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Tag: commodity

  • Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback

    Long U.S. dollar now seen as the most crowded trade, but bodes ill for the greenback

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    Long positions in the U.S. dollar is now considered the most crowded trade, according to a survey conducted by the Bank of America with global fund managers, but the greenback is likely near a peak, the bank said.

    The bank surveyed 67 fund managers managing $997 billion assets under management from the United States, United Kingdom, Continental Europe and Asia from October 6 to 11.

    The response represents a shift from early August as fund managers surveyed became more concerned about interest rates in September, according to the Bank of America note. 

    The latest survey bodes ill for the U.S. dollar
    DXY,
    as the equity rally this year has partially corrected and bond yields risen, after earlier making it to the most crowded trade, according to the bank’s strategists. 

    “We believe USD is near the peak, further strength requires a change in narrative,” the strategists wrote. 

    The ICE U.S. Dollar Index
    DXY,
    which measures the greenback’s strength against a basket of rivals, has slightly pulled back from its highest close in 11 months at 107 reached on Oct. 3, according to FactSet data. The index is mostly flat on Friday at around 106.6.

    Strong economic data in the U.S. coupled with a relatively more hawkish Federal Reserve than other major central banks, could be the most likely reason to support further strength in the dollar, according to the fund managers surveyed.


    BofA Global Research

    Meanwhile, the biggest downside risk to the greenback is if the U.S. economy sees a hard landing which will prompt the Federal Reserve to cut its policy interest rates. 


    BofA Global Research

    Respondents of the survey think that rate cuts are currently underpriced, and they think the Fed is likely to cut rates the most among major central banks. 

    “This should erode faith in USD strength, and suggests that USD longs may indeed be vulnerable,” the strategists noted. 

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  • Why uranium prices have climbed to their highest in over a decade

    Why uranium prices have climbed to their highest in over a decade

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    Uranium prices have reached their highest level in more than a decade as a global supply shortage persists, with the bull market for uranium investments still in its “earliest days.”

    The market is “definitely in a structural deficit as demand is growing at a 5% annual rate and the current (2023) gap between global production and consumption remains at over 50 million pounds,” Scott Melbye, executive vice president at mining company Uranium Energy Corp.
    UEC,
    +0.78%    ,
    told MarketWatch.

    Weekly spot uranium prices stood at $72.75 a pound as of Oct. 2, the highest since February 2011, according to data from nuclear-fuel consulting firm UxC, and were last at $69 as of Oct. 9. Weekly prices have climbed nearly 45% since the end of last year.

    Weekly prices for uranium have climbed around 45% year to date, data from UxC show.


    UxC

    In late August, Jonathan Hinze, president at UxC, told MarketWatch that the market was seeing the “best set up for nuclear power expansion” that he’d ever seen. That observation still holds, he said.

    It is clear that the uranium supply/demand balance remains “extremely tight, and it will likely only get tighter” in the coming 12 to 24 months as demand continues to rise, “while new supplies are taking more time to materialize, and inventories keep getting drawn down,” he said.

    Read: Uranium prices are still ‘nowhere near the peak of the last cycle’: Here’s why nuclear energy ETFs could power your portfolio

    Since late August, financial players, including hedge and publicly traded funds active in uranium, have been quite active buying additional uranium off the spot market, said Hinze. These funds “clearly believe that prices are set to rise further, and investors are therefore adding money to their coffers to allow them to buy physical uranium.”

    This is demand that isn’t fully anticipated in the market and this has added to the overall positive demand picture, he said.

    Price pullback

    Still, Melbye pointed out that uranium prices have pulled back a bit more recently as some traders took some “very handsome profits on their accumulated long positions.”

    That pullback may have also come as an “overreaction,” he said, to news from Kazakhstan, which produced the world’s largest share of uranium from mines in 2022, according to the World Nuclear Association. Kazatomprom, Kazakhstan’s national operator for the export and import of uranium, announced in late September a return to full production in 2025 to meet global nuclear energy demand.

    Melbye believes there was an overreaction in uranium prices because “this will ultimately have little impact on Western supply and demand as most analysts had them producing close to those levels by that time in their forecasts.”

    Even with that production assumption, the market is “still dramatically undersupplied,” and based on Melbye’s estimation, requires eight to 10 new mines starting up globally by 2030, he said.

    And while uranium has been among the best performing commodities year to date, it has only recently reached the level which “incentivizes the world’s best mines,” he said.

    This bull market in uranium investments is “still in its earliest days,” said Melbye.

    Among the exchange-traded funds, the Global X Uranium ETF
    URA
    has gained more than 25% on the year through Friday afternoon, while the Sprott Uranium Miners ETF
    URNM
    has added almost 36%. The Sprott Physical Uranium Trust
    SRUUF,
    a closed-end fund, trades nearly 39% higher.

    Broader new mine developments with significant capital investments in an inflationary environment require higher prices to move ahead, Melbye said. “Even at those levels, the long lead times needed to achieve these necessary start ups could leave the market in a short squeeze for several years.”

    The recent spot market move lower in prices marks a “temporary pause, and not a peak,” he said. “Buyers should be active on this welcome dip.”

    Supply ‘challenges’

    Contributing to supply concerns, a July coup has disrupted mining operations in the country of Niger in West Africa. Niger produced just over 4% of the world’s uranium in 2022, according to World Nuclear News. 

    The coup caused borders to close, and major uranium mine and mill operation called Somair has been halted, said UxC’s Hinze. The mine, operated by the French company Orano, sells most of uranium to customers in Europe, he said.

    Meanwhile, Cameco Corp.
    CCJ,
    +0.64%    ,
    one of the world’s largest providers of uranium, said it’s encountered challenges at its mine and milling operation in Canada. The company now expects to produce nearly 3 million pounds of uranium concentrate less this year than previously anticipated, said Hinze.

    “These production challenges add to the overall view that the supply/demand balance is very tight and will get even tighter,” he said.

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  • Treasuries Are Signaling Weak Demand. What’s Ailing The Market.

    Treasuries Are Signaling Weak Demand. What’s Ailing The Market.

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    30-Year Treasuries Had an Ugly Auction. What’s Behind the Weak Demand.

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  • Subprime car-loan rates are hitting 17%-22%. Should investors be worried?

    Subprime car-loan rates are hitting 17%-22%. Should investors be worried?

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    Many borrowers with subprime credit have been paying 17% to 22% rates on new auto loans this year as the Federal Reserve’s inflation fight takes a toll on lower-income households.

    That borrowing range reflects the average cost, or annual percentage rate, for a loan in recent subprime auto bond deals, according to Fitch Ratings, an increase from last year’s average APR of closer to 14%.

    Higher borrowing costs can mean households need to put more of their income into monthly auto payments, ramping up the risks of late payments, defaults and car repossessions. Those risks, however, have yet to make investors flinch.

    The subprime auto sector already has cleared almost $30 billion of new bond deals this year, according to Finsight, a pace that’s slightly below volumes from the past two years, but still above historical levels since 2008.

    The subprime auto bond market is revved up, even as borrowing rate soar


    Finsight

    “I do believe there has to be a reckoning if rates stay higher for longer,” said Tracy Chen, a portfolio manager on Brandywine Global Asset Management’s global fixed income team.

    Figuring out when the tumult might hit has proven difficult. Instead of slowing, the economy has shown resilience despite the Fed lifting its policy rate to a 22-year high of 5.25% to 5.5%. The central bank also indicated it might need to keep rates higher for some time to fight inflation. Longer-duration bond yields, as a result, have pushed higher, but still hover below 5%.

    Subprime standoff

    Inflation eats away at paychecks, especially those of lower-wage workers, a problem the Fed hopes to solve by keeping borrowing rates elevated. A gauge of inflation out Thursday showed consumer prices were steady at a 3.7% yearly rate in September, above the Fed’s 2% target.

