Summary
Energy leading Communications by 100%
Seen biggest ever 100%+ US sector performance divergence this year. This has left 30-40% spread between best and worst performing countries and investment styles in the dust. Energy and Value have been in the performance driving seat and remain well-positioned. Tech and Growth been laggards, but are set to see some valuation relief next year as inflation fears ease, even as earnings concerns build. The 2023 sector outlook is for a gradual rotation to more risk.
Fed drives sharp market reality-check
Equities down sharply after November’ rebound. Reality check from Fed’ hawkish rate pivot to slower but higher rises, and BoE jumbo hike and recession call. Saw US bond yields and dollar rise. China soared on hope for covid policy change. Earnings a support, with 80% S&P500 reported and 70% beating. AAPL and AMZN froze hiring and MAERSK warned on trade. See video updates, twitter @laidler_ben.
Earnings season buying investors more time
Less-bad S&P 500 third quarter profits relief. Q3 11% sales and 5% profits growth buys investors time until a eventual Fed interest rate slowdown. Europe’s profits are even stronger.
Anatomy of dollar dominance
US dollar (DXY) rally off boil after big 20% surge. Is expensive and most outperformance in rear view mirror. But supported with wide interest rate differentials and big global risks.
Winter heating season in focus
Start of winter heating season delayed by warm weather, which may continue. Driven welcome plunge in Europe natgas prices. But product spreads very wide. @OilWorldWide.
COP27 down but not out
UN climate conference started in Egypt with low expectations but still strong trends.
Crypto markets holding firm
Crypto resilient to tech-led equity weakness, with BTC and ETH near key $20,000 and $1,500 levels. DOGE held on to most of recent big gains on TWTR optimism. MATIC benefitted from its Instagram NFT deal and the coming zkEVM scalability solution. NY Fed bullish on CBDC for significantly improving FX operations.
Commodities focus on China changes
Industrial metals, from copper to aluminium, and oil helped as the world’s biggest commodity importer considers possible zero covid policy change and Xi met with Germany’s Scholz and potentially US’ Biden, Came as latest PMIs show economy weak. Wheat whipsawed as Russia to re-join Black Sea grain export deal.
The week ahead: a big ‘event’ week
1) Risk that US core inflation rises further over 6.6% peak. 2) US mid-term elections (Tue) likely to further gridlock Congress. 3) China ‘singles day’ world’s biggest shopping event. 4) Earnings season winding down, with DIS, OXY, ATVI. 5) COP27 climate conference Nov 6-18.
Our key views: Fed risking a policy mistake
Fed is risking a policy mistake, with a high-for longer interest rate outlook even as forward looking inflation and the growth outlook falls. This raises risks. Recovery to be gradual and U shaped. Focus on cheap and defensive assets for now like healthcare, and styles like dividend yield, and related markets like UK.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -1.40% | 10.60% | -10.83% |
| SPX500 | -3.35% | 3.60% | -20.89% |
| NASDAQ | -5.65% | -1.66% | -33.04% |
| UK100 | 4.07% | 4.92% | -0.67% |
| GER30 | 1.63% | 9.67% | -15.27% |
| JPN225 | -0.53% | -0.41% | -5.53% |
| HKG50 | 8.73% | -8.90% | -30.93% |
*Data accurate as of 07/11/2022
Market Views
Fed drives a market reality check
- Equities were down sharply after November’s big rebound. Reality check came from Fed’s hawkish interest rate pivot to slower but higher rate rises, and Bank of England jumbo hike and recession warning. Bond yield curve saw a ‘bear flattening’ and dollar firmed. China markets soared on hope for zero covid policy easing. Earnings a support, with 80% of S&P500 reported and 70% beating forecasts. AAPL and AMZN announced hiring freezes and shipping giant MAERSK warned on trade.
Earnings season buying investors more time
- Less-bad S&P 500 third quarter profits been a relief to investors. Europe’s are even stronger. This buys investors time until a eventual Fed interest rate slowdown. Profits will keep easing but be crucially offset by less valuation pressure.
- Markets were braced for well under the 5% profits and 11% sales growth reported. Forecasts were slashed in advance, and valuations fell to 15% below average. Markets are now rewarding profits ‘beats’ more than are punishing ‘misses’, and shrugging off tech weakness.
