Summary
Roadmap for a pivotal fourth quarter
Were few places to hide in a bad Q3 for global markets. The big fourth quarter question is will the US Fed ‘blink’, signalling a interest rate top, in time to avoid global recession. Politics also looms large, from China Party Congress to US midterms and more Russia oil sanctions. We keep calm and carry on, invested but defensive. Q4 catalysts to watch are a US Fed interest rate and bond yield peak, plus ‘less-bad’ Q3 earnings.
Contagion spreads across assets and globe
Equities slumped to end a miserable Q3. Hawkish Fed contagion spread across assets and globe. US 10-yr yields touched 4% and dollar index 114. UK crisis forced BoE emergency bond buying, and EU inflation spike prepped for more ECB hikes. Saw huge Porsche IPO and Biogen soar on Alzheimer success, but Apple to Carmax hit hard by rising growth and profits fears. Q4 start and US payrolls the coming highlights. See video updates, and twitter @laidler_ben.
The reverse currency wars can last
20% stronger US dollar DXY index driving global FX weakness and stoking inflation fear. Forcing others to hike rates or intervene, from Japan (JPY) to China (CNH) and UK (GBP).
Living in unprecedented times
Global economic policy uncertainties now the 2nd highest of past 25-yrs, depressing investors and corporates. But also contrary indicator. Markets spring-loaded if see more certainty.
Where there is market hope
Our four-indicator ‘bear market tracker’ shows not all hope is lost for markets. Also see three catalysts-to-watch, from Fed rate peak, to bond yields, and resilient Q3 earnings.
Defensives port in the markets storm
Most economically sensitive from financials to discretionary sectors under pressure. Defensives preferred port in the storm for now.
Crypto volatility in a new perspective
Crypto prices again traded in a relatively tight range, despite the wild swings seen across other asset classes like fiat currency. US CFTC chair see’s regulation boosting crypto markets and institutional adoption. XRP (XRP) imminent SEC settlement hopes eased, whilst DeFi protocol Uniswap (UNI) among biggest weekly gainers on outlook for ‘several new products’.
Commodities in the cross hairs
Rising recession risks and strong dollar again hurt asset class. Oil supported by outlook for a big OPEC supply cut. Heating oil and gasoline by maintenance shutdowns and hurricane risks. Lumber back at lows as US housing slows. Etoro adds Brent, zinc, lead to platform.
The week ahead: A fresh quarterly slate
1) Start of last quarter of year, after miserable Q3 cross-asset performance. 2) Friday’s US jobs report the focus. Under 300k new jobs to ease inflation fear. 3) OPEC+ meeting could see a big 1mbpd output cut to help prices. 4) STZ, MKC light earnings week before Q3 starts.
Our key views: Fed risking a policy mistake
Fed is risking a policy mistake, spreading its hawkish rate stance globally even as inflation pressures fall. This raises risks but also takes us nearer a market inflection point. But recovery to be U-shaped only. Focus on cheap and defensive assets like healthcare, and styles like dividend yield, and related markets like UK.
Top Index Performance
| 1 Week | 1 Month | YTD | |
| DJ30 | -2.92% | -8.28% | -20.95% |
| SPX500 | -2.91% | -8.63% | -24.77% |
| NASDAQ | -2.69% | -9.07% | -32.40% |
| UK100 | -1.78% | -5.32% | -6.65% |
| GER30 | -1.38% | -7.17% | -23.74% |
| JPN225 | -4.48% | -6.20% | -9.91% |
| HKG50 | -3.962% | -11.46% | -26.39% |
*Data accurate as of 03/10/2022
Market Views
Contagion spreads across assets and the globe
- Equities slumped to end a miserable Q3 as Fed tightening contagion spread across assets and globe. US 10-yr yields touched 4% and DXY dollar index 114. UK crisis forced BoE emergency bond buying, and EU inflation spike prepped for more ECB hikes. Saw Porsche IPO success and Biogen soar on Alzheimer success, but Apple to CarMax hit hard by rising growth and profits fears. Q4 start and US payrolls the coming highlights.
The reverse currency wars can last
- The 20% stronger US dollar DXY index this year is driving global FX weakness and stoking inflation fears. This is forcing many to hike rates or intervene to defend FX levels, from Japan to China and UK’s latest verbal intervention.
- But the intervention record is poor, and only slows the dollar wrecking ball. More needs lower risk aversion and clarity on end of the Fed hiking cycle. Until then the dollar will keep pressuring many, like the GBP and EUR, with only a few beneficiaries, like local exporters.
