US exceptionalism highlights uneven global recovery | Banking Updates

AT A GLANCE

Dovish hike from the ECB before a probable hawkish pause from the Fed…
The disinflationary process in the United States was dented by rising energy prices
We increased our allocation to government bonds across profiles targeting a 5-year maturity

The performance of the main asset classes for the week points to rising concerns about inflation as at the same time growth remains overall resilient. Value outperformed across the board, with the Dow Industrials the only major US index just in positive territory and non-US stocks showing larger gains, while longer-dated yields closed at the top-end of their recent range, and Brent crude held comfortably above USD90/bbl.

In the United States the relentless rise of energy prices was pervasive in the CPI and retail sales release. Headline inflation shifted higher for a second consecutive month, while the core index continued to fall. Overall, we hold the view that the disinflationary process will continue, with the Fed looking through the impact of energy prices as core inflation showed a nice pace of deceleration. Retail sales rose way above projections in August, yet mainly on rising gasoline sales. Powell is expected to hold rates steady at this week’s FOMC meeting, keeping its options open should the energy impulse spread to the broader economy.

In spite of economic conditions bordering on recession the ECB hiked the benchmark rate by 25bps, while in China the economy showed further signs of stabilization with industrial production and retail sales accelerating higher.

As central banks draw closer to peak rates, we increased our allocation to government bonds across profiles, targeting a middle-of-the-curve duration given the resiliency of the US economy.

This week sees many central bank meetings, with the Fed lined up on Wednesday, the BOE and BOJ to follow. The DM flash PMIs will also be closely watched.

US exceptionalism highlights uneven global recovery

Cross-asset Update

As year-end approaches and investors keep on pondering about the odds of a US recession in 2024, caution abounds following the large to-date equity gains. A widely followed gauge of investor sentiment devised by Bank of America Merrill Lynch shifted towards less bullish readings in the five days through Friday, to be read in a contrarian way as far as the continuation of the current rally is concerned. We would be tempted to see the glass half full, though, as the resilience of the US economy comes alongside growing signs of stabilisation in China, while Europe continues to be mired in stagnation. With both manufacturing and services business confidence picking up in the United States, and still solid labour market dynamics, we hold the view that a moderately positive tone will be set for equities to drift higher, though beyond the fair values we have projected for this year. Earnings growth seems to have bottomed in Q2, with a return to positive growth expected in the coming quarters. Along the same lines, two weeks ago US productivity surprised significantly to the upside for Q2, usually a harbinger of expanding multiples and margins, being for instance price-to-earnings positively correlated with yearly changes in productivity.

This will not come without risks, as the so-called US exceptionalism is exerting upward pressure on yields and could reignite inflation concerns, should a soft-landing scenario change into a no-landing one in investor minds. Yields are already at the highs of the year, supported by rising energy prices, with the crude market expected to be in deficit not only in Q3, but also through Q4 this year. Also, the favourable mix of loose fiscal and tight Fed monetary policy is supporting the US dollar, that has been rising for nine weeks back-to-back. Overall, the level of yields, of energy prices and the higher US dollar are pointing to tighter financial conditions, even as the global recovery remains uneven, being mainly driven by US growth. Against this backdrop we would tend to see an outlook marked by more moderate returns and a rise in risk-asset volatility.

A decisive change in China policy with a large fiscal stimulus would represent a positive shift, reigniting global growth and weakening the dollar against the major peers. But nothing of the sort is in sight as Beijing is being careful not to add excessive leverage to the already vulnerable real estate sector. And for now, China is stabilising but not recovering due to the deepening housing slump partially offsetting improvements in other parts of the economy.

Overall, we reiterate the advice to remain up in quality across asset classes, to navigate what could be a choppy market environment into year-end.

US exceptionalism highlights uneven global recovery

Fixed Income Update

Ahead of this Wednesday's anticipated "Hawkish Pause" by the Fed, the ECB delivered a "Dovish Hike" last week. The Central Bank increased rates for the 10th time to take the policy benchmark to 4%. Lagarde mentioned, "With today's decision, we have made sufficient contributions, under the current assessment, to returning inflation to target in a timely manner," though later she added that the focus would be on duration, and this may not be the peak. The ECB cut the growth outlook for the Eurozone till 2025, while inflation was forecast to weaken to an average of 3.2% in 2024 and then 2.1% in 2025. This kickstarts the central bank season in the developed markets, with as many as six policy decisions due in the next five days.

