After both Boris Johnson and Penny Mordaunt pulled out of the British PM race, Rushi Sunak cried victory on Monday afternoon, and markets cried ‘Ready for Rishi’.
The British sovereign bonds posted one of the biggest gains on record, the 10-year gilt yield tanked 8.50%, the 30-year yield dived 8.40%, sterling gained, but Cable remained offered near its 50-DMA, that stood around 1.14 level yesterday.
In plain English, it means that investors bet that Rishi Sunak could restore confidence and credibility that the country lost in just about 6 weeks under Liz Truss’ disastrous rule, but there is a lot to do still.
One thing is positive, though. Sunak has an opposite view on how to do things compared to Liz Truss. While Truss aimed for big spending and energy credits, Sunak opts for financial austerity, as the country’s debt-to-GDP went through the roof due to the pandemic spending. Therefore, Sunak wants to reduce debt – of course at a very bad time with the war and the energy crisis.
But that’s the thing! If he had become PM 6 weeks earlier, he would’ve seen political opposition to his austere point of view regarding the country’ finances. Yet today, Liz Truss and her mini budget’s massive failure gives him reason, the much-needed support of the market, and some political support as well, as many colleagues have seen that the idea of big spending pushed the country into a historical financial chaos.
Xi didn’t see the same enthusiasm
Investors loved seeing Sunak become the new UK Prime Minister, they, however, hated seeing Xi Jinping confirm a third term.
Nasdaq’s Golden Dragon China index lost more than 20% yesterday and closed the session more than 14% down. Direxion’s FTSE China Bear times 3 ETF jumped almost 30% in the session.
An analyst at JP Morgan said the market action is ‘disconnected from fundamentals’ and could present a dip buying opportunity. But one needs solid nerves to go long in Chinese assets right now.
Slowing
PMI data revealed yesterday did little good to the mood in Europe. The composite PMI fell to 47.1, which is the lowest level since April 2013. And unsurprisingly, the worst downturn was seen in manufacturing, especially in energy intensive sectors.
European natural gas prices fell below 100 euro per megawatt-hour thanks to unusually warm October and projections of a mild winter. But a mild winter alone can’t save the day in Europe. Growth is slowing, the European Central Bank (ECB) is tightening, while the single currency remains weak. The EURUSD is again testing the 50-DMA offers to the upside, near 0.99 level. And only the dollar bulls could decide whether the euro could gain some more field against the greenback.
In the US, the services sector saw a sharp, and an unexpected decline to 46.6, from 49.3 printed a month earlier, and 49.6 expected by analysts.
Japanese core CPI advanced to 2% versus 1.9% expected by analysts. The dollar-yen trades touch below the 149 mark after the Bank of Japan (BoJ) intervened to slowdown the depreciation in yen.
But the BoJ’s neutral policy stance could hardly prevent the yen from falling further against the US dollar, therefore, the outlook remains tilted to the upside for the USDJPY, while the risk of further BoJ intervention looms.
Alphabet & Microsoft rely on cloud revenue
In the corporate space, two big US tech giants are due to announce earnings: Alphabet and Microsoft.
Alphabet’s revenue is expected to rise, but slower than recent quarters, while earnings per share is expected to be negatively impacted by the challenging advertisement business, and the rising competition from TikTok. If there is one thing that could save the day is the cloud revenue, which has been one of the key growth drivers. But even that is expected to reveal a slower growth compared to previous quarters.
For Microsoft, the picture is not rosy either. Microsoft is expected to reveal the 5th consecutive quarter of slowing revenue, due to a steep decline in PC demand, the strong US dollar, and unideal macroeconomic conditions. As for Google, investors will focus on how Microsoft’s cloud segment did last quarter. Growth in Azure is also expected to slow but remain at around 20%.
It’s important to remember that soft results don’t necessarily mean negative market reaction. If the soft results still beat the market estimates, we could see Google, and Microsoft shares rally.
