Good Start to a Big Finish? The Market’s Rally and the Road Ahead

Colivar Weekly Market Pulse

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Good Start to a Big Finish? The Market’s Rally and the Road Ahead

As the fallen leaves are swept away, making room for the festive season, investors, too, have witnessed a clearance of the persistent market gloom. Stocks have leapt forward, celebrating what could be the prelude to an impressive finale for 2023.

Last Week’s Rally: A Respite for the Rattled

The markets revelled in their best week of the year, driven by optimism and relief across various sectors. Real estate and utilities, the bond proxies that had been languishing, found their footing as yields softened. Banks, having navigated through the stormy seas of high-interest rates, welcomed the calm with open arms as investors grew increasingly convinced that rate cuts could be on the horizon – a prospect that appeared more tangible after the Fed’s latest policy pause, joined by ECB and BOE. 

Emerging market credit saw a variety of outcomes, painting a much more nuanced picture of global finance. Commodity markets added another layer of complexity. Oil prices dipped to their lowest since August as supply disruption concerns ebbed away – a significant departure from recent trends that had kept prices buoyant.

Across the Pacific, the landscape is shifting. The 10-year JGB yield flirted with 1% following the Bank of Japan’s redefinition of its yield-curve control policy into a more flexible guideline –a move away from the rigid structures of the past. The yen, however, faltered,shaken by the BOJ’s mixed messages, only to find respite as the dollar’s descent to its weakest since September lent an inadvertent hand. Japan’s monetary policy stands at a crossroads, diverging from the route taken by other major central banks.

Fed’s Balancing Act Spurs Market Confidence

The Federal Reserve’s recent meeting culminated in a steadied interest rate, much to the market’s delight, as we correctly predicted. Chair Jerome Powell’s remarks hinted at a cessation of hikes, aligning with the softening employment data. This Fed-driven reassurance not only supported a retreat in yields but also stimulated the banking sector,which closed the week with a rally, eclipsing the lows following the troubling episode at First Republic Bank earlier in the year.

Employment: A Moderating Yet Resilient Market

A cooling labour market has presented a dichotomy – a sign of easing inflation but still robust enough to avert a deep recession. The moderation in hiring is seen as a welcome alignment with the Goldilocks narrative, neither too hot nor too cold, hinting at a sustained yet temperate growth that could stave off aggressive monetary tightening.

Earnings Estimates: The Party Spoiler?

However, this resurgence faces headwinds. Analyst projections have cast a shadow, with 4Q23 and 1Q24 earnings-per-share estimates undergoing revisions. As Bloomberg Intelligence reports, this concern is not limited to banks but extends to most industries, pointing to broader economic pressures and demand issues that could lower revenue forecasts.

Sectoral Performance: A Silver Lining Amidst Cautions

The rally brought much-needed relief, particularly in sectors hit hard by rising interest rates. Despite the upward trend, the banking sector is not out of the woods just yet. The aftermath of the ‘higher-for-longer’ interest regime has scarred profit estimates for the coming quarters. Even as the market draws a sigh of relief, the lingering effects of the past tumult cannot be disregarded lightly. 

Additionally, European mining stocks might draw attention, bolstered by China’s intensified sovereign debt issues aimed at rejuvenating its construction and property sectors, which could, in turn,increase the demand for steel and iron ore. Tech remains a sector under scrutiny, with Apple suppliers exhibiting mixed responses to Apple’s revenue projections that failed to meet market expectations.

In the Asia-Pacific region, Filipino casino operator Bloomberry Resorts could see a surge after optimistic income forecasts from the national gaming regulator.

A Look Ahead: Cautious Optimism Amidst Turning Tides

Investors might well wonder if this market uplift is sustainable or just another transient phase of hope. Historical patterns suggest a seasonal advantage, i.e., the last two months have traditionally smiled upon the stock market. Yet, as corrections and market adjustments dictate portfolio decisions, the importance of strategic, long-term planning cannot be overstated. While the current market enthusiasm is contagious, it warrants a measured approach given the upcoming earnings revisions.

The impending week might offer a respite from the recent tumult, but only if the Middle East stays out of the headlines.The U.S. Treasury’s schedule features a trio of auctions: three-year notes on Tuesday, 10-year notes on Wednesday, and 30-year bonds on Thursday. All eyes will be on Jerome Powell’s scheduled appearances, with his IMF engagement on Thursday likely to be the linchpin for U.S. market sentiment. Moreover, the Fed’s senior loan officers’ survey may hint at a tightening credit landscape.

As the holiday cups brim with cheer, may investors’ portfolios reflect the same spirit, albeit grounded in the vigilance that the times demand. Could this be the good start leading to a big finish?Time, that shrewd storyteller, will unfold the narrative in the coming weeks.

Source: Data and insights derived from diverse financial sources, including Bloomberg Intelligence and market observations.