USA
All major indexes declined over the week with the Dow Jones Industrial Average being the best of the bad, retracting on previous week’s gains as uncertainty over incoming policies grew, leading to disparities in sector returns. The Russell 2000 fell by the most (-3.99%) following its rally post Trump victory as investors fear his policies could drive a resurgence in inflation, hurting the rate-sensitive sector. Meanwhile, earnings-revision momentum – a gauge of upward-to-downward changes to expected per-share earnings over the next 12 months for the S&P 500 – has turned negative and is currently hovering near its second-worst reading in the past year. This means further S&P 500 advances in the coming months is less likely because of a less positive outlook on profit growth leading to analysts marking down EPS estimates.
Small caps, financials and energy shares shared in the benefit from similar hopes for deregulation, merger approvals and tailwinds from policies geared towards US companies. Bitcoin, Palantir and Tesla were notable movers over the week with the former having surged by nearly a third (32.46%) at its peak on Wednesday since the eve of the election, breaking $90,000 for the first time, with the price now forecasted to reach $100,000 by the end of the year as investors anticipate looser regulation of digital currencies. Elon Musk’s new position as co-head of a planned new Department of Government Efficiency alongside Vivek Ramaswamy, another tech investor, entrepreneur, and Trump supporter sent Tesla to a Monday peak of nearly a 45% gain since election day, which was somewhat lost over the week following news of the planned elimination of tax credits for EV purchases. Following Palantir’s earnings report last Monday which exceeded expectations, shares are up 45%, bolstered 11% after announcing the move to Nasdaq, which will start November 26th.
Meanwhile, healthcare took a hit following news of Robert F. Kennedy Jr’s, vocal critic of pharma companies and existing public health initiatives, new position as head of the Health and Human Services Department (HHS). He will oversee Medicare, Medicaid and other programs accounting for roughly one quarter of government spending.
Wednesday’s inflation data fell largely in line with expectations, with headline prices rising 0.2% in October and core (excluding food and energy) prices rising 0.3%. Year on year headline inflation rose for the first time since March from 2.4% to 2.6%, largely due to high housing costs. Jerome Powell’s speech on Thursday signaled that the Fed is in no hurry to cut rates, leading to expectations for a quarter-point cut in December priced into futures markets falling from 64.6% to 58.4% over the week. This led to a sharp rise in yields, especially of the 10Y, which hit its highest intraday level (4.51%) on Friday since June. Municipal bond yields, however, ended the week roughly unchanged. The bond market was active, with heavy issuance in the investment-grade corporate bond market, leading to spreads drifting wider. The bank loan market remained active as well, with a higher volume of new deals as investors sought to take advantage of the market’s new strength.
Source: Bloomberg, Bocconi Students Investment Club
Europe and UK
The pan-European STOXX 600 fell for a fourth consecutive week, ending 0.69% lower largely due to concerns about Trump’s trade policies and their impact on Europe, as well as political tensions rising in Germany weighing on sentiment. Major stock indexes were mixed, with only the Italian FTSE MIB gaining (1.11%), while the German DAX was little changed and the UK’s FTSE 100, and France’s CAC 40 declined 0.11% and 0.94% respectively.
Eurozone data continues to foster hopes of a soft landing, with a second estimate of GDP from Eurostat confirming unexpectedly strong 0.4% expansion in Q3, showing good signs despite uncertainty over new policies to be implemented by Trump. Also, the European Commission projects growth of 0.8% despite Germany’s economy forecasted to contract by 0.1%. Employment data also outperformed, with a 0.2% rise following three consecutive months of 0.1% growth, adding to signs of a stable labor market in Europe. Confidence was supported by the ECB commenting that the October rate cut was precautionary and motivated by “prudent risk management”. The central bank also reiterated that decisions would remain data dependent and that it was not pre-committed to a future rate path.
Meanwhile the economic outlook for the UK is not as positive, with GDP in Q3 measured at 0.1% – from 0.5% in the previous quarter and below consensus forecast of 0.2%, largely due to the contraction of 0.1% seen in September (driven by weak manufacturing data). The services sector grew 0.1% over the quarter, alongside construction which was up 0.8% while wage growth slowed to its lowest level in over three years, where annual wage growth excluding bonuses averaged 4.8% over the period.
In the bond market, the yield on the 10Y German Bund fell since hitting the three-month high 10 days ago following the dismissal of finance minister Christian Lindner leading to the collapse of the three-party coalition. Since then, Olaf Scholz has signalled openness to moving parliamentary vote of confidence forward to before Christmas, increasing the possibility of a snap election. Meanwhile, for Italy and France, whose yields reached four-month highs of 3.26% and 3.84% respectively earlier in November., signs of a slowing economy strengthened bets of a sharper dovish response by the ECB, in sharp contrast with developments in US debt markets. UK gilts increased slightly following disappointing GDP data riven by lower manufacturing output.