Last week, the US CPI numbers advanced 0.3% MoM, the first acceleration in six months. Gasoline contributed to more than half of the gain in US CPI in August. The so-called super core rate, which looks at core services prices excluding housing and has been a focus for Fed policymakers, rose 0.37% in August on a monthly basis. That's the most since March. Again, a depressing figure for the Fed. However, the silver lining in the data was shelter prices, the biggest services component, which accounts for about a third of the overall CPI index, increased 0.3%, the smallest gain since early last year. A moderation in housing costs is essential for a sustained downward trend in core inflation.

Swap contracts referencing the November Fed meeting date are around 5.41%, eight basis points higher than the effective Fed funds rate of 5.33%. That repricing suggests odds of about 31% that the US central bank will raise its policy rate to a range of 5.5% to 5.75% by November. As of Friday, interest-rate futures show a slightly higher expected end-2024 rate for the Fed's benchmark, at 4.54% against 4.43% the week before. So, futures still reflect bets that the Fed will lower interest rates next year. As for the rest of this year, futures suggest a 40% chance of one more rate hike.

EM debt spreads compressed and currently trade lower than their 3-month median as China's economic activity gathered pace in August amid a summer travel boom and in the wake of a stimulus push. Industrial production rose 4.5% from a year earlier, while retail sales jumped 4.6%. Fixed-asset investment grew 3.2% in the first eight months of the year. In addition, the PBOC lowered the Reserve Requirement Ratio, the amount of cash lenders must keep in reserve for the second time this year by 25 bps, partly to beef up banks' ability to buy bonds and support government spending. The PBOC also injected a net 191 billion yuan ($26.2 billion) via the medium-term lending facility into the interbank market.

US exceptionalism highlights uneven global recovery

Equity Update

Last week saw rate rises in the Eurozone, upbeat China economic data, the successful listing of Arm Holdings in the US, though it wasn’t a good week for tech and other chipmakers. Global equities rose half a percent last week and September hasn’t seen too much volatility, with month to date little change in returns. US equities remain range bound, with the S&P 500 hovering around the 4,500 level and the Nasdaq +32% YTD. But down by 2% this month to date as US treasury yields have been more volatile, rising last week in anticipation of the Fed’s higher for longer mantra. US equities saw inflows last week and China has seen foreign holdings in assets consistently fall from a Dec 21 peak. Best performers in September to date are India and the UAE markets.

Our fair values for the main equity indices predicate flat returns from DM and c.10% from EM into year end. Our positioning is close to neutral on equities (small underweight) with a preference for EM. We don’t see any major negative catalysts into year end and see returns maintained for DM, with the US our preference. U.S. consumers’ “resilience” has been the buzzword for the S&P 500. The earnings decline of 5% for Q2 could represent a bottom, with consensus calling for flat earnings growth next quarter and then high-single-digit growth by 4Q, and an optimistic return to the double digits next year. The S&P 500 rally at +17% YTD returns has been led by the 7 tech behemoths, with optimism around the AI evolution continuing.

In EM we like India and the UAE and await better visibility on China. Regional diversification works this year, with very different macro dynamics and valuations between countries. India fundamentals remain attractive, and the market will soon start focusing on the upcoming general elections as its key driver. As per Bloomberg data August marked the sixth straight month of buying by foreign institutional investors (FIIs) in Indian equities -- with inflows of $1.7 bn, the highest among emerging markets -- amid India's rising appeal as an alternative to China. Utilities and industrials were the most-bought sectors.

China stocks rallied on Friday, though closed the week flat. On Friday China retail sales and industrial production surprised to the upside, though the RRR cut of 25 bps was not seen as a big fillip as it applies only to banks that don’t already have a 5% reserve ratio. European consumer stocks rose for the week and on Friday on a beta to China’s upbeat economic numbers. However, an anti-subsidy investigation by the European Commission was announced as China EV brands are dominating the lower end of the European market. The average price of a Chinese EV in the EU is $48,000 compared to $67,000 for a locally produced EV (The FT). China automakers are quick to adapt to global requirements, have dominance in battery innovation and production and are able to roll out cheaper models more quickly and this would affect European EV makers market share in their own countries.

US exceptionalism highlights uneven global recovery

Written by:

Maurice Gravier Chief Investment Officer , [email protected]
Anita Gupta Head of Equity Strategy , [email protected]
Satyajit Singh Fixed Income Analyst , [email protected]
Giorgio Borelli Head of Asset Allocation , [email protected]

Disclaimer

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”), having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accept any responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they may not be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investor may lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app

Personal | Home | Auto Loans