    “This recession has been on everyone’s mind for the past three years,” Chen said. While she thinks the economy will likely contract in the middle of 2024, a lot of damage could be done before that. “The longer rates stay here, the harder the landing.”

    For now, the Fed is widely expected to hold rates steady at its next meeting in November. “Fed policy makers are now shifting their focus from ‘how high’ to raise the policy rate to ‘how long’ to maintain it at restrictive levels,” said EY Chief Economist Gregory Daco, in emailed comments.

    Stocks were flat to slightly higher in choppy trade at midday Thursday after the inflation report came in hotter than forecast, with the Dow Jones Industrial Average
    DJIA
    near unchanged and the S&P 500 index
    SPX
    up 0.2%.

    Past recessions and the burden of higher interest costs typically hit lower-wage workers harder, making subprime credit a canary in the coal mine for the rest of financial markets. Even so, investors in subprime auto bonds have yet to demand significantly more spread, or compensation, to offset potentially higher defaults among these borrowers.

    Related: Subprime auto defaults on path toward 2008 crisis levels, say portfolio managers

    Take the AAA rated 2-year slice of a new bond deal issued in mid-October by one of the subprime auto sector’s biggest players. It priced at a spread of 115 basis points above relevant risk-free rate, up from a spread of 90 basis points on a similar bond issued in August, according to Finsight, which tracks bond data.

    When factoring in Treasury rates, the yield on the bonds bumped up to about 6% and 5.7%, respectively. The shot at higher returns and low delinquencies in subprime auto bonds have likely helped with investor confidence. The rate of subprime auto loans at least 60-day past due in bond deals was about 5% in September, according to Intex, up from historic lows around 2.5% two years ago.

    “I think people still feel confident,” Chen said of subprime auto bonds. When putting a recent bond out on a Wall Street list to gauge its market value, she said bids come in right away.

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  • ‘Banks fail. It’s OK,’ says former FDIC chair Sheila Bair.

    ‘Banks fail. It’s OK,’ says former FDIC chair Sheila Bair.

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    Higher interest rates may be painful in the short term, but banks, savers and the financial ecosystem will be better off in the long run, said Sheila Bair, former chair of the Federal Deposit Insurance Corp.

    “When money is free, you squander it,” Bair said in an interview with MarketWatch. “It’s like anything. If it doesn’t cost you anything, you’re going to value it less. And we’ve had free money for quite some time now.”

    Bair, who led the FDIC from 2006 to 2011, caused a stir recently in criticizing “moonshots,” the crypto industry and “useless innovations” like Bored Ape NFTs, which proliferated because of speculation and near-zero interest rates.

    Her main message has been that the path to higher rates, while potentially “tricky,” ultimately will lead to a more stable financial system, where “truly promising innovations will attract capital” and where savers can actually save.

    Former FDIC Chair Sheila Bair was dubbed “the little guy’s protector in chief” by Time Magazine in the wake of the subprime mortgage crisis.

    Bair sat down for an interview with Barron’s Live, MarketWatch edition, to talk about the ripple effects of higher rates, what could trigger another financial crisis and why more regional banks sitting on unrealized losses could fail in the wake of Silicon Valley Bank’s collapse in March.

    “We probably will have more bank failures,” Bair said. “But you know what? Banks fail. It’s OK. The system goes on. It’s important for people to understand that households stay below the insured deposit caps.”

    The FDIC insures bank deposits up to $250,000 per account. It also has overseen 565 bank failures since 2001.

    “I know borrowing costs are going up, but your rewards for saving it are going up too,” she said. “I think that’s a very good thing.”

    However, Bair isn’t focused only on money traps and pitfalls for grown-ups. She also has two new picture books coming out that aim to explain big financial themes to young readers, including where easy-money ways, speculation and inflation come from.

    “One thing that I’ve learned from the kids is to not ask them what a loan is, because when I did that, a little hand when up, and she said: ‘That’s when you’re by yourself,’” Bair said.

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  • Dividend stocks are dirt cheap. It may be time to back up the truck.

    Dividend stocks are dirt cheap. It may be time to back up the truck.

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    The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.

    The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note
    BX:TMUBMUSD10Y
    or close to 5% on a 20-year Treasury bond
    BX:TMUBMUSD20Y
    seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.

    It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500
    SPX.

    Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF
    DIVL,
    use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.

    Dividend stocks are down

    Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF
    SCHD,
    which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust
    SPY.
    Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:


    FactSet

    The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.

    The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:

    Fund

    		 2023 return

    		 2022 return

    		 Return since the end of 2021
    SPDR S&P 500 ETF Trust

    		 14.9%

    		 -18.2%

    		 -6.0%
    Schwab U.S. Dividend Equity ETF

    		 -3.8%

    		 -3.2%

    		 -6.9%
    Madison Dividend Income Fund – Class Y

    		 -4.7%

    		 -5.4%

    		 -9.9%
    Madison Dividend Income Fund – Class I

    		 -4.7%

    		 -5.3%

    		 -9.7%
    Source: FactSet

    Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.

    The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.

    The opportunity — high relative yields

    The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index
    RUT,
    which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.

    The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF
    SCHD
    (because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:

    Index or ETF

    		 Dividend yield

    		 5-year Avg. yield 

    		 10-year Avg. yield 

    		 15-year Avg. yield 

    		 Relative yield

    		 5-year Avg. relative yield 

    		 10-year Avg. relative yield 

    		 15-year Avg. relative yield 
    Schwab U.S. Dividend Equity ETF

    		 3.99%

    		 3.41%

    		 3.20%

    		 3.16%

    		 2.6

    		 2.1

    		 1.8

    		 1.6
    S&P 500

    		 1.55%

    		 1.62%

    		 1.79%

    		 1.92%
    Source: FactSet

    The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.

    Examples of high-quality stocks with high relative dividend yields

    After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.

    When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips
    COP,
    -0.29%
    and EOG Resources Inc.
    EOG,
    +0.52%    .

    Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.

    Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:

    Company

    		 Ticker

    		 Dividend yield

    		 Relative yield

    		 2023 return

    		 2022 return

    		 Return since the end of 2021
    CME Group Inc. Class A

    		 CME,
    +0.47%         		2.04%

    		 1.3

    		 31%

    		 -23%

    		 1%
    Home Depot, Inc.

    		 HD,
    -0.39%         		2.79%

    		 1.8

    		 -3%

    		 -22%

    		 -25%
    Lowe’s Cos., Inc.

    		 LOW,
    +0.27%         		2.17%

    		 1.4

    		 3%

    		 -21%

    		 -19%
    Morgan Stanley

    		 MS,
    -1.54%         		4.24%

    		 2.7

    		 -3%

    		 -10%

    		 -13%
    U.S. Bancorp

    		 USB,
    -0.25%         		5.89%

    		 3.8

    		 -22%

    		 -19%

    		 -37%
    Medtronic PLC

    		 MDT,
    -4.32%         		3.62%

    		 2.3

    		 1%

    		 -23%

    		 -22%
    Texas Instruments Inc.

    		 TXN,
    -0.21%         		3.30%

    		 2.1

    		 -3%

    		 -10%

    		 -12%
    United Parcel Service Inc. Class B

    		 UPS,
    -0.16%         		4.17%

    		 2.7

    		 -8%

    		 -16%

    		 -23%
    Union Pacific Corp.

    		 UNP,
    +1.52%         		2.52%

    		 1.6

    		 2%

    		 -16%

    		 -15%
    Source: FactSet

    Click on the tickers for more about each company, fund or index.

    Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

    Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.

    Before showing this next set of data, let’s work through one example among the nine stocks:

    • If you had purchased shares of Home Depot Inc.
      HD,
      -0.39%
      five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%.

