Investors Display Change Of Character After Two Painful Weeks

Investors are displaying a change of character by embracing risk taking in the final days of October following a pair of painful weeks for equities. The development comes as Wall Street braces for important tests in the coming sessions, including earnings reports from three Mag7 constituents, a Federal Reserve monetary policy decision and a complex geopolitical situation ahead of the midterm elections next Tuesday, during which prediction markets are signaling heavy GOP setbacks in House, Senate and gubernatorial races. Nonetheless, participants are reflecting a shift in demeanor regarding tech and AI, with recent turbulence offering bulls opportunities to raise exposures at cheaper prices. Additionally, easing oil costs are quelling yield pressures prior to the central bank’s Thursday announcement, which is largely expected to feature a pause although fixed income watchers still expect a hike in December. The Treasury gains are being driven by duration, with the shorter tenors suffering modest losses. But in stocks, the four major benchmarks are climbing, 10 of the 11 principal sectors are advancing and all subcategories are rising. Cryptocurrencies and non-energy commodities are also benefiting from the revival in animal spirits. Elsewhere, the greenback is strengthening and volatility protection instruments are seeing lightening premiums due to offensive sentiment on the trading floor.

Bar Has Been Lowered For Mag7 Earnings

The recent plunge in the Nasdaq paired with plummeting interest rates has effectively lowered the bar for upcoming Mag7 earnings. It would have been harder to achieve further appreciation from record highs in the indices amidst yields that were approximately 35 basis points higher a few weeks ago. Similarly, slowdown worries getting priced into the Treasury curve reduces pressure on the Fed to raise aggressively, as the complex essentially trimmed its expectation of where the central bank should be on its benchmark, which all else equal, decreases the odds of Chair Kevin Warsh coming out hawkish in light of fixed-income investors growing increasingly concerned about the health of the cycle and specifically concerning the feasibility of AI firms fulfilling their debt obligations over time. Meanwhile, overall AI trends remain robust and economic data continue to signal buoyant investment and demand, which when combined with loosening financial conditions, are conducive to a year-end rally as seasonals turn progressively favorable once we flip the calendar to November.

International Roundup

Singapore Industrial Production Weakens

September industrial production in Singapore sank 3.9% month over month (m/m) and grew at a slower year over year rate than in the preceding month, according to the Singapore Economic Development Board. The monthly decline comes after August’s 1% drop. When compared to the year-ago period, production was up only 3.4%, a much slower advance than the 15.4% jump in August even with strong demand for semiconductor equipment. 

For the m/m result, biomedical manufacturing helped dampen the weakness. When excluding the category, output was down 5.5%. For the annual rate, biomedical manufacturing and chemicals sank 32.8% and 4.6%. In the biomedical category, a change in the manufacturing mix of pharmaceutical ingredients contributed to the overall contraction. Export demand for medical technology also softened. The chemicals sector, meanwhile, slowed due to lower output of fragrances. Softer demand for petrochemicals and input supply disruptions also weighed on activity.

Categories with output expansion and the extent of their y/y growth were as follows:

• Precision engineering grew 31% with strong demand for semiconductor equipment, precisions modules, industrial rubber and various metal products.

• Transport engineering climbed 10.6%. While shipyard activity weakened, demand for aircraft parts and maintenance was strong.

• Electronics jumped 5.7% with output of AI products supporting the positive result.

• General manufacturing gained 4%, driven increased production of food, beverages and tobacco.

• Commercial printing also strengthened.

UK Retail Contraction Slows

The retail sector in the UK limped along in October but sales year to date moved close to neutral with the Confederation of British Industry Distributive Trades Survey climbing from -55 in the preceding month to -10. The result is based on the net balance of retailers reporting either negative or positive results. The survey also surpassed the economist consensus forecast of -47.