Focus: Looking through the volatility
We look through the current market weakness to an eventual year-end ‘Santa rally’ in seasonally strongest November and December. We see growth re-accelerating, as virus cases fall, and the long-list of short term markets concerns easing — from US debt ceiling and Fed tapering to Chinese growth. Value stocks, like financials and energy, will continue to come in from cold, along with small caps, as bond yields rise. Whilst ‘bond proxies’ utilities and real estate suffer, with tech resilient as was ultimately seen in Q1.
Markets buffeted from all sides
Markets fell sharply as bond yields and oil prices surged and a US government shutdown was only temporarily avoided. September saw the S&P 500 down 4.8%, in its worst month since the March 2020 covid-crash, but manage a 0.2% gain for Q3, its 6th consecutive quarterly rise. The market is now 6% off it’s last all-time-high, in its first pullback of the year, versus an annual average three pullbacks. See our global markets presentation here for background.
Temporary pain from higher yields
US 10-year bond yields spiked. The speed, not level, unnerved equities, as in Q1. This supports some sector rotation into more growth-sensitive and cheaper Value sectors, such as financials and energy. Meanwhile, our proprietary investor sentiment indicator shows sentiment back down at average levels, a contrarian market support. If everyone is bullish there would be no marginal buyer to help take markets higher.
The buyback rebound in US and Europe
US companies share buybacks surged 50% last quarter, a big market support as the largest buyer of US equities. Buybacks were led by Apple (AAPL) and Alphabet (GOOG), with a large rebound from financials, led by JP Morgan (JPM). We expect a similar bank buybacks rebound in Europe, as regulators end their restrictions. We look to the best capitalised banks, from SEB (SK.PA) to Credit Agricole (ACA.PA).
DeFi tokens in focus
Crypto assets stabilised, shrugging of USD strength and China’s latest crackdown, helped by SEC chair Gensler’s support for a bitcoin futures ETF. Exchange protocol Uniswap (UNI) led major coin gains. Bitcoin (BTC) closed Q3 +35%, with Q4 historically its strongest quarter.
Oil rally and palladium collapse
Brent oil briefly rose over $80/bbl., a 3-year high, as the broad Bloomberg Commodity index closed September +4.1%, and a strong +6.3% for Q3. Precious metals weakness masked a continued palladium, and related equities, price collapse on auto industry disruption.
The week ahead: Looking for some comfort
1) A heavy Washington DC agenda to focus on looming Oct. 18 federal debt ceiling deadline. 2) Look for Friday’ US employment report rebound to set scene for Fed tapering. 3) Monday’ OPEC meeting under pressure to raise output further as prices soar. 4) Consumer earnings from Pepsi (PEP) and Constellation Brands (STZ) ahead of the Oct. 13 earnings season start.
Our key views: Staying the course
We see a positive outlook of 1) vaccine rollout and economic re-opening, and 2) still huge policy support, offsetting virus third wave and Fed tightening risks. We like assets helped by this growth: equities, commodities, crypto, and are cautious fixed income, and the USD.
Written by a team of experienced financial analysts at eToro.
This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation. Past performance is not an indication of future results.