    • If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.

    • That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.

    Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.

    Here’s the dividend CAGR comparison for the nine stocks:

    Company

    		 Ticker

    		 Five-year dividend CAGR

    		 Dividend yield on shares purchased five years ago

    		 Dividend yield five years ago

    		 Current dividend yield

    		 Five-year price change

    		 Five-year total return
    CME Group Inc. Class A

    		 CME,
    +0.47%         		9.46%

    		 2.44%

    		 1.55%

    		 2.04%

    		 20%

    		 42%
    Home Depot Inc.

    		 HD,
    -0.39%         		15.20%

    		 4.32%

    		 2.13%

    		 2.79%

    		 54%

    		 75%
    Lowe’s Cos, Inc.

    		 LOW,
    +0.27%         		18.04%

    		 4.14%

    		 1.81%

    		 2.17%

    		 91%

    		 109%
    Morgan Stanley

    		 MS,
    -1.54%         		23.16%

    		 7.62%

    		 2.69%

    		 4.24%

    		 80%

    		 108%
    U.S. Bancorp

    		 USB,
    -0.25%         		5.34%

    		 3.60%

    		 2.78%

    		 5.89%

    		 -39%

    		 -26%
    Medtronic PLC

    		 MDT,
    -4.32%         		6.65%

    		 2.90%

    		 2.10%

    		 3.62%

    		 -20%

    		 -9%
    Texas Instruments Inc.

    		 TXN,
    -0.21%         		11.04%

    		 5.24%

    		 3.10%

    		 3.30%

    		 59%

    		 82%
    United Parcel Service Inc. Class B

    		 UPS,
    -0.16%         		12.23%

    		 5.56%

    		 3.12%

    		 4.17%

    		 33%

    		 56%
    Union Pacific Corp.

    		 UNP,
    +1.52%         		10.20%

    		 3.37%

    		 2.07%

    		 2.52%

    		 34%

    		 49%
    Source: FactSet

    This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos.
    LOW,
    +0.27%
    was added to the portfolio this year, as was United Parcel Service Inc.
    UPS,
    -0.16%    .
    But for most of these companies, dividends have compounded at relatively high rates.

    When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc.
    VZ,
    -0.94%
    last year, “as we became concerned about its fundamental competitive position in its industry.”

    Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”

    Don’t miss: How to tell if it is worth avoiding taxes with a municipal-bond ETF

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  • Emerging-market stocks look poised for a comeback after a difficult decade. Here’s what U.S. investors need to know.

    Emerging-market stocks look poised for a comeback after a difficult decade. Here’s what U.S. investors need to know.

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    Emerging-market stocks are coming off a tough quarter after facing down a triple threat of rising Treasury yields, a stronger U.S. dollar, and a lackluster recovery in China’s economy and markets.

    But amid the pain, some see opportunity for a lasting rebound.

    The iShares MSCI Emerging Markets ETF
    EEM,
    which tracks the widely followed MSCI Emerging Markets Index, fell 4.1% during the quarter ended in September, outpacing a 3.7% decline for the S&P 500
    SPX,
    the deeply liquid U.S. benchmark. Both benchmarks endured their worst performance in a year.

    It is just the latest chapter in what has been a decade of persistent underperformance during both good times and bad. The EM ETF fell 22.4% amid the global equity-market rout in 2022, compared with a 19.4% drop for the S&P 500, FactSet data show.

    But while the selloff in Chinese stocks has dominated headlines this year, some corners of the emerging markets universe have held up surprisingly well. Greek and Mexican stocks have even outperformed U.S. stocks in dollar terms, while other major markets like Brazil and India are trailing by only a modest margin.

    This hasn’t gone unnoticed by Wall Street, where some are advising clients to consider expanding their exposure to markets once deemed too risky for many U.S. investors saving for retirement.

    In a research note shared with MarketWatch, a team of equity strategists at Goldman Sachs Group
    GS,
    +0.69%
    pointed out that emerging-market stocks excluding China had outperformed developed-market stocks excluding the U.S. so far this year.

    Meanwhile, dissatisfaction with lofty valuations in the U.S., well as the prospect of another recession potentially looming around the corner have helped to embolden portfolio managers to seek out better returns elsewhere.

    Country ETF

    		 Ticker

    		 Performance YTD (USD)
    Brazil

    		EWZ +9.2%
    India

    		 INDA +7%
    South Korea

    		 EWY +4%
    Colombia

    		 GXG +2.5%
    Chile

    		 ECH -7.6%
    Mexico

    		 EWW +13%
    China

    		 MCHI -7.6%
    Indonesia

    		 EIDO -2%
    Saudi Arabia

    		KSA +0.3%
    Greece

    		 GREK +22%
    MSCI Emerging Markets

    		 EEM +0.8%
    U.S. (S&P 500 index)

    		SPX +13%

    Times are changing

    Over the past 10 years, rock-bottom interest rates helped U.S. stocks best practically all comers. During the 10 years through Monday’s close, the S&P 500 has risen 161.8% excluding dividends, while the MSCI ACWI Index
    ACWI,
    a broad index of developed- and emerging-market stocks, gained nearly 74%, according to Dow Jones Market Data.

    Emerging markets performed pretty poorly by comparison, with the MSCI EM Index down 9.6%.

    But just because EM stocks have lagged their developed-world peers for a decade doesn’t mean they are doomed to repeat this dismal performance forever. Some pointed to the torrid gains for Japanese stocks in 2023 as an example of how a market that trailed the U.S. for decades can see its prospects suddenly brighten.

    Japan’s Nikkei 225
    NIY00,
    +0.47%
    has risen more than 21% since the start of the year in U.S. dollar terms, according to FactSet.

    To that end, a chorus of investment bank equity strategists along with big-name investors like GMO’s Jeremy Grantham have said a similar dynamic could play out in emerging markets.

    Equity strategists like Bank of America’s Michael Hartnett and Barclays Emmanuel Cau have urged clients to look beyond the U.S. for returns. According to a research report from Cau and his team, emerging markets offer “better tactical risk-reward.” Hartnett told clients that U.S. stocks appear extremely overvalued compared with the rest of the world, and that it is time to diversify away from the U.S.

    “From the perspective of relative performance, the U.S. market has been really strong the past 10 years. It wasn’t like that the prior 20 years, and at some point, a reversion will happen,” said Dina Ting, head of global index portfolio management at Franklin Templeton, during an interview with MarketWatch.

    “That is helping to make the case for international markets.”

    The bull case for emerging markets

    With the possible exception of India, emerging-market stocks generally enjoy much lower valuations compared with their counterparts in the U.S.

    That is according to a table of valuations and projected returns shared by analysts at Goldman. Many local equity markets enjoy forward price-to-earnings ratios below 10. By comparison, the S&P 500, considered the U.S. benchmark, presently enjoys a forward price-to-earnings ratio of 18.11, according to FactSet.

    Country

    		 NTM P/E

    		 12-month return forecast (USD)
    Brazil

    		 7.5

    		 +35%
    Mainland China

    		 9.4

    		 +23%
    Mexico

    		 10.7

    		 +27%
    India

    		 20

    		 +8%
    Colombia

    		 4.6

    		 +55%
    Egypt

    		6.7

    		 0%
    South Korea

    		 11.1

    		 36%
    Indonesia

    		 13.8

    		 +20%
    Chile

    		 8

    		 +37%
    Saudi Arabia

    		 14.9

    		 +13%
    Total EM

    		 11.3

    		 +27%

    Developing economies have more rosy growth prospects, according to the International Monetary Fund, which released its latest batch of projections on Tuesday.

    As a group, the IMF expects developing economies to grow by 4% in 2024, compared with 1.4% for a group of advanced economies that includes the U.S.

