Equities slumped on Thursday as weaker economic data stoked concerns of a recession in 2023.
United States
For the month of November, retail sales declined -0.6% compared to forecasts of -0.1%. Retail sales are not adjusted for inflation, highlighting that underlying spending by the consumer which accounts for two-thirds of the economy, is slowing dramatically. Should the Fed indeed continue to tighten policy and keep it restrictive for some time as it forecasts in contrast to market pricing, risks increasingly turn from inflation towards a recession. This would have the likely impact of lowering earnings forecasts for 2023 which have yet to be meaningfully downgraded and valuation multiples may have further downside to reach levels consistent with previous market lows and recessions. In summary, the likelihood of a “soft landing” in narrowing. Elsewhere, industrial production for the month of November missed expectations for a modest increase of 0.1% instead declining -0.2%.
The S&P 500 sunk –2.49% on Thursday in broad-based selling with 94% of stocks lower and all sectors negative. The Dow also lost -2.25%, the Nasdaq -3.23rty % and the Russell 2000 -2.52% with the VIX jumping 7.71% to 22.77. Should economic data continue to weaken and force the Federal Reserve into easing policy, government debt is likely to be the first beneficiary, particularly longer-dated debt which has been decimated as part of the current tightening cycle. While the 2-year rate rose 2.1 basis points on Thursday, both the 10 and 30-year rates were -3.1 and -3.6 basis points lower respectively keeping the 2-10 yield spread near the most inverted levels since the 1980’s.
Europe
In Europe, equity benchmarks were also sharply lower as the ECB raised interest rates by 0.5% as widely anticipated, however, it was an upwards revision of inflation projections and decision to shrink its 5 trillion Euro bond portfolio starting in March that weighed on sentiment. The ECB now forecasts inflation in 2023 to rise 6.3% compared to 5.5% previously, slowing to 3.4% in 2024 and 2.3% in 2025 higher than its September projections. “We have more ground to cover, we have longer to go, and we are in for a long game,” the ECB Chairman Christine Lagarde cleared the air on the bank’s future interest rates stating, “We should expect to raise interest rates at a 50 basis-point pace for a period of time”. Separately, the Bank of England also raised interest rates by 0.5% to 3.5% a 14-year high after nine successive increases and markets expect a peak rate of 4.25%. The STOXX 600 index closed -2.85% lower on Thursday with all sectors closing in the red. The CAC slumped -3.09%, the DAX -3.28% while the FTSE100 was -0.93% weaker shielded somewhat by a -2.01% decline in the Pound.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
Australia
The ASX is expected to open lower as ASX futures were down 83 points or -1.16% to 7,078. The ASX closed –0.64% lower on Thursday after ten of the twelve sectors fell sharply. Consumer staples and energy were the high performers, gaining 0.73% and 0.40% respectively. Materials lost -1.35%, consumer discretionary -1.25%, and real estate-0.96%. Lithium stocks sunk on signs prices peaking, Pilbara Minerals dropped -11.4%, Core Lithium -9.4, Liontown Resources -7.9, IGO -6.2 and Allkem -4.9%. In coal miners, New Hope rose 4.7%, Whitehaven Coal was up 3.9%. In corporate news, Woolworths confirmed a buyout of pet Business Petspiration Group for $586 million.
Commodities
In commodities, oil prices fell with the WTI and Brent declining -1.37% and -1.58% to $76.22 and $81.39 respectively. Spot gold slid -1.66% to $1,777.42 while spot silver -3.44% to $23.12. Data out of China showed retail sales below forecasts, leading to industrial metal prices to fall. Copper was down by -2.75% to $377, SGX Iron Ore slipped-0.14% to $108.62 while nickel gained 0.49% to $28,143.
Economic Data:
- S&P Global Manufacturing PMI (Dec) 09:00
- UK GfK Consumer Confidence (Dec) 11:00
- UK Retail Sales YoY (Nov) 18:00
- Eurozone S&P Global Services PMI (Dec) 19:00
- European Council Meeting 19:00
- Eurozone Core Inflation Rate (Nov) 21:00
- US S&P Global Composite PMI Flash (Dec) 01:45
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
