Issue #45: Nov'24 week 47
Block 1. Key Indices/Instruments
Block 2: Summary and Macroeconomic Overview
During the review period, we observed mixed trends in major stock indices. Notably, the Russell 2000 index outperformed others, as highlighted in the table above. Despite a slight decline in the Magnificent 7 stocks, the S&P 500 posted gains, indicating a reversal in the Stock Price Breadth metric. Interestingly, the equal-weighted S&P 500 rose by 3.07%, compared to the 1.59% increase in the market-cap-weighted index.
A significant rally was seen in U.S. retail stocks (e.g., XRT US), which surged by 6.77%, buoyed by positive business activity data. The decline in bond yields was primarily driven by the nomination of Scott Bessent, CEO and CIO of Key Square Group, as the potential U.S. Treasury Secretary. His candidacy is perceived as pragmatic and measured, given his extensive hands-on experience. However, his appointment remains subject to Senate approval.
November 2024 marked the fastest expansion in U.S. business activity since April 2022. The S&P Global Composite Index, which tracks manufacturers and service providers, rose from 54.1 to 55.3, signalling robust growth. Services continued to drive the economy, while manufacturers displayed the highest optimism about future output since spring 2022.
The Future Output Index reached its highest level since May 2022, extending October’s gain by 6.4 points. Meanwhile, the Producers and Services Prices Index fell to a four-year low of 50.8, pointing to a significant decline in inflationary pressures. This is a positive sign for the Federal Reserve, despite contrasting interpretations from Donald Trump’s team regarding future policy actions.
A slowdown in raw material costs also supports the downward inflation trend, suggesting inflation levels below the Fed's 2% target. Despite overall economic growth, manufacturing has contracted for five consecutive months, while services have reached activity levels not seen since March 2022. This heavy reliance on services raises concerns about sustainability.
The proposed protectionist policies and tariffs by the new administration are bolstering confidence in the manufacturing sector.
Block 3: Impact on Indicators
Fear and Greed Index
The Fear and Greed Index swiftly shifted into the greed zone despite mixed trends in major indices. As noted in the summary, the current stage is marked by "broad market growth" rather than gains concentrated in a few large-cap names.
Expectations for Fed Rate Cuts
Since the last update, expectations for rate reductions have not shifted significantly. Federal Reserve Chair Jerome Powell reiterated that there is "no urgency to act given the strength of the economy."
Insider Activity
There has been a notable increase in insider sales, driven by election results and higher medium-term sales volumes. Top executives are selling shares at historic highs, citing a lack of transparency regarding the administration’s tariff policy.
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Block 4: EU Update
The period saw a sharp decline in government bond yields, with a significant drop (e.g., a 10 bps decrease in the 10-year yield) following disappointing business activity data. This has increased the likelihood of larger rate cuts during the ECB’s December meeting.
November PMI data highlighted a deterioration in Eurozone economic activity, with the index falling to 48.1 from October’s 50.0, below economists’ expectations. The October-November average (49.1) is considerably lower than Q3’s 50.3, indicating a weakening economy in Q4 2024.
Major economies showed declines:
The ECB is set to lower rates by 25 bps in December, but risks stemming from Donald Trump’s presidency, including tariff threats, could prompt a more aggressive 50 bps cut. However, hawks within the ECB may resist significant cuts, citing wage growth in Q3 2024 and potential overestimation of PMI weakness.
Currently, a 25 bps cut in December is fully priced in, while a 50 bps cut is seen as a 25% probability.
Block 5: Great Britain
During the review period, UK broad market indices rose, and the yield curve shifted downward. Government bond yields were fully retraced following the announcement of a new fiscal plan and a sharp drop in sterling. The 10-year yield peaked at 4.56% on 6 November before falling approximately 30 bps.
Broad equity indices also rallied alongside sterling depreciation, as UK companies derive a significant portion of their revenues from global markets.
Retail sales fell short of expectations, while the S&P PMI highlighted deteriorating business sentiment. October retail sales in the UK dropped by 0.7% MoM, reflecting consumer caution ahead of the autumn budget. Delays in winter clothing purchases due to unusually warm weather and postponed spending in anticipation of Black Friday sales contributed to the decline. However, a 0.8% three-month growth in sales suggests a positive broader trend.
Following the budget’s publication and reduced uncertainty, consumer confidence has improved. The GfK Consumer Confidence Index rose by three points in November, while major purchase intentions increased by five points. Rising real wages and a 25 bps Bank of England rate cut to 4.75% are boosting purchasing power, though concerns about inflation and high rates persist.
Conversely, the composite PMI fell below the 50-point threshold to 49.9, driven by a sharp drop in services from 52 to 50. New business growth slowed to its weakest pace this year, with firms citing subdued demand and declining backlogs.
With the Federal Reserve’s commitment to rate cuts waning, the differential between BoE and Fed key rates could narrow, creating additional pressure on sterling. The BoE’s cautious stance suggests a 25 bps rate cut per quarter. The next meeting is on 19 December, with investors pricing a slim to none probability of a rate cut.
Disclaimer:
This information serves as a snapshot of market trends and does not constitute financial advice. Always conduct thorough research or consult with a financial advisor before making investment decisions.