    As Ting and other portfolio managers have pointed out, financials, producers of consumer goods and other industries are accounting for a growing share of emerging-market equity benchmarks. After so many years of being so heavily weighted toward China, and the commodity space, more diversity is seen as a welcome development.

    Although few, if any, emerging-market economies enjoy the trifecta of rule of law, deeply liquid capital markets, and institutional independence that investors take for granted in the U.S., progress has been made. Ting cited India as a great example of a country that’s recently made major strides toward becoming more friendly toward international investors.

    At the same time, paralysis in the U.S. Congress has raised concerns about potential political instability diminishing the attractiveness of the U.S. As House speakers are deposed and budget battles rage, some on Wall Street expect Moody’s Investors Service could join Fitch Ratings and S&P Global Ratings in stripping the U.S. of its AAA credit rating, as the agency has threatened to do.

    Central banks in Mexico, Brazil and India have also had far less trouble tamping down inflation compared with the Federal Reserve, which also bodes well for future equity returns.

    “In India and other emerging markets, certainly Brazil and others, their central banks have been much further ahead than the U.S. in fighting inflation,” said Ashish Chugh, a portfolio manager of long-only and long-short global emerging market equity strategies at Loomis, Sayles & Co.

    “The U.S. government handed out free money during COVID-19, but these emerging-market countries didn’t do that. They gave out food and other stuff, but they didn’t send checks in the mail. Because of that, you didn’t have as big of an inflation problem.”

    A word of caution

    While emerging markets have matured in many ways, the sheer number of disparate economies and governments can make risk management difficult. The emerging-market space as defined by MSCI consists of two dozen countries.

    Chinese stocks are still the most heavily represented in popular EM equity indexes like the MSCI Emerging Markets index, which is roughly 30% weighted toward the world’s second-largest economy.

    Many investors in the West are already familiar with the risks of investing in China, including those emanating from China’s authoritarian system to the fallout from burgeoning geopolitical tensions with the U.S. But the potential pitfalls of investing in India or Brazil may not be quite as well understood.

    That is why Zak Smerczak, an analyst and portfolio manager specializing in global equities at Comgest, would advise newcomers interested in the sector to start by investing in only the most established companies, even if their valuations don’t look quite as attractive.

    “Being selective is the key,” he said during an interview with MarketWatch. “Making a broad investment in emerging markets right now seems risky to us, but there are pockets of opportunities and in specific companies.”

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  • Stock market likely to see 12% retreat ahead of recession, says trader who called ’87 crash

    Stock market likely to see 12% retreat ahead of recession, says trader who called ’87 crash

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    “‘The stock market, typically, right before recession declines about 12%.That’s probably going to happen at some point from some level.’”


    — Paul Tudor Jones, founder and CIO, Tudor Investment Corp.

    That’s famed hedge-fund manager Paul Tudor Jones in an interview with CNBC Tuesday morning, explaining why he’s not enthusiastic about U.S. stocks and other risky assets as he awaits a recession induced by the Federal Reserve’s aggressive monetary tightening.

    Jones said it’s difficult to be positive on equities amid what he described as “the most threatening and challenging geopolitical environment that I’ve ever seen,” which is occurring “at the same time the United States is at its weakest fiscal position since World War II. It’s a really difficult time.”

    A 2023 rally in U.S. stocks has stalled, with the S&P 500 index
    SPX
    pulling back 5.5% from a 2023 high set on July 31, leaving the large-cap benchmark up 12.9% for the year to date through Monday’s close. The Dow Jones Industrial Average
    DJIA
    is up just 1.4% so far this year.

    Jones is widely credited with predicting, and profiting, from the stock-market crash on Oct. 19, 1987, which saw the Dow lose nearly 23% of its value, marking the largest one-day percentage decline for the blue-chip benchmark in its history.

    So what does Jones like?

    “I would love gold and bitcoin, together,” he said.

    “I think [bitcoin and gold] probably take on a larger percentage of your portfolio than historically they would because we’re going to go through a challenging political time here in the United States and…we’ve obviously got a geopolitical situation” in Israel and Ukraine, Jones said.

    Bitcoin
    BTCUSD,
    -0.72%
    was off 0.8% near $27,380 Tuesday morning and has rallied around 65% so far in 2023. Gold
    GC00,
    +0.59%
    has retreated from a high above $2,000 an ounce earlier this year, slumping below $1,850 last week as Treasury yields marched higher and the dollar strengthened.

    A pullback in U.S. bond yields has seen gold bounce 1.4% this week, trading recently near $1,871 an ounce.

    Large, speculative short positions in gold will provide fuel for a rally as a recession takes hold, the investor said.

    “In a recession, the market is typically really long assets like bitcoin and gold,” he said. “So there’s probably $40 billion worth of buying that has to come into gold at some point between now and if that recession actually occurs.

    “So yeah, I like bitcoin and I like gold right here,” Jones said.

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  • Here’s the real reason the stock market is so horrid. And, yes, it’s rather spooky.

    Here’s the real reason the stock market is so horrid. And, yes, it’s rather spooky.

    [ad_1]

    Some say it’s the fear of stagflation.

    Some say it’s chaos on Capitol Hill.

    Some say it’s turmoil in the Middle East.

    But we all know the real reason the stock market is so crummy, right?

    It’s October! Of course stocks are down!

    It is a bizarre, inexplicable, and yet undeniable, fact that, throughout history, Wall Street has produced almost all of its gains during the winter months of the year — from Nov. 1 to April 30. It is an even more bizarre, inexplicable and yet undeniable fact that the rest of the world’s stock markets have done the same thing.

    The so-called summer months, meaning the half of the year from May 1 to Halloween, have generally given you bupkis or worse. 

    Around the world, over the course of centuries of recorded financial history, stock-market returns have averaged four full percentage points higher from November to April than from May to October, report researchers Ben Jacobsen at Tilburg University and Cherry Yi Zhang at Nottingham University’s Business School in China. This so-called Halloween Effect seems “remarkably robust,” they concluded, after studying the financial returns of 114 different countries going back as far as they could find reliable monthly data — starting with the stock market in 1693 London. 

    Even more extreme: In the 65 countries for which they had extensive data both about the stock market and about short-term interest rates, it’s fair to say you would have been better off selling your stocks on May 1, putting the money in the bank, then taking it out again at the end of October and buying back your stocks (ignoring fees and taxes, of course).

    “In none of the 65 countries for which we have total returns and short-term interest rates available — with the exception of Mauritius — can we reject a Sell in May effect based on our new test. Only for Mauritius do we find evidence of significantly positive excess returns during summer.”

    Italics mine. Mauritius? 

    The Dow Jones Industrial Average
    DJIA
    is now lower than it was at the end of April. So is the Russell 2000
    RUT
    index of small-cap U.S. stocks. The benchmark international stock index, the MSCI EAFE, is down about 6%. Japan’s Nikkei
    NIY00,
    +1.90%
    is slightly up, as the yen has tanked.

    The S&P 500
    SPX
    is hanging on to a small gain, but that is only because of the early summer gains of a few tech titans. The average S&P stock is down about 2.5% since the end of April — while an investment in no-risk Treasury bills is up more than 2%.

    Meanwhile, let the record show that, over the same period, according to the record keepers at MSCI, the stock market in Mauritius is up 12%.

    Booyah!

    Every time I write about this Halloween or “sell in May” effect, I make the same two points, and I make no apologies for repeating them here, because they are unavoidable.

    The first is that, every spring, after looking at this data, I am tempted to sell all my stocks at the end of April, and every year I don’t, because I think it’s absolutely ridiculous. (And someone on Wall Street who is much smarter than me usually persuades me not to.) And most years I end up kicking myself for not doing it.

