Last week, I asked somewhat ironically “what could go wrong?”, while being fully aware of the many risks and challenges ahead of us. As a result, Cagliari Calcio lost miserably on Friday against Udinese… In the same time, we are entering into November this week through the Halloween backdoor, while investors have already had many treats so far this year -and certainly more than we were expecting. So, I decided to look, with the help of my colleagues, for a list of potential tricks that may derail the current fairy-tale bull market. Excluding obviously the unknown unknows, we came with 4 main categories: geopolitical crises, US presidential election-related turmoil, unfavorable macro backdrops and other risks, either endogenous or exogenous, we can think or fear about. So, here are a few, but unfortunately non-exhaustive, scary movies scripts we hope we won’t never see or will remain in the drawer as long as possible.
Geopolitics: keeping in mind that energy prices are the key factor to monitor in order to assess the potential “lasting” economic/market impact
- Middle-East: escalation leading to a broader conflict in the Middle-East
- Russia-Ukraine: war getting out of control with the involvement of other nations
- North-Korea: Kim Jong Un fat finger accident
- Taiwan: China invading it, or just besieging it (economic/sea transport blockade)
US presidential election turmoil: people are obsessed with this impending election as it is perhaps the world’s largest guessing game in terms of scenarios (results and then consequences). We identified three more or less possible outcomes, which we deem as the most disruptive for markets.
- Trump victory and a Republican sweep (red wave)
- Harris victory and a Democratic Congress (blue wave)
- Very tight outcome requiring a recount of the votes, with a marginal victory of Kamala Harris and Trump proving a sore loser
Unfavorable macro backdrops, which some of them as a consequence of other risks discussed here above or below
- Recession
- No landing of the US economy, with US inflationary pressures rebounding or a US labor market getting too hot again, leading the Fed to eat its hat by making a challenging U-turn.
- Stagflation as a consequence of an oil shock related to escalation in the Middle-East for example
Other endogenous or exogenous risks
- Bond vigilantes making an unwelcome come-back, “saddling up” again with US deficits on their agenda. Likely among the most disruptive scenarios given US Treasuries importance for global financial markets and potential uncertainties on the subsequent implications on growth, monetary policy and overall political choices
- A destabilizing endogenous “accident” on markets such as a big ETF blowing out, excessive -and obviously undetected so far- financial leverage of a major player (real estate, private market, insurance, bank, …), a crypto scam or scandal triggering a major correction, a more or less rapid deflating concentration within the US markets, etc.
- Another disruptive outbreak of a harmful and contagious virus
- A global tariffs war on the back of heightened protectionism across major economies, reversing most of previous decade globalization benefits
- A major terrorist attack with geopolitical consequences (still keeping an eye on oil prices)
- Destabilizing facts or developments in the euro area such as a destitution of President Macron with the LFI or the RN (far-left or right) taking over, sovereign debt issues, a major economic depression in Germany, or say it.
- Human singularity in a less distant future than thought. Singularity refers to a hypothetical future point at which artificial intelligence surpasses human intelligence, leading to unpredictable and potentially transformative societal changes.
- Or any black swans you may think about or other unknown unknows
As traditional valuation metrics are now looking increasingly stretched by historic standards, at a time when geopolitical risks are elevated and the fairy-tale soft landing’s scenario is now increasingly priced in, it should in theory get harder from here. In this context, it may be valuable to find some way to hedge your back with some efficient protection for the next few weeks or months (such a “cheap” put-spread on S&P500), but there could also be other more or less direct ways. In this context, I highly suggest to spend some time building a decision-support aid by to thinking about
- the probability you assign to each of these risks. It’s obviously hard and not really productive to put a precise figure but you can still give a “qualitative” assessment such as “very low”, “moderate” or “high” and just rank them.
- the consequences on the key financial assets’ prices or metrics impacting more or less directly your portfolios: equities (overall, sectors, geographical, or eventually specific stocks), bonds (rates, yield curve slope, credit spreads), forex (gainers/losers), commodity (especially oil and gold), with more details or emphasis in the area you are directly concerned in.
As the saying goes, it’s better to look ahead & prepare, than to look back and regret.