Source: Yahoo Finance, Bocconi Students Investment Club
Rest of the World
Japanese and Chinese stock markets experienced a decline over the week, with the Nikkei 225 down 2.2% and the broader TOPIX index falling 1.1% while the Shanghai Composite Index fell 3.52% and the benchmark Hang Seng Index plunged 6.28% from the prospect of Trump-imposed tariffs weighing on companies that are heavily reliant on exports to the US.. The yield on the 10-year Japanese government bond rose to 1.07%, from the prior week’s 1.00%.
Japan’s GDP slowed to 0.2% in Q3 from 0.5% in Q2, and this increase was supported by increased private consumption which accounted for more than half of the economy after a one-off income tax cut and higher summer bonuses. In general, the economy grew by 0.9% on an annualized basis, down from 2.2%.
Chinese equities additionally suffered from persistent deflation, with CPI rising a below-consensus 0.3% in October, down from 0.4% in September due to lower food and energy prices. Meanwhile, core inflation rose 0.2%, up from September’s 0.1% rise. More generally, the producer price index fell 2.9% year on year, surpassing the 2.5% decrease predicted by analysts and accelerating from September’s 2.8% drop, extending the deflation in factory gate prices. Retail data showed positive signs, up 4.8% this month after 3.2% in September, marking the strongest retail growth since February. Weaker auto sales meant industrial data underperformed, rising 5.3% over the year, below September figures. Property investment in the period fell 10.3% while the unemployment rate eased to 5% from 5.1% in September. The multiple stimulus packages delivered across the past months led to an improvement in new home prices, with October’s decline marking the second month of slowing home price declines and the slowest pace since March.
Global equities had a mixed week, with gains seen in Turkey, while Mexico and South Korea experienced declines and Brazil and Australia remained unchanged. On Thursday, the Mexican central bank cut rates from 10.50% to 10.25% which was unanimous and expected by markets. This move came as the peso has depreciated markedly since the last meeting, pre US elections, and employment has slowed down. Annual headline inflation rose to 4.8% in October while core decreased to 3.8%, showing a general improvement in inflation conditions meaning a restrictive monetary policy stance is still necessary, but this data means there can be a reduction in the level of restriction.
Source: Yahoo Finance, Bocconi Students Investment Club
FX and Commodities
Brent crude oil futures recorded a weekly loss of nearly 4%, closing at $71 per barrel on Friday amid concerns about China’s weakening demand and a stronger US dollar – slower factory output and demand issues seen by China’s crude processing dropping 4.6% in October. The IEA and OPEC both revised their global demand growth forecasts, with IEA predicting a 1 million barrel per day supply surplus in 2025. The stronger US dollar surging to a 2 year high further reduces the appeal of dollar-denominated commodities.
Natural gas demand is expected to increase later in November as temperatures drop, with gas in storage now 6.1% above the seasonal norm, marking the fourth consecutive week of above-average storage builds which has not been seen in over 2 years. Production has also dropped to a nine month low on Tuesday, partly due to disruptions from Hurricane Rafael impacting the Gulf of Mexico.
Precious metals experienced a drop following Jerome Powell’s speech suggesting further rate cuts will be delayed, weakening the appeal of non-interest-bearing assets such as gold or silver. The reduction in expectations of a cut is also supported by higher inflation expected under Trump via his protectionist policies and increased deficit spending, further reducing the Fed’s ability to reduce borrowing costs.
Over the week, the yen continued to weaken against the dollar to the 155 range, up from around 140 at the beginning of October as the dollar continued its strengthening after Trump’s election, calling into question whether his policies will be inflationary and calling future Fed moves into question. Japanese authorities again warned that they would take appropriate action against excessive currency moves though uncertainty regarding the timing of future Japanese interest rate cuts remains and continues to negatively impact the yen. The BoJ’s October meeting provided some clarity, reaffirming that if economic activity and prices evolve as expected, the central bank can follow a path in which it raises the policy interest rate gradually so that the rate will be at 1.00% in the second half of fiscal 2025, at the earliest.
Generally, the dollar continued its rally against all major currencies, with the Dollar Spot Index up nearly 3% over the week and EUR/USD exchange rate trading close to one-year lows of 1.05.
Next Week Main Events
Brain Teaser #25
Eight quants from different banks are getting together for drinks. They are all interested in knowing the average salary of the group. Nevertheless, being cautious and humble individuals, everyone prefers not to disclose his or her own salary to the group. Can you come up with a strategy for the quants to calculate the average salary without knowing other people’s salaries?
SOLUTION
The first quant adds a random number N1 to his salary S1, and then informs the second quant of the sum N1+S1. The second quant subsequently adds his own salary S2 to the number, then communicates the total sum N1+S1+S2 to the third quant. This process continues until the eighth quant adds his salary, the first subtracts his random number and divides the total by N=8 for the final average.
Brain Teaser #26
You and I are to play a competitive game. We shall take it in turns to call out integers. The first person to call out 50 wins. The rules are:
- The player who starts must call out an integer between one and 10 inclusive
- A new number called out must exceed the most recent number called by at least one and by no more than 10. For example, if the first player calls out “nine” then the range of valid numbers for the opponent is 10 to 19 inclusive.
Do you want to go first and, if so, what is your strategy?
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