    The second is to recall the old economists’ joke: “I don’t care if it works in practice! Does it work in theory?” Selling in May — or, sure, the Halloween Effect — has absolutely no reason that anyone can find for working in theory. But apparently, it works in practice — which is pretty much where we are now.

    Does this mean stocks are going to rally? It’s anyone’s guess. It would be crazy if it were that simple. But, then, the whole Halloween Effect is crazy.

    If history is any guide, now is the time to buy stocks, not sell them, because the next six months are likely to be the time when they make you money. And if history isn’t any guide, well, aren’t we all sunk anyway?

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  • PepsiCo’s stock climbs after earnings beat consensus and company raises guidance

    PepsiCo’s stock climbs after earnings beat consensus and company raises guidance

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    Shares of PepsiCo Inc.
    PEP,
    +0.67%
    rose 2.5% in premarket trading Tuesday, after the beverage and snack giant reported third-quarter earnings that topped consensus and raised its full-year guidance.

    Net income rose to $3.092 billion, or $2.24 a share, from $2.702 billion, or $1.95 a share, in the same period a year ago.

    Excluding nonrecurring items, core earnings per share of $2.25 were ahead of the FactSet consensus of $2.15.

    Revenue grew to $23.453 billion from $21.971 billion, also ahead of the FactSet consensus of $23.413 billion.

    “We are pleased with our performance as our businesses and associates displayed tremendous agility and resilience across geographies and categories in an evolving and dynamic environment,” Chief Executive Ramon Laguarta said in a statement.

    Revenue at Frito-Lay North America rose 7%, while it was up 5% at Quaker Foods North America. PepsiCo Beverages North America rose 8%, while Latin America was up 21% and Europe up 2%.

    Revenue for Africa, Middle East and South Asia fell 6%, while Asia Pacific, Australia and New Zealand and China Region’s revenue was up 4%.

    For 2023, the company revised its core EPS guidance to $7.54 from $7.47 previously.

    “For fiscal year 2024, we expect to deliver results towards the upper end of our long-term target ranges for both organic revenue and core constant currency EPS growth,” said the statement.

    The company’s long-term target ranges for both organic revenue growth — 4% to 6% growth — and core constant currency EPS growth– high-single-digit percentage increase– remain unchanged.

    The stock has fallen 11% in the year to date, while the S&P 500
    SPX
    has gained 13%.

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  • 1970s-style stagflation may be at risk of repeating itself, Deutsche Bank warns

    1970s-style stagflation may be at risk of repeating itself, Deutsche Bank warns

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    A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era.

    Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return — adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia’s invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of Frankfurt-based Deutsche Bank
    DB,
    -1.40%    .

    Read: Questions emerge over how Israeli intelligence missed Hamas attack

    Oil prices settled more than 4% higher on Monday as traders weighed the impact of the war in the Middle East on crude supplies. The spike in energy prices is adding to the growing list of similarities to the 1970s era — which also includes consistently above-target inflation across major economies and repeated optimism about how quickly it would fall; strikes by workers; and even increasing chances that this winter will be dominated by the El Niño weather pattern, similar to what took place in 1971 and which is historically tied to higher commodity prices, according to Deutsche Bank.

    Inflation remains above central banks’ targets in every G-7 country — the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. How long it will remain high is one of the most important questions facing financial markets, and a destabilization of expectations would make it even harder for policy makers to restore price stability.

    “So given inflation is still above its pre-pandemic levels, it is important not to get complacent about its path,” Allen and Ainsworth-Grace wrote in a note released on Monday. “After all, if there is another shock and inflation remains above target into a third or even a fourth year, it is increasingly difficult to imagine that long-term expectations will repeatedly stay lower than actual inflation.”

    History indicates that the last mile of inflation is often the hardest. One of the key lessons of the 1970s was that inflation failed to return to previous levels after the first oil shock of 1973 and U.S. recession of 1973-1975, and went even higher following a second oil shock in 1979. Now that inflation has been above target for the last two years, “a fresh inflationary spike could well lead expectations to become unanchored,” according to the Deutsche Bank note.


    Source: Bloomberg, Deutsche Bank

    For now, the public’s inflation expectations, as measured by a New York Fed survey of consumers in August, remain largely stable, though still above the Federal Reserve’s 2% target.

    The current period differs from the 1970s era in a number of ways, the Deutsche Bank team also points out. Long-term inflation expectations remain “impressively” well-anchored, commodity prices have fallen substantially from their peaks over the past 12 to 18 months, and supply-chain disruptions that emerged during the pandemic have “broadly healed.” In addition, the U.S. is less energy intensive than in the past and less susceptible to damage from a 1970s-style energy shock.

    Even so, “it is vitally important to avoid complacency,” Allen and Ainsworth-Grace wrote. “Indeed, with the benefit of hindsight, one of the mistakes of the 1970s was that policy was eased up too early, which contributed to a resurgence in inflation.”

    Risk-off sentiment prevailed in financial markets during the early part of Monday, before stocks turned higher during the New York afternoon. All three major U.S. stock indexes
    DJIA

    SPX

    COMP
    finished higher in a volatile session. Trading in U.S. government-debt futures reflected greater demand and gold rallied as a flight to safety took hold. The cash market for Treasurys was closed for Columbus Day and Indigenous Peoples Day.

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  • Will Israel-Gaza war sink stocks and shake the global economy? Watch oil prices.

    Will Israel-Gaza war sink stocks and shake the global economy? Watch oil prices.

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    Wall Street on Monday shook off a bout of selling sparked by the Israel-Gaza war.

    That’s in keeping with the historical tendency of investors to look past geopolitical conflict and human tragedy, but it isn’t necessarily the last word. That last word will likely belong to oil traders.

    “Oil rallied today yet remains below the near-term peak from last month. If oil prices rise higher for longer, the global economy could feel a resurgence of inflation during a period when investors are hoping inflation is clearly decelerating,” said Jeffrey Roach, chief economist for LPL Financial, in emailed comments.

    Roach also noted that, in general, markets tend to have difficulty pricing the difference between a temporary shock and a permanent shock.

    For now, however, the jump in oil prices isn’t signaling a permanent shock. Sure, Brent crude
    BRN00,
    +0.11%    ,
    the global benchmark, jumped 4.2% on Monday to end at $88.15 a barrel, while West Texas Intermediate crude
    CL.1,
    +0.07%

    CL00,
    +0.07%
    surged $3.59, or 4.3% to $86.38 a barrel — the biggest one-day jump for both grades since April 3.

    See: Here’s what Israel-Gaza war means for oil prices as fighting continues

    The jump was impressive, but it comes after a big pullback last week that saw both WTI and Brent retreat from 2023 highs near $100 a barrel.

    So if crude can manage to close above those highs — $93.68 a barrel for WTI — investors across other markets will likely take notice.

    What would it take to drive crude back toward the highs? The focus is on Iran.

    The Wall Street Journal on Sunday reported that Iranian security officials helped plan the attack by Hamas. The Israeli military has said there is no concrete evidence of Iranian involvement, according to news reports.

    A direct role by Iran, a longtime ally of Hamas, would raise the threat of a broader conflict.

    Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.

    “If Israel discovers that Iran played a role in Hamas’ attack, it could retaliate militarily. At the very least, any warming of relations between Iran and the West is now on hold and this will limit incremental oil supply,” said Nicholas Colas, co-founder of DataTrek Research, in a Monday note.

    It’s a reminder that “while neither Israel nor Gaza are major oil producers, everything that happens geopolitically in the Middle East invariably ends up affecting oil prices,” he said.

    The potential for a broader conflict could lead to a “sharp market correction,” argued Olivier d’Assier, head of applied research, APAC, at Axioma.