Living in unprecedented times
- Market uncertainty is running high, but just how much? Geopolitical fears eased from the spike around Russia’s Ukraine invasion. But been replaced by higher, more entrenched, and more global, economic policy uncertainties. Interest rates are soaring, recession fears high, and the US dollar rampant. This is the second highest economic uncertainty level of the past 25 years.
- The longer this very high uncertainty continues the worse, sapping both investor and company confidence. But it is also often a good contrarian indicator, with markets spring-loaded for any easing for these uncertainty highs.
Where there is market hope
- Equities hit new lows for this bear market, with recession risks in driving seat. The Fed is tightening financial conditions everywhere, hitting earnings and valuations. OECD was the latest to cut its global GDP growth outlook, to only 2.2% next year.
- Yet our four-indicator ‘bear market tracker’ shows not all hope is lost for markets,. We also see three specific catalysts-to-watch. 1) Effort to talk back US dollar ‘wrecking ball’ as head into Oct. 12th G20 meeting, or a softer Fed hiking tone as policy ‘mistake’ risks rise. 2) Q3 earnings resilience, like Q2, as season starts Oct. 14. 3) Lower US long term bond yields, as inflation eases.
Defensives port in the markets storm
- Equities of the most economically sensitive, from financials to discretionary, lagged defensives, like healthcare and staples, this year as recession risks soared. Is a smaller underperformance vs history given valuation discount, shallow recession outlook, and nearing catalyst of peaked Fed rate fears.
- With risks high and only a U-shaped recovery seen we keep focus on defensives, including big tech. But not immune to coming opportunities in select cyclicals, like banks and energy.
US Cyclicals* underperformance vs Defensive** equities (10-years)
Crypto volatility in perspective
- Crypto assets again traded in a relatively tight price range, and rose over the week. This compares to the heightened levels of volatility being seen in many other asset classes, from equities to commodities and fiat currencies.
- US CFTC Chairman Ross Benham says clear rules would help crypto asset markets grow and would also attract more institutional investors.
- Uniswap (UNI) among bigger large coin gainers on week, breaking downtrend. The development team behind this DeFi protocol said have ‘several new products’ coming to grow share further.
Commodities in the cross-hairs
- Commodities pressured by both rising global recession risks and the stronger US dollar.
- Oil firm ahead of a possible big supply cut at the OPEC+ meeting. Refined products heating oil and gasoline saw tighter supply from maintenance shutdowns and the hurricane season ramp up. Nord stream pipe explosions stoked EU tensions.
- Lumber fell to pre-pandemic lows as US housing slowdown picked up. 90% houses timber framed.
- Etoro added three new physical commodities to the platform. UK Brent crude benchmark now joins its US WTI oil peer. Also zinc, used for steel galvanising, and lead, for legacy auto batteries.
US Equity Sectors, Themes, Crypto assets
| 1 Week | 1 Month | YTD | |
| IT | -3.46% | -11.29% | -34.96% |
| Healthcare | -1.07% | -4.57% | -16.54% |
| C Cyclicals | -2.35% | -9.80% | -31.68% |
| Small Caps | -0.89% | -8.67% | -25.86% |
| Value | -2.86% | -8.82% | -18.95% |
| Bitcoin | 5.10% | -1.08% | -58.56% |
| Ethereum | 4.73% | -13.99% | -63.97% |
Source: Refinitiv, MSCI, FTSE Russell
The week ahead: another quarter to forget
- Markets closed a miserable Q3 quarter, with a new slate for the last quarter of the year. DXY dollar index led Q3 performers, up 7%, with oil the big loser, -22%. Global equities fell -7%.
- Friday’s US employment report the highlight. Estimates for easing of new jobs ease to under 300,000, and that enough to balance cooling inflation fears with rising recession risks.
- Wednesday’s OPEC+ meeting may accelerate its last symbolic 100,000bpd supply cut to a much bigger 1mbpd one, equal to 1% global supply, in response to recent oil price plunge.
- Quiet earnings week before unofficial Oct. 14 Q3 kick off. Brewer STZ, food staples MKC and CAG, plus midcaps AYI, RPM all set to report.
Our key views: Fed risking a policy mistake
- The Fed is risking a policy mistake, spreading its hawkish interest rate stance globally even as inflation pressures fall. This both raises risks but also takes us nearer a market inflection point. 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, like equities 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 China markets.