Anatomy of dollar dominance
- US dollar (DXY) rally came off boil after big 19% surge this year, with hopes of a coming Fed rate hike slowdown and latest equity bear rally. Dollar is expensive and most of its outperformance may be in rear view mirror. But remains supported with interest rate differentials set to stay wide, and global risks not disappearing overnight.
- This is a recipe for some relief, from commodities to EM, but not a reversal. The latest deep dive on global currencies from the central banks bank, BIS, makes the US dollar’s dominance clear.
Winter heating season in focus
- November 1st typical start of winter heating season in energy markets. Been delayed by warm weather, which may continue if forecasts right. Has helped drive a welcome plunge in European natgas prices.
- Yet tight supplies keeping US refined product price premiums high, raising risks for return of normal seasonal demand. This would keep delivering huge energy company profits and stoke windfall tax talk. These taxes are a European reality today but unlikely in US. This has driven a big performance and valuation wedge between their energy sectors this year. See @OilWorldWide.
COP27 down but not out
- 27th two-week UN climate conference started in Egypt with low expectations. Policymakers face big distractions from the Ukraine war, energy security fears, geopolitical tensions, and weak economies. The focus will be on accelerating implementation and not on big new commitments. Recent extreme weather and Africa’s hosting to see change of tone towards climate adaptation as much as mitigation.
- But climate change continues to rise up the public’s agenda, governments are pushing policies, and renewables investments seeing strong growth. See @RenewableEnergy and @Driverless.
World’s ten most traded currency pairs (% total, 2022)
Crypto markets holding firm
- Crypto markets held firm despite the sharp tech led equity market weakness. Bitcoin (BTC) held above key $20,000 and Ethereum $1,500, with asset market capitalisation around $1 trillion.
- Bitcoin ‘dominance’ under 40% with recent focus elsewhere. Dogecoin (DOGE) held onto most of its dramatic recent gains on hopes that Twitter (TWTR) would enable for payments. Polygon (MATIC) price rose as its founder said the worlds first zkEVM mainnet scalability solution was ‘near’ and it inked an NFT deal with Instagram.
- US Fed official saw promising role for central bank digital currencies (CBDC) in speeding and scaling wholesale currency market operations.
Commodities focus on China changes
- Industrial metals, copper to aluminium, and oil helped by hope on China. Fall in composite PMI to contractionary 48 offset by hope for zero covid policy change and easing of geopolitical tensions. German chancellor Scholz visited China and Xi may meet President Biden at coming G20. China is world’s largest commodity importer, buying over 50% of global industrial metals production.
- Wheat prices were whipsawed by reports Russia was set to re-join the Black Sea grain export agreement that has eased global supply fears. The overall FAO food price index is down 15% from its March peak, with cereals the only ag component rising in the past month.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -7.32% | -6.90% | -35.15% |
| Healthcare | -1.82% | 2.15% | -10.88% |
| C Cyclicals | -5.52% | -7.04% | -33.56% |
| Small Caps | -2.55% | 1.36% | -19.84% |
| Value | -1.07% | 4.23% | -10.60% |
| Bitcoin | 2.42% | 4.71% | -55.59% |
| Ethereum | 5.89% | 21.78% | -56.05% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: A big ‘event’ week
- Data highlight is October US inflation (Thu) which may see key core inflation rise to a new peak over 6.6%, validating the hawkish Fed.
- US mid-term elections (Tue) to see divided Congress as Republicans make gains, per polls. Governor races and ballot initiatives (cannabis)
- China ‘singles day’ (Fri) world’ largest shopping event. Consumer and online trends test with slowdown struggles of world’s no.2 economy.
- US earnings season winding down with 80% S&P500 reported, and 70% beating forecasts. Results from DIS, OXY, ATVI , DD, BAM, BDX.
- The COP27 two-week UN Climate Conference kicks off in Egypt with low expectations.
Our key views: Fed risking a policy mistake
- Fed is risking a policy mistake, with a high-for longer interest rate outlook even as the forward looking inflation and GDP growth outlook falls. This raises risks. Market trying to bottom but recovery to be U-shaped only. Gradually lower inflation will be a bumpy ride but will eventually start to de-risk markets and allow risk assets, from equities to crypto to perform better.