    The scale of the conflict, the largest since the Yom Kippur War 50 years ago, renders comparisons with how markets have shaken off past geopolitical incidents, but they may be irrelevant in terms of stress testing, he argued.

    “The closest historical scenarios we could use would be 9/11 and the start of the Ukraine war. But because both took place on Western soil, they might not be adequate,” d’Assier said.

    On Monday, however, remarks by Federal Reserve officials ultimately trumped the rise in crude prices and jitters over the Middle East. Dallas Fed President Lorie Logan and Fed Vice Chair Philip Jefferson both noted the rise in long-term Treasury yields and their role in tightening financial conditions, which investors took as a signal the Fed may not be as likely to further raise interest rates.

    See: An Israel-Hamas war could change what the Fed does about interest rates

    Stocks turned north after a morning dip, with the Dow Jones Industrial Average
    DJIA
    rising nearly 200 points, or 0.6%, while the S&P 500
    SPX
    also advanced 0.6% and the Nasdaq Composite
    COMP
    gained 0.4%.

    For now, market participants appear set to look ahead to economic data later this week, including September consumer-price index and producer-price index readings.

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  • 1970’s-style stagflation may be at risk of repeating itself, bank warns

    1970’s-style stagflation may be at risk of repeating itself, bank warns

    [ad_1]

    A major Wall Street bank is warning about the risk that inflation expectations could become unanchored in a fashion similar to the 1970s stagflation era.

    Weekend attacks on Israel by Hamas illustrate how geopolitical risks can suddenly return — adding to the surprise shocks of the current decade, such as the COVID-19 pandemic and Russia’s invasion of Ukraine, said macro strategist Henry Allen and research analyst Cassidy Ainsworth-Grace of Frankfurt-based Deutsche Bank
    DB,
    -1.45%    .

    Read: Questions emerge over how Israeli intelligence missed Hamas attack

    Oil prices jumped by more than 4% on Monday as traders weighed the impact of the war in the Middle East on crude supplies. The spike in energy is adding to the growing list of similarities to the 1970s era — which also includes consistently above-target inflation across major economies and repeated optimism about how quickly it would fall; strikes by workers; and even increasing chances that this winter will be dominated by the El Niño weather pattern, similar to what took place in 1971 and which is historically tied to higher commodity prices, according to Deutsche Bank.

    Inflation remains above central banks’ targets in every Group-of-7 country — the U.S., Canada, France, Germany, Italy, Japan, and the United Kingdom. How long it will remain high is one of the most important questions facing financial markets, and a destabilization of expectations would make it even harder for policy makers to restore price stability.

    “So given inflation is still above its pre-pandemic levels, it is important not to get complacent about its path,” Allen and Ainsworth-Grace wrote in a note released on Monday. “After all, if there is another shock and inflation remains above target into a third or even a fourth year, it is increasingly difficult to imagine that long-term expectations will repeatedly stay lower than actual inflation.”

    History indicates that the last mile of inflation is often the hardest. One of the key lessons of the 1970s was that inflation failed to return to previous levels after the first oil shock of 1973 and U.S. recession of 1973-1975, and went even higher following a second oil shock in 1979. Now that inflation has been above target for the last two years, “a fresh inflationary spike could well lead expectations to become unanchored,” according to the Deutsche Bank note.


    Source: Bloomberg, Deutsche Bank

    For now, the public’s inflation expectations, as measured by a New York Fed survey of consumers in August, remain largely stable, though still above the Federal Reserve’s 2% target.

    The current period differs from the 1970s era in a number of ways, the Deutsche Bank team also points out. Long-term inflation expectations remain “impressively” well-anchored, commodity prices have fallen substantially from their peaks over the past 12 to 18 months, and supply-chain disruptions that emerged during the pandemic have “broadly healed.” In addition, the U.S. is less energy intensive than in the past and less susceptible to damage from a 1970s-style energy shock.

    Even so, “it is vitally important to avoid complacency,” Allen and Ainsworth-Grace wrote. “Indeed, with the benefit of hindsight, one of the mistakes of the 1970s was that policy was eased up too early, which contributed to a resurgence in inflation.”

    Risk-off sentiment prevailed in financial markets on Monday, with all three major U.S. stock indexes
    DJIA

    SPX

    COMP
    down in New York afternoon trading. Trading in U.S. government-debt futures reflected greater demand and gold rallied as a flight to safety took hold. The cash market for Treasurys was closed for Columbus Day and Indigenous Peoples Day.

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  • U.S. stocks lose ground after Hamas attacks Israel

    U.S. stocks lose ground after Hamas attacks Israel

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    U.S. stocks were slightly lower Monday as investors edged away from equities and other assets perceived as risky in favor of traditional havens after a surprise attack by Hamas on Israel over the weekend raised geopolitical alarms.

    What’s happening

    • The Dow Jones Industrial Average
      DJIA
      was down 26 points, or 0.1%, at 33,382.

    • The S&P 500
      SPX
      fell 11 points, or 0.3%, to 4,295.

    • The Nasdaq Composite
      COMP
      was down 102 points, or 0.8%, at 13,329.

    Stocks bounced Friday after a stronger-than-expected September jobs report, allowing the S&P 500 to rise 0.5% for the week and break a streak of four straight weekly declines. The Dow saw a 0.3% weekly decline, while the Nasdaq Composite rose 1.6%.

    What’s driving markets

    The attack by Hamas on Israel raised fears of a broader conflict.

    “Such geopolitical tension is traditionally and unsurprisingly negative on sentiment, with investors likely to be unsettled by the prospect of further uncertainty,” said Richard Hunter, head of markets at Interactive Investor.

    The price of Brent crude
    BRN00,
    +3.80%    ,
    the global energy benchmark, jumped nearly 4% amid concerns oil supplies from the region may be compromised.

    Need to Know: From $150 oil to no impact at all: What the surprise attack on Israel means to markets

    “The shocking attacks in Israel have sent the price of oil soaring, as investors assess the potential for the conflict to disrupt supply in the Middle East, if other countries are drawn in,” said Susannah Streeter, analyst at Hargreaves Lansdown.

    U.S. stock futures dived as bourses in much of Europe and Asia sold off, while traders moved into the perceived havens of gold
    GC00,
    +1.17%    ,
    the U.S. dollar
    DXY
    and government bonds, such as the German bund
    BX:TMBMKDE-10Y.

    See: Gold, U.S. dollar rally as investors flock to havens as Israel-Hamas war escalates

    The U.S. Treasury market is closed on Monday for Columbus Day and Indigenous Peoples’ Day, but futures
    TY00,
    +0.80%
    are trading and these indicate falling benchmark yields.

    “Geopolitical risk doesn’t tend to linger long in markets but there are many second order impacts that could come through in the weeks, months and years ahead from this weekends’ developments,” said Jim Reid, strategist at Deutsche Bank.

    Indeed, traders may find their focus soon switches this week back to monetary and corporate issues. Markets ultimately reacted positively to what on the surface was a strong nonfarm payrolls report published Friday, as traders believed it was not so hot it would move the needle on Fed policy.

    With that in mind, the U.S. producer and consumer prices data for September will be published on Wednesday and Thursday, respectively, with further evidence of easing price pressure required to cement no more rate increases by the Federal Reserve this year.

    Then Friday sees the start proper of the third-quarter company-earnings season, when big banks such as JPMorgan Chase
    JPM,
    -0.69%    ,
    Citigroup
    C,
    -0.97%    ,
    and Wells Fargo
    WFC,
    -0.93%
    present their results.

