Market Watch: October 24, 2023

Equity markets erase early week gains following spike in Treasury yields

Despite the relatively good news about the state of the global economy, moves in bond yields continue to foment volatility in the equity market. Concerns over interest rates pushed yields higher, with the 10-year U.S. Treasury crossing 5.0%, a level that could have knock-on effects throughout the economy, raising rates on mortgages, credit cards, auto loans and more. Yields have not been this high since 2007. Higher yields in the bond market also offer investors an attractive alternative to stocks, another reason why volatility continues to ebb and flow in equity markets.

Highlights

U.S. markets closed -2.38%
lower for the week led by financials, particularly regional banks, as higher rates raised worries about the sector’s exposure as Treasury values continue to fall.
Canadian markets fell -1.78%
for the week amid broad-based declines in several sectors including industrials, utilities and base metals as markets grapple with uncertainty.
European stocks faced a similar situation to their North American counterparts, down -2.31%, as the possibility of higher rates continues to play out. Long-dated U.K. gilts closed at their highest levels since 1998.
Emerging market losses deepened amid the risk off sentiment, closing -2.35%
lower for the week. The potential for even higher yields as well as a wider conflict in the Middle East caused a sell-off in risk assets.

Highlights

The 2-year U.S. Treasury yield rose 9 basis points (bps) while the 10-year yield was up 29 bps. In Canada, the 2-year yield was up 6 bps and 10-year yields 16 bps.
The latest flow data from Bloomberg shows that investment grade funds turned heavily negative last month, at -$3.9bn USD. High-yield funds were hit with their second straight month of outflows, reaching -$3.0bn USD for September alone.
The Fed is now in a communication blackout period ahead of the October 31, 2023, Federal Open Market Committee (FOMC) meeting.

Weekly dashboard

The global week behind

Canada’s annual inflation eases in September, likely heading off interest rate hike

Canada’s annual inflation rate unexpectedly slowed to 3.8% in September and underlying core measures also eased, prompting markets and analysts to trim bets for another interest rate hike next week. Headline inflation had outpaced expectations in the previous two months, stoking fears that the Bank of Canada’s (BoC) 10 rate hikes since March of last year might not have been enough to cool prices. At 3.8%, inflation is still nearly double the bank’s 2% target. The price figures came after a third-quarter survey by the BoC that showed businesses gloomy on the economic outlook and inflation expectations easing slightly.

Highlights

According to Statistics Canada, month-over-month, the consumer price index was down 0.1%, lower than a forecasted 0.1% gain.
The deceleration in September was broad-based, stemming from lower prices for some travel-related services, durable goods and groceries. A factor driving prices was a 7.5% year-over-year increase in gasoline prices.
Grocery prices cooled for the third straight month, rising at 5.8%, the slowest pace since December 2021. Excluding food and energy, prices rose 3.2% compared with a 3.6% rise in August.

U.S. retail sales beat expectations in boost to third-quarter GDP growth expectations

U.S. retail sales increased more than expected in September as households stepped up purchases of motor vehicles and spent more at restaurants and bars, cementing expectations that economic growth accelerated in the third quarter. Strong demand illustrated by the report from the U.S. Commerce Department however raises the risk of the Fed hiking interest rates in December. The data followed on the heels of stronger-than-expected employment growth and consumer price readings in September.

Highlights

Sales at auto dealerships accelerated 1.0% last month. Receipts at gasoline stations climbed 0.9%, reflecting higher pump prices.
Online sales jumped 1.1% while sales at food services and drinking places increased 0.9%. Economists view dining out as a key indicator of household finances. There were also increases in sales at health and personal care, general merchandise as well as food and beverage stores.
Consumers cut back on big-ticket items like electronics and appliances, with sales at these outlets falling 0.8%. Receipts at building material, garden equipment and supplies dealers dropped 0.2%.

China’s third-quarter growth exceeds forecast

China’s third-quarter economic growth came in stronger than expected, boosting hopes that the world’s second-largest economy will meet or even exceed Beijing’s target of about 5% this year. Economic activity has also shown signs of stabilization in recent data with September retail sales and industrial production also bested median forecasts.

Highlights

According to China’s National Bureau of Statistics, the country posted 4.9% growth in the July to September quarter from a year earlier, beating economists’ expectations of 4.6%. This follows the 6.3% print for the April-June quarter and 4.5% growth for the January-March quarter.
On a quarter-on-quarter basis, China’s economy grew 1.3% in the third quarter, stronger than economists’ expectations for a0.9% growth. Second-quarter gross domestic product (GDP) growth was revised to 0.5%.
Other monthly releases by China included a 4.5% growth in industrial production and a 5.5% spike in retail sales in September from a year earlier, both slightly exceeding market expectations.

In the news: Country Garden bondholders seek urgent talks after missed bond payment

Bondholders of Country Garden, one of China’s largest property developers, are requesting urgent talks regarding a potential debt restructuring package after it was reported the company missed a $15m USD coupon repayment, putting it at risk of default. The coupon payment was due in mid-September, but there was a 30-day grace period for payment which the company has now passed. Non-payment would put the developer at risk of default on its nearly $11bn USD in outstanding offshore bonds and could trigger one of the country’s largest corporate debt restructurings, exacerbate the ongoing real estate crisis, and bring into question the country’s economic recovery.

Behind the headline

The group seeking a potential debt restructuring package holds ~$2bn USD of the developers’ bonds and consists of international investors and fund managers.
Rating agency Moody’s has said the company is at risk of having its ‘corporate family rating’ downgraded; Country Garden’s senior unsecured rating of C is already the lowest on the rating scale.
For the last few months Country Garden has been trying to raise money to meet its sizable debt obligations by unloading assets and selling shares. Most recently, the company’s Australian subsidiary has been in talks to close a $250m sale of an undeveloped housing plot in Melbourne to Singapore’s Frasers Property.

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by Scotia Wealth Management - The Zukiwsky Group

Market Watch: October 24, 2023

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