October 16, 2023
(THERE ARE MANY NARRATIVES ABOUT THE MARKET AND THE ECONOMY)
October 16, 2023
Hello everyone,
What’s on the Economic Calendar this week:
Monday
Australia RBA meeting minutes
Previous: N/A
Time: 8:30pm ET
Tuesday
Canada Inflation Rate
Previous: 4%
Time: 8:30am ET
Wednesday
UK Inflation Rate
Previous: 6.7%
Time: 2:00am ET
Thursday
Japan Inflation Rate
Previous: 3.2%
Time: 7:30pm ET
Friday
UK Retail Sales MoM
Previous: 0.4%
Time: 2:00am ET
Earnings reports continue this week.
Tuesday October 17
Goldman Sachs (GS)
Bank of America (BAC)
Johnson & Johnson (JNJ)
United Airlines (UAL)
Wednesday October 18
Morgan Stanley (MS)
Citizens Financial Group (CFG)
Western Alliance Bancorp (WAL)
Lam Research (LRCX)
Netflix (NFLX)
Thursday October 19
American Airlines (AAL) October 19
If we are in for a prolonged period of higher interest rates, we can also foresee:
Higher oil prices
Higher government deficits
Higher defense spending and
More political division
What will keep rates high?
A strong economy
Higher fiscal deficits
More Treasury issuance to cover budget deficits.
Investment implications:
A contrarian bias toward longer-duration debt and
Investment grade tax-free municipal bonds.
OIL
The Hamas attacks on Israel plus tighter supplies, declining inventories and limited spare capacity are lining up to keep energy costs high.
Investment implications:
Stay overweight energy as strong cash flow and earnings drive benefits to the sector.
BUDGET DEFICITS
The U.S. government has racked up a budget deficit of more than $1.5 trillion.
It becomes a spiral – the market stresses out over America’s finances -> greater potential for higher interest rates, deferred social spending, credit downgrade, a weaker U.S.$ and fiscal consolidation.
DEFENCE SPENDING
Geopolitical tensions should lead to an increase in defense spending around the world. The war in Ukraine and now the war in the Middle East have heightened the need for investment in this sector.
Investment implications:
Given the geopolitical situation, you can expect an emphasis on ‘hard power.’ In other words, we could see coercive diplomacy, economic sanctions, military action, or the formation of military alliances to act as deterrence.
U.S. firms are global leaders in defense and cyber activities.
POLITICS
There is political uncertainty everywhere:
A presidential election next year
Another potential government shutdown in November
The election of the Speaker of the House
Markets hate uncertainty.
Investment implications:
A rising dollar could mean trouble for stocks (but a downward move could be close).
Another credit downgrade could rattle markets.
Another viewpoint:
We can also argue that rising yields may have done the job for the Fed, and we may not get another interest rate rise this year. The implication here is that bond market movements are working to tighten financial conditions by raising the cost of credit for companies and individuals.
The 10-year Treasury yield has reached a medium-term high and could drop by roughly 80 basis points by the end of the year, according to some analysts.
Why might this happen?
Growth could start to falter in the U.S. with the economy possibly falling into a mild recession. And this will help push inflation down more quickly than most anticipate. These movements may give the Fed enough reasons to cut rates sooner and by more than what is currently discounted in the markets.
In other news:
Australians voted NO in the Referendum held on Saturday, October 14 that would have given Indigenous Australians a voice in Parliament in the form of an advisory body.
Thoughts on the S&P 500
From an Elliott Wave perspective, we can still interpret the market to be in the early stages of a rally headed toward an Elliott Wave 5 target around the mid-4,500s in the weeks ahead.
Next resistance is at 4340/4386.
Gold
Gold has the potential to trend higher after its big jump last week. (There was a flight to safe-haven assets because of the Israeli/Hamas war.) Resistance is now at $1,960/$2,000. If Gold can clear the $2,000 level, then this precious metal can retest Chart resistance at $2,072.
Wishing you all a wonderful week.
Cheers,
Jacquie