    Earnings Watch: Q3 earnings are here: S&P 500 heads toward year of profit declines as JPMorgan, and Delta report this week

    Forecasts suggest analysts have become less confident about corporate profitability in recent weeks. Aggregate S&P 500 earnings are expected to decline by 0.3% for the year to Q3 2023, which would mark the fourth consecutive quarter of falling earnings, according to John Butters, senior earnings analyst at FactSet.


    Source: FactSet

    Read: Good for stocks? Why Tom Lee says the attack on Israel could help equities.

    Companies in focus

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  • Oil prices jump 4% after Hamas attack on Israel

    Oil prices jump 4% after Hamas attack on Israel

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    Oil futures opened with strong gains late Sunday as traders reacted to an attack by Hamas on Israel, raising Middle East tensions and stoking worries about the outlook for crude supply.

    Price action

    Market drivers

    Oil traders were focused on Iran after a weekend attack on multiple fronts by Hamas militants, who are backed by Tehran. The Wall Street Journal reported that Iranian security officials helped Hamas plan the attack, which has left more than 700 Israelis dead and saw dozens of Israeli citizens and soldiers abducted. Israel pounded Gaza in retaliation, where the death toll was also reported in the hundreds.

    Analysts said that if Iranian involvement is affirmed, it could lead the U.S. to increase enforcement of sanctions on the country’s crude exports, which have moved back toward pre-2018 levels in recent months.

    “Historical analysis suggests that oil prices tend to experience sustained gains after the Middle East crises,” said Stephen Innes, managing director at SPI Asset Management, in a note.

    Oil fell last week, retreating after Brent moved within a few dollars of the $100-a-barrel threshold last month and WTI briefly topped $95 a barrel for the first time in more than a year.

    Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.

    See: U.S. stock futures tumble after Hamas attack on Israel

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  • ‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets

    ‘Fear trade’: What Israel-Hamas war means for oil prices and financial markets

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    Oil traders on Sunday said crude prices were likely to remain supported in the near term, as investors assessed the fallout from the surprise attack by Hamas on Israel and focused on the role played by Iran and the potential impact on that country’s petroleum exports.

    The conflict may also hold market-moving consequences for talks aimed at normalizing relations between Saudi Arabia and Israel.

    “While in the short term there is no impact directly on supply, it’s obvious how things play out over the next 24 to 48 hours could change that,” Phil Flynn, an analyst at Price Futures Group in Chicago, told MarketWatch.

    Brent crude futures
    BRN00,
    +4.17%    ,
    the global benchmark, and West Texas Intermediate oil futures
    CL00,
    +4.35%

    CL.1,
    +4.35%
    jumped more than 3% when the market opened Sunday night. U.S. stock-index futures
    ES00,
    -0.66%
    traded lower, while traditional havens, including gold
    GC00,
    +0.98%
    and the U.S. dollar
    DXY
    rose.

    Movements in oil prices, meanwhile, will also serve as a gauge for broader market worries around the conflict, analysts said.

    See: Israeli stocks slump in first day of trade since Gaza attack

    Hamas, the Iran-backed, Palestinian militant group that controls the Gaza Strip, staged a sweeping attack on southern Israel early Saturday. News reports put Israeli deaths at more than 700. The Gaza Health Ministry said 413 people, including 78 children and 41 women, were killed in the territory as Israel retaliated, according to the Associated Press. Injuries in Israel and Gaza were both said to be around 2,000.

    Israeli troops on Sunday were engaged in fierce fighting in an effort to retake territory in southern Israel as Hamas launched further barrages of missiles. Israeli citizens and soldiers were captured and are being held hostage in Gaza, according to the Israeli military.

    Read: Israel declares war, approves ‘significant’ steps to retaliate after surprise attack by Hamas

    The Wall Street Journal reported that Iranian security officials helped Hamas plan the attack. U.S. officials said they haven’t seen evidence of Iran’s involvement, the report said.

    “Iran remains a very big wild card and we will be watching how strongly [Israeli] Prime Minister Netanyahu blames Tehran for facilitating these attacks by providing Hamas with weapons and logistical support,” said Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Sunday morning note.

    Iranian crude exports have risen in recent years, indicating the Biden administration has adopted a soft approach to sanctions enforcement, Croft said. Some analysts have put Iranian crude production at more than 3 million barrels a day and exports above 2 million barrels a day — the highest levels since the Trump administration pulled the U.S. out of the Iranian nuclear accord in 2018, according to the Wall Street Journal. Sales fell to around 400,000 barrels a day in 2020 as the U.S. reimposed sanctions.


    RBC Capital Markets

    Hedge-fund manager Pierre Andurand, one of the world’s best energy traders, said in a social-media post that a large price spike for oil isn’t likely in coming days, but emphasized the market focus on Iran.

    “Now, over the last six months we have seen a very large increase in Iranian supply due to weak enforcement of sanctions. As Iran is also behind Hamas’ attacks on Israel, there is a good probability that the U.S. administration will start enforcing those sanctions on Iranian oil exports more tightly,” he wrote. “That would further tighten the oil market. Also the probability that this will lead to direct conflict with Iran is not zero.”

    Meanwhile, the Wall Street Journal late Friday reported that Saudi Arabia had told the White House it would be willing to boost oil production next year if crude prices remained high, as part of an effort aimed at winning goodwill in Congress for a deal that would see the kingdom recognize Israel and in return get a defense agreement with the U.S.

    A Saudi production cut of 1 million barrels a day that was implemented in July and recently extended through the end of the year has been given much of the credit for a rally that took global benchmark Brent crude within a few dollars of the $100-a-barrel threshold before retreating this past week. The U.S. benchmark last week briefly topped $95 a barrel for the first time in 13 months.

    In a statement, Saudi Arabia’s foreign ministry called on both sides to halt the escalation and exercise restraint, but also recalled its “repeated warnings of the dangers of the explosion of the situation as a result of the continued occupation, the deprivation of the Palestinian people of their legitimate rights, and the repetition of systematic provocations against its sanctities.”

    With the Israeli government vowing an unprecedented response, “it is hard to envision how Saudi normalization talks can run on a parallel track to a ferocious military counteroffensive,” said RBC’s Croft.

    Beyond oil, much will depend on the potential for the conflict to widen.

    Stocks have stumbled, retreating from 2023 highs set in late July, as yields on U.S. Treasurys have jumped. The yield on the 30-year Treasury bond
    BX:TMUBMUSD30Y
    rose 23.2 basis points last week to end Friday at 4.941%, its highest since Sept. 20, 2007. The 10-year Treasury note yield
    BX:TMUBMUSD10Y
    topped 4.80% on Oct. 3, its highest since Aug. 8, 2007, and ended the week at 4.783%. Yields and debt prices move opposite each other.

    The U.S. bond market will be closed Monday for the Columbus Day and Indigenous People’s Day holiday, while U.S. stock markets will be open.

    The S&P 500 index
    SPX
    rose 0.5% last week, breaking a streak of four straight weekly declines, while the Dow Jones Industrial Average 
    DJIA
    fell 0.3% and the Nasdaq Composite
    COMP
    gained 1.6%.

    “I think there will be a negative reaction. However, I don’t see a meltdown,” Peter Cardillo, chief market economist at Spartan Capital Securities, told MarketWatch.

    Traditional haven plays, including gold, the dollar and U.S. Treasurys may see a strong move upward, with price gains for Treasurys pulling yields down.

    “Geopolitical crises in the Middle East have usually caused oil prices to rise and stock prices to fall,” said economist Ed Yardeni, president of Yardeni Research Inc., in a note. “More often than not, they’ve also tended to be buying opportunities in the stock market.”

    The broader market reaction will depend on whether the crisis turns out to be a short-term flare-up or “something much bigger, like a war between Israel and Iran,” he said. The latter is unlikely, but tensions between the two are likely to escalate.

    “The price of oil may be a good way to assess the likelihood of a broader conflict,” he said.