- Focus on core cheap and defensive assets to be invested in this ‘new’ world, of higher inflation and lower growth, and to manage still high risks. Sectors, like healthcare, defensive styles like div. yield, and related UK to Japan markets.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | 5.13% | 0.31% | 18.48% |
| Brent Oil | 4.87% | 0.30% | 26.70% |
| Gold Spot | 2.27% | -0.95% | -7.91% |
| DXY USD | 0.03% | -1.78% | 15.44% |
| EUR/USD | -0.06% | 2.26% | -12.42% |
| US 10Yr Yld | 14.72% | 27.41% | 265.00% |
| VIX Vol. | -4.66% | -21.72% | 42.57% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: The biggest ever sector divergence
The biggest ever sector performance divergence leaves countries and styles in the dust
Adding to the records this year, many negative, has been the record performance gap between sectors (see chart). This is running at over 100% between energy and communications and is more than twice long term average levels. This has left both country and investment style choices in the dust. The gap between top and worst performing major countries in US$ this year is nearer 40 points between laggard China and leaders UK or India. Whilst the best performing high dividend investment style is leading the Growth laggard by 30 points. We see a more bunched performance next year as lower inflation and outlook for lower interest rates supports markets, with a switch from earnings downside risk to valuation upside.
Energy and Value have been in the driving seat and remain well-positioned
Energy has led with high-for-longer oil prices, investor friendly dividends and buybacks, and the markets cheapest valuations. These remain 2023 supports. Healthcare and Staples have been next best performers and are two the largest ‘Value’ sectors. Defensive cashflows and low valuations remain supports. Financials, the second largest value sector, been the relative disappointment but still outperformed. Its combination of cheap valuation, strong capital, and benefits of higher interest rates stand it in good stead. The Dow Jones Industrials just posted its strongest monthly performance since the 1970’s. The equal weighted S&P 500 has continued to outperform, and the market has shrugged off recent big tech weakness.
Tech and communications the laggard with focus on some valuation relief in 2023
‘Big tech’ stocks make up a fifth the S&P 500 and have disappointed. And dragged the three sectors they dominate, at 50% of IT, 40% of communications, and 30% of consumer discretionary. There high valuations were crushed by rising bond yields early in the year. More recently earnings misses hurt and their previous market leading growth rates are history. They are set to perform better in 2023 as their earnings resilience is in focus as economies cool further, whilst peaked Fed interest rates may ease the valuation downdraft.
The 2023 sector outlook of a gradual rotation to more risk
We are in midst of a slow u-shaped market recovery. Lower valuations, resilient earnings, peaked headline inflation, and poor investor sentiment all support troughed markets. We have a ways to go for the sharp inflation declines and lower interest rates that will drive start of next bull market. This is a scenario of fully invested but defensive positioning. Gradually re-risking through 2023 as lower inflation and peaked interest rates are validated. Rate sensitivities real estate and financials would benefit, along with tech, that suffered most from lower valuations. These should see relief, even as earnings continue to see pressure.
Performance gap between strongest and weakest S&P 500 sector (%)
Key Views
| The eToro Market Strategy View | |
| Global Overview | The aggressive Fed interest rate hiking cycle and stubborn inflation has boosted uncertainty, recession risk, and hit markets hard. We see this gradually fading, with global growth stressed but resilient, inflation pressure slowly easing, and valuations now more attractive. Focus on cheap and defensive assets for a gradual ‘U-shaped’ market recovery. |
| Traffic lights* | Equity Market Outlook |
| United States | World’s largest equity market (60% of total) seeing slowing GDP growth but still-resilient earnings growth. Valuations led market rout, and now at average levels, and are supported high company profitability and near peaked bond yields. Faster Fed hiking cycle boosting recession risks. Focus on cash-flows defensives, like healthcare and high dividend. Big-tech supported by structural growth outlook. See gradual ‘U-shaped’ rebound as inflation slowly falls. |
| Europe & UK | Favour defensive and cheap UK equities (‘Economies are not stock-markets’) over high risk/high return continental Europe. Recession risks high with Russia and energy crisis, threatening to overwhelm ‘buffers’ of rising fiscal spending (defence and refugees), low interest rates (slow to raise ECB), and weak Euro (50%+ sales from overseas). Equities partly cushioned by lack of tech, and 25% cheaper valuations vs US. Favour cheap and defensive UK over Continent. |