Economic Calendar
I hope you are well rested either because you were lucky enough to enjoy some holiday last week, or just because you fully benefitted from an extra-hour sleep related to the changeover to winter time this week-end. There’ll be indeed plenty to test the market nerves, and ours by the way, over the fortnight ahead. So, fasten your seatbelt and please don’t scream: a data-packed and likely Rock ‘n’ Roller Coaster week is awaiting us. On the extra-long menu list of attractions, we will get several key Q3 GDP releases, some important inflation prints, the US jobs report for October, a BoJ meeting, the US ISM manufacturing index as well as the earnings results of five of the Magnificent 7 stocks along with plenty other mega-caps stocks. And that’s just the starters before the US presidential elections and the Fed meeting the following week on Tuesday 5 and Thursday 7 November respectively… So, are you ready? If not, you can still take a deep breath (or a restful nap) today as the daily agenda is empty.
Globally, the main focus will certainly be the US October jobs report on Friday. However, the first preliminary of US Q3 GDP on Wednesday, as well as the September PCE deflator (favorite Fed’s inflation gauge) along with personal income and spending on Tuesday or the US ISM manufacturing index on Friday late afternoon will also draw investors’ attention as all these data will influence and shape the next Fed’s rate decision and stance on November 7th as Fed officials are now proclaiming their data-dependency. In this context, the consensus expects payrolls to increase by +120k in October, down from +254k in September (due to recent hurricanes downward distortions), with the unemployment rate stable at 4.1% and hourly earnings growth of +0.3% (vs. +0.4% in September). Ahead of this job report, the JOLTS and ADP reports will be released tomorrow and Wednesday.
As far as Q3 GDP preliminary print is concerned on Wednesday, the consensus foresees the US economy growing at 3.0% a.r. in real terms last quarter (same pace as the previous quarter). Details/contributions will be important too as the devil may be in them. Finally, a small uptick in both the PCE headline and core deflator month-over-month print is expected on Thursday: +0.3% in September for core vs. +0.1% in August, which will lead to a modest decrease of the annual rate of this inflation gauge to 2.6% from 2.7% (remaining therefore above the Fed’s target), while personal consumers income (+0.4% vs. +0.2% in Aug.) and consumption (+0.3% vs. +0.2%) should be both up as well. Other notable US macro data releases include the manufacturing ISM index on Friday (consensus at 47.6, while our model forecasts 51.1… vs. 47.2 in September) and the US Conference Board’s consumer confidence tomorrow.
Moving on to Europe, we will also get the release of the preliminary Q3 growth estimates of key Eurozone economies on Wednesday (Germany, France, Italy and Spain) and CPI October flash readings for Germany on the same day and for France, Italy and the whole Euro Area the day after (Thursday): Eurozone headline annual inflation is foreseen rebounding slightly towards 1.9%, while the core inflation may slow marginally to 2.6%. October inflation is also due in Switzerland on Friday. In Asia, the highlights will be the BoJ monetary policy meeting on Thursday and Chinese official PMI indices on Thursday and the Caixin manufacturing PMI on Friday. In Japan, the BoJ meeting could be trickier than usual giving last night Japanese Lower House elections, where the LDP-led ruling coalition lost its majority for the first time since 2009 and left now a highly uncertain political situation as the main opposition party -CDP- fell well short of a majority, while JPY is sliding once again. A somewhat more hawkish stance -and why not another unexpected rate hike- from the BoJ may help to stabilize the Japanese currency, especially if the depreciation seems getting out of control.
To conclude with the releases of the earnings results, more than 40% of the S&P500 market cap will report this week. All eyes will obviously be on the Big Tech names such as Alphabet (tomorrow), Microsoft and Meta (Wednesday), Apple and Amazon (Thursday), representing together $12tn of market cap or 23% of the S&P 500 alone! Staying in the tech sector, AMD (Tuesday), Samsung and Intel (Thursday) will also report. Energy heavyweights will also release their earnings results, including Exxon Mobil and Chevron on Friday, BP on Tuesday, as well as Shell, Total and ConocoPhilips on Thursday. Key names in healthcare include Pfizer, Eli Lilly and Novartis, while a potential read-on across consumer demand will come from McDonald’s, Mondelez, Starbucks, Adidas or VW. Mega-cap Q3-2024 earnings releases over the week is provided below the economic calendar.
Non-exhaustive list of major Q3-2024 earnings releases over the week (Market Cap > $100bn)
Source: earningshub.com
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