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  • U.S. stocks staged a surprising rally on Friday. But can the party last?

    U.S. stocks staged a surprising rally on Friday. But can the party last?

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    U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.

    So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?

    “Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”

    Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.

    Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.

    At Friday’s session lows, the S&P 500 index
    SPX
    was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
    DJIA
    booked a 0.9% gain and the Nasdaq Composite Index
    COMP
    rose 1.6% higher.

    “The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”

    The yield on 10-year Treasury
    BX:TMUBMUSD10Y
    note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
    BX:TMUBMUSD30Y
    rose to 4.941%, according to Dow Jones Market Data.

    Read: Why 5% bond yields could wreak havoc on the market

    While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.

    “Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.

    Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.

    “That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.

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  • U.S. stocks stage a surprising rally on Friday. But can the party last?

    U.S. stocks stage a surprising rally on Friday. But can the party last?

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    U.S. stocks saw a surprising bounce on Friday, culminating in the S&P 500 index’s biggest intraday comeback since the March banking crisis, even though a monthly jobs report for September came in much higher than expected.

    So, are investors no longer worried about the Federal Reserve’s inflation fight or higher interest rates wrecking the U.S. economy?

    “Stocks initially sold off on the blockbuster jobs report which indicates the Fed may not be done,” said Gina Bolvin, president of Bolvin Wealth Management Group. “However, after digesting the strong labor market is still strong, stocks rallied. And why shouldn’t they? Will good news- finally – be good news?”

    Bolvin said part of the rally could be seasonal, with September typically being a rough months for stocks. There also has been increased optimism that the earnings recession for American corporations may be over, she said.

    Analysts are predicting corporate earnings growth rates of 5.9% for the fourth quarter for S&P500 companies, according to John Butters, senior earnings analyst at FactSet. Estimates are for the third-quarter of 2023 after the stock index’s fourth straight quarterly earnings decline on a year-over-year basis.

    At Friday’s session lows, the S&P 500 index
    SPX
    was down 0.9%, but it ended up posting a 1.2% advance, its largest intraday comeback since March 24, 2023, according to Dow Jones Market Data. The Dow Jones Industrial Average
    DJIA
    booked a 0.9% gain and the Nasdaq Composite Index
    COMP
    rose 1.6% higher.

    “The movement in stocks today is certainly encouraging given yields are up as well,” said Chris Fasciano, portfolio manager, Commonwealth Financial Network. “But we will need to see follow through next week.”

    The yield on 10-year Treasury
    BX:TMUBMUSD10Y
    note rose for five straight weeks in a row to 4.783% on Friday, while the 30-year yield
    BX:TMUBMUSD30Y
    rose to 4.941%, according to Dow Jones Market Data.

    Read: Why 5% bond yields could wreak havoc on the market

    While the U.S. stock-market will be open for business on Monday, the bond market will be closed for Columbus Day and Indigenous Peoples Day holiday, giving investors somewhat of a pause before a big week of economic data that could shape the Fed’s next decision on interest rates.

    “Ultimately, stocks and bonds will take their cues next week from the economic releases,” Fasciano told MarketWatch.

    Key items on the calendar for the week will be September inflation reports, with the producer-price index on Wednesday and the consumer-price index due Thursday. In between, Fed minutes of its policy meeting in September also are due to be released Wednesday.

    “That makes next week an important week for the future direction of both the bond and equity markets as the Fed will certainly be focused on those reports prior to their next meeting on Oct. 31-Nov. 1,” Fasciano said.

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  • Why 5% bond yields could wreak havoc on the market

    Why 5% bond yields could wreak havoc on the market

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    The yield on the 30-year Treasury bond briefly rose above 5% again on Friday, opening the door to the likelihood of a more sustainable rise above that mark and the risk that the benchmark 10-year yield follows — moves which could wreak havoc across financial markets.

    One big reason is that investors are likely to demand greater compensation for taking risk as yields hover around some of the highest levels of the past 16 years, asset managers said. Corporate credit spreads could keep widening in a sign of worsening economic conditions and higher overall risk. And with returns on government debt becoming a more favorable option for investments, the stock market may be vulnerable to repeated drubbings.

    Read: Treasury yields are climbing: ‘There’s never really been such an attractive opportunity for fixed-income investments’

    Stock investors nonetheless shook off Friday’s stunning official jobs report for September, which saw the U.S. add almost twice as many jobs as forecasters had expected. All three major stock indexes
    DJIA

    SPX

    COMP
    finished higher even though yields climbed on everything from the 1-month T-bill
    BX:TMUBMUSD01M
    to the 30-year bond
    BX:TMUBMUSD30Y.
    The yield on the long bond finished at 4.941% — the highest level since Sept. 20, 2007 — after rising past 5% during the New York morning. The rate on the 10-year note
    BX:TMUBMUSD10Y
    ended at 4.783%, the second-highest level of this year.

    Yields are returning to more normal-looking levels that prevailed before the 2007-2009 recession as the result of aggressive selloffs in government debt. More important than the absolute level of yields is the speed with which they have been heading to 5%. In the words of analyst Ajay Rajadhyaksha of Barclays earlier this week, there’s “no magic level” that will turn the current selloffs into a rally, and stocks have substantial room to reprice lower before bonds stabilize.

    “I think the market isn’t breaking yet, but a 5% 10-year yield is coming,” said Robert Daly, who manages $4.5 billion in assets as director of fixed income at Glenmede Investment Management in Philadelphia. “We’re already here on 30s and not that far away on 10s. Investors are trying to figure what level breaks the market, and I don’t think you can put your finger on the pulse as to what that level is.”

    Still, “a higher level of interest rates and yields is going to start having ramifications for broader markets at large,” leaving many investors hesitant to buy just about anything due to the volatility, Daly said via phone on Friday, after the release of September’s hot payrolls data.

    Friday’s data, which showed the U.S. creating 336,000 new jobs last month or almost double what economists had expected, is opening the door to a possible interest rate hike by the Federal Reserve on Nov. 1. The strong labor market means the Fed’s higher-for-longer mantra in rates is still in play and “the market is in a tenuous position to navigate all these things because of all the uncertainty,” Daly said.

    “Yields sustainably above 5% for a longer period of time will act as a weight on the market in terms of how you value risk compensation,” he said. “Investors are going to ask for more compensation to take risk and when you see liquidity evaporate more and more, that’s what’s going to turn the market over.”

    Friday’s price action was the second time this week that data related to the robust U.S. labor market has triggered a bonds selloff. On Tuesday, a snapback in U.S. job openings for August sent the 10- and 30-year yields to their highest closing levels since August-September of 2007.

    The next day, high-grade corporate-credit spreads widened for a seventh consecutive session. Daniel Krieter, a fixed-income strategist at BMO Capital Markets, wrote that “if rates continue to move higher or simply remain at these elevated levels for a significant period of time, it is going to have a pronounced effect on the creditworthiness of corporate borrowers, particularly in the high yield space.”

    In a note on Friday, Krieter’s colleagues, rates strategists Ian Lyngen and Ben Jeffery, wrote that “it’s not difficult to envision 10s maintain a range between 4.75% and 5.00%.”

    “The longer 10s hold this range, the more convinced the market will become that elevated yields are here to stay,” Lyngen and Jeffery said. “Admittedly, we’ve been surprised by the muted response in U.S. equities from the spike in yields and expect that’s due in part to the expectation for a swift reversal. In the event a correction fails to materialize, stocks will be overdue for a more meaningful reckoning.”

    The risk of “something breaking” will remain top of mind and “there is no shortage of risks facing equities and credit as rates continue to climb,” they added. “It’s not only the outright level of yields, but the length of time that borrowing costs stay elevated will also hold implications for risk asset valuations.”

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