehicle boom that spawned multibillion-dollar startups overnight is starting to flounder as a key theme from this earnings season is waning demand. First was Tesla’s grim earnings report last week, followed by dour commentary from GM, Mercedes-Benz, Honda and car-rental company Hertz. The shift has been sobering for investors, as the valuations of most EV stocks assume a rapid industry expansion. BB

China’s ambassador to the EU labeled the bloc’s probe into its electric vehicle subsidies as “unjustified and regrettable,” and warned against any future trade measures that would penalize its clean-tech industry. It marks one of the strongest rebuttals yet by Beijing against the EU’s proactive approach in protecting its emerging green energy sector. BB

Saudi Arabia is looking to sign more free trade agreements and is still considering joining the BRICS club of emerging nations, as it looks to boost non-oil exports, the kingdom’s minister of economy and planning said. Authorities are exploring trade deals with an “ambitious” list of countries, Faisal Al Ibrahim said in an interview. “Exports are growing, but not as much as we want them in terms of non-oil exports,” Al Ibrahim said. “We want them to grow faster.” BB

In the tit-for-tat series of tariff hikes launched by then-President Donald Trump in 2018, it was quickly apparent that China would run out of scope to return fire, because it only imported a fraction of the value of goods that the US imports from China.

But it had other instruments in the mercantilist toolkit, and recent news has shown Beijing has honed them over time. Antitrust rulings and tax inspections have emerged as new arrows in a quiver that already featured things like curbs on exports of important raw materials and the wherewithal to halt overseas package tours, with all their spending power.

News on any of these fronts has the ability to reshape the outlook for companies affected, with implications for their share prices. Witness the $9 billion hit at one point this week to stocks linked to Foxconn Technology Group. That was after China put scrutiny on Apple Inc.’s largest iPhone assembler over apparent concerns with Taiwan’s election.

For investors, it means understanding geopolitical currents has become vital. Simply looking at products, marketing, costs and the broader economic backdrop aren’t enough. Goldman Sachs Group Inc. is so taken by the opportunity of guiding clients through what it calls “the swift currents of world affairs,” it just unveiled a whole new institute to do so. BB

China Evergrande Group, the world’s most indebted developer, faces a make-or-break moment today, at a court hearing on creditor requests for liquidation. The case in Hong Kong’s High Court follows a saga that’s epitomized the rise and fall of China’s real estate industry. The builder must present “concrete” restructuring progress to help avoid a once-unthinkable outcome. Any wind-up order could make Evergrande, with about 2.39 trillion yuan ($327 billion) of liabilities, the biggest Chinese developer to ever face such a fate. BB

Australia has walked away for the second time in three months from talks with the European Union toward a free trade deal. The two sides have been working on a free trade agreement for more than five years and while there was broad consensus across most areas, a few remaining agricultural issues were threatening to derail the entire compact. Australia was pushing for greater access to the European market for its beef, mutton and sugar, while Brussels wants an end to the use of certain geographic locators on products such as Prosecco and feta. BB

The Bank of Japan’s meeting this week is very much live, which means global currency and rates markets could be in for some severe shocks. All of the Japanese central bank’s gatherings bring with them the chance for change because it’s so hard to see how it can keep policy unchanged. Inflation is looking as sticky in the nation as it does elsewhere — look at Tokyo’s surprisingly robust October readings that came out Friday. And can the BOJ really go on buying up bonds faster than Japan’s government can issue them?

In the decade since then-BOJ Governor Haruhiko Kuroda kicked off massive persistent easing, the BOJ has bought some 60% more than the government sold, on a net basis, just looking at bonds rather than including T-bills. It now holds well above half of the long-term debt on issue. Adding to the burden for the current Governor Kazuo Ueda is the likelihood that the BOJ would probably have to initially increase purchases when it does move to end yield-curve control and/or negative rates. That pressure also means that markets could fluctuate even more wildly if Ueda simply holds pat rather than opening the door to ending the current set up.BB

HSBC announced a $3 billion buyback program after pretax profit came in at $7.7 billion, falling short of the $8.1 billion estimate. The bank also said it may increase some performance-related pay—resulting in higher expenses. It’s setting aside more funds for possible losses in China’s commercial property sector after warning of the risk of a further deterioration. BB