Fixed Income, Commodities, Currencies
| 1 Week | 1 Month | YTD | |
| Commod* | -0.81% | -6.39% | 12.42% |
| Brent Oil | -5.27% | -7.16% | 9.79% |
| Gold Spot | -0.66% | -2.36% | -8.96% |
| DXY USD | -0.90% | 2.41% | 16.89% |
| EUR/USD | 1.17% | -1.55% | -13.81% |
| US 10Yr Yld | 14.10% | 62.98% | 231.50% |
| VIX Vol. | 5.68% | 24.15% | 85.62% |
Source: Refinitiv. * Broad based Bloomberg commodity index
Focus of Week: When will the pain stop
Were few places to hide in a tough Q3. Global equities fell 7% taking decline this year to 25%
It was another miserable quarter for markets, after a long, hot summer, with few places to hide. As the US Federal Reserve and others ramped up the pace of interest rates hikes and stoked global recession fears. Cash and the dollar were the only assets to rise, with the US dollar DXY index surging 7%. At the other extreme, oil fell over 20%. US bond prices fell further in their worst year-to-date performance ever. Bitcoin was resilient after its 60% first half loss. Global equities fell 7%, half the Q2 plunge, with US outperforming. Weakness was led by China, as its economic rebound stalled, and Europe, as energy crisis came to a head.
The big Q4 question. Will the US Federal Reserve blink in time to avoid a global recession?
The US Fed is on the verge of making a policy mistake. Its continued dramatic interest rate hikes are making a recession near inevitable. This is despite declines in both headline US inflation and all leading price indicators, from commodities to housing. Higher interest rates have also turbocharged the US dollar, which has become a global wrecking ball. This sets markets up for a potential positive easing hawkish Fed rhetoric during the fourth quarter and better visibility on the end of its rate hiking cycle. But without this the world faces a big leg down to earnings forecasts and is dependent on Asia to keep it out of recession.
Politics, and geopolitics, loom large. From China Congress to US midterms and new Russia sanctions
Hopes are China’s imminent Communist Party Congress (see table) signals a more pro-growth policy pivot to support its economy, and the world’s. It has been by far the largest driver of global growth in recent years. The US midterm elections are set to see a more gridlocked Congress, according to polls, raising risks as the economy faces possible recession. The COP 27 climate conference will keep environmental issues high on the agenda as Europe increases oil sanctions on Russia and ramps up spending to manage the natgas pipeline shutoff during the winter. Otherwise, we can at least look forward to the FIFA World Cup.
Keep calm and carry on. The upside catalysts to watch: a Fed and bond yield peak, plus earnings
The strong cross currents of higher interest rates and rising recession risks will keep buffeting markets. But we see a nearing inflection point. Our four-indicator recovery tracker already shows depressed sentiment and peaked inflation and interest rate expectations. Whilst growth expectations and valuations, whilst not yet troughed, are low. The three near term catalysts are 1) easing US rhetoric on the dollar and/or interest rates, 2) another less-bad Q3 earnings season, and 3) stabilization or decline of long-term bond yields. This would ease pressure on both earnings forecasts and valuations. Traditionally better Q4 seasonality would be a welcome support. We look for a gradual U-shaped recovery and are fully, but defensively, invested.
Key events to watch in fourth quarter 2022
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 by peaked bond yields and high company profitability. Faster Fed hiking cycle is boosting recession risks. Focus on traditional cash-flows defensives, like healthcare and high dividend. Big-tech supported by structural growth outlook. See a gradual ‘U-shaped’ rebound as inflation 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, as global growth rebounds and bond yields set to rise. Japanese equities among cheapest of any major market and vaccination rates accelerating, but has 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, parts of consumer discretionary (Amazon, Tesla), dominate US and China. Expect more subdued performance as bond yields rise. But are structural stories with good growth, high margins, fortress balance sheets that justify high valuations. ‘Big-tech’ the new defensives. ‘Disruptive’ tech 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 in a ‘slowdown not recession’ scenario. Are sensitive to re-opening economies, resilient GDP growth, and higher bond yields, with 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 themes. |
| Traffic lights* | Other Assets |
| Currencies | USD well-supported for now by rising Fed interest rate outlook and ‘safer-haven’ bid on virus fourth wave virus. This is likely more modest than prior USD rallies as rest of world growth recovers and virus fears ease. A strong USD traditionally hurts EM, commodities, US foreign earners, such as tech, but helps EU and Japan exporters. |
| Fixed Income | US 10-year bond yields to rise modestly as inflation above 2% average Fed target, ‘real’ inflation-adjusted yields negative, Fed to gradually tighten policy. Will be modest as inflation expectations already high, wide spread to other market bond yields, and structural headwinds of all-time high debt, poor demographics, and 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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