| Emerging Markets (EM) | China, Korea, Taiwan dominate EM (60% wt.), and more tech-centric than US. Positive on China as economy reopens, cuts interest rates, and eases tech regulation crackdown. Valuations 40% cheaper than US and market out of favour. Recovery helps global sectors from luxury to materials. More cautious rest of EM on rising rates and strong USD. |
| Other International (JP, AUS, CN) | Canada and Australia benefit from strong equity market weight in commodities and financials, if global growth resilient and bond yields rising. Japanese equities among cheapest of any major market, benefit from weaker JPY and with low inflation, offsetting structural headwinds of low GDP growth, an ageing population, and world’s highest debt. |
| Traffic lights* | Equity Sector & Themes Outlook |
| Tech | ‘Tech’ sectors of IT, communications, consumer discretionary (Amazon, Tesla), dominate US and China. Hurt by higher bond yields and above average valuations. But structural stories with good growth, high margins, fortress balance sheets support some. ‘Big-tech’ attractive new recession defensives. ‘Disruptive’ tech is much more vulnerable. |
| Defensives | Core positions as macro risks rise and bond yields are better priced. Consumer staples, utilities, real estate attractive defensive cash flows, less exposed to rising economic growth risks, and robust dividends. Offset impact of higher bond yields. Healthcare most attractive, with cheaper valuations, more growth, some rising cost protection. |
| Cyclicals | Higher risk cyclical sectors, like discretionary (autos, apparel, restaurants), industrials, energy, and materials, are cheap and attractive if see a ‘slowdown not recession’ scenario. Are select but high risk opportunities from energy to financials stocks. With often depressed earnings, cheaper valuations, and have been out-of-favour for many years. |
| Financials | Benefits from higher bond yields, charging more for loans than pay for deposits. Also one of cheapest P/E valuations, and room for large dividend and buyback yields. But is being outweighed by rising recession risks, with lower loan demand and higher defaults. Banks most exposed. Insurance and Diversifieds (like Berkshire Hathaway) least. |
| Themes | We favour Value over Growth on GDP resilience, lower valuations, rising bond yields, under-ownership after decade under-performance. Dividends and buybacks recovering with cash flows. Power of dividends under-estimated, at up to 1/2 of total long term return. Secular growth of Renewables and Disruptive Tech investment themes. |
| Traffic lights* | Other Assets |
| Currencies | USD ‘wrecking ball’ surge driven by rising Fed interest rates and ‘safer-haven’ bid. Whilst many developed markets currencies hurt by their still low interest rates and struggling growth. ‘Reverse currency war’ interventions ineffective. Strong USD hurts Emerging Markets, commodities, US foreign earners like tech. But helps big EU and Japan exporters. |
| Fixed Income | US 10-year bond yields risen above prior 3.5% peak, as Fed hikes continue aggressively and balance sheet runoff accelerates. Set to ease as recession risks rise and inflation expectations fall. Additionally US has a wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, low productivity. |
| Commodities | Strong USD and rising recession fears hitting commodities. But still above average prices helped by GDP growth, ‘green’ industry demand, supply under-investment, recovering China, and Russia supply crisis. Industrial metals and battery materials well positioned. Oil by slow return of OPEC+ supply and Russia 10% world supply problems. |
| Crypto | Institutionalization of bitcoin market barely begun, as asset class benefits from very strong risk-adjusted returns and low correlations with other assets. Clear supply rules a benefit as inflation high. Volatility still high, with the 16th -50% pullback of the last decade. Adoption and development continuing regardless. See Ethereum merge to Proof-of-Stake. |
| *Methodology: | Our guide to where we see better risk-adjusted outlook. Not investment advice. |
| Positive | Overall positive view, and expected to outperform the asset class on a 12-month view. |
| Neutral | Overall neutral view, with elements of strength and weakness on a 12-month view |
| Cautious | Overall cautious view, and expected to underperform the asset class on a 12-month view |
Source: eToro
Analyst Team
| Global Analyst Team | |
| CIO | Gil Shapira |
| Global Markets Strategist | Ben Laidler |
| United States | Callie Cox |
| United Kingdom | Adam Vettese Mark Crouch Simon Peters |
| France | Antoine Fraysse Soulier David Derhy |
| Holland | Jean-Paul van Oudheusden |
| Italy | Gabriel Dabach |
| Iberia/LatAm | Javier Molina |
| Poland | Pawel Majtkowski |
| Romania | Bogdan Maioreanu |
| Asia | Nemo Qin Marco Ma |
| Australia | Josh Gilbert |
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