Weekly | Energetic Dislocation
Your weekly summary with the most important news for your investments:
Market Performance and Key Events of the week.
Impact on the Financial Sector.
Dislocation in the Energy Sector and its possible effects.
The global stock market adjustment, which began at the end of July, continued to exert downward pressure with another week in which the main stock indexes gave up another -2.4% on average and the 10-year sovereign rate showed a high degree of volatility, once again touching 5% and then settling temporarily at 4.84%. Thus, since the end of July:
The Dow accumulates a mismatch of -9%.
The S&P 500 has fallen -10.3%.
The tech-heavy Nasdaq -11.9%.
Bringing their year-to-date returns to -2.2%, +7.2% and +20.8%, respectively.
Undoubtedly, market developments this week will be focused on three important events:
The Federal Reserve (FED) will be ruling on the level of its monetary instance rate with a subsequent intervention by its chairman, Jerome Powell, on Wednesday, November 1.
On Thursday, Apple will be reporting its quarterly results, whose share price, since reaching its historical maximum on July 31 (US$196.45 per share), has dropped -14.4% since then, closing slightly above US$168 per share last Friday.
On Friday, employment data for the month of October will be released where it is estimated that the economy would have generated 190 thousand new jobs and the unemployment rate remained at 3.8% once again.
However, in this edition I will stop to analyze a dislocation that has been occurring on the energy front in an increasingly tense geopolitical environment in the Middle East with a land incursion by Israel after incessant bombardment of the Gaza Strip.
I will start by briefly pointing out that market participants estimate that the FED will once again keep the monetary policy rate at 5.5%, pending the evolution of inflation. For now, PCE inflation remained at 3.4%, pivoting at that level since July of this year, when the stock market adjustment began to exert its power. The underlying figure, which excludes food and energy prices, continues to fall towards 3.7% (from 3.8%) with strong resistance for the remainder of the year. At this point there is also preliminary evidence that high interest rates are beginning to be reflected in tighter domestic demand, with the national savings rate easing, accompanied by a deterioration in bank loan portfolios showing the first signs of economic stress. This is the reason why the financial sector has been unadjusted since July, with share prices falling by an average of -18%. For now, with the 10-year rate looking to cross the 5% mark, it is very likely that Powell will continue with his anti-inflationary discourse, seeking to anchor short-term inflation expectations, which are once again on the rise.
On the corporate front, the results of the major technology companies (Alphabet, Amazon, Intel, Meta and Microsoft) were not well received by the market. The summary for now is that they all continue to show good dynamism despite the interest rate hike. According to Factset, with 245 S&P 500 companies having reported their quarterly results, sales growth is +2.1% and earnings growth is +2.7%, both exceeding market expectations. This week 162 other S&P 500 companies will be reporting including Airbnb, AMD, Apple, Caterpillar CVS, Expedia, Kraft Heinz, McDonald's, Pinterest and Yelp among many others. Despite the strong quarterly results, given the stock market adjustment, the price-to-earnings ratio has slipped to 17.2x, already below the 5- and 10-year averages.
But I would like to stop briefly to analyze what has been happening in the country's energy sector since there has been a dislocation between the price of gasoline and oil. Since the conflict between Israel and Hamas began, the price of oil measured by WTI has been fluctuating between US$85 to US$90 per barrel. Meanwhile, mysteriously, the average price of gasoline in the United States has been falling consecutively since the conflict began. For now, according to statistics provided by the US government in the month of October, it has neither bought nor sold part of its strategic oil reserves. In between we had two mega energy transactions with Exxon going out to buy Pioneer Natural Resources for US$60 billion and Chevron buying Hess for US$53 billion, a mega consolidation of the country's energy industry as if these companies knew what was coming in the Middle East. Already in past events between Israel and its neighboring countries (such as the Yom Kippur War in 1973), the oil embargo from the Middle East became an economic and inflationary problem for NATO countries. For now, the rest of the Middle East countries, including Iran and Syria, have not entered directly into the conflict, however, as Israel's incursion into the Gaza Strip becomes more persistent, other countries such as Saudi Arabia and Egypt will have to intervene militarily, diplomatically or energetically, as happened in 1973 during the Yom Kippur War. What we do know is that the OPEC+ countries (including Russia) have opted to keep the oil supply reduced with the Russian-Ukrainian war dragging on for more than a year.
But even with such uncertainty, the question is how is it that the price of gasoline in the United States has dropped in recent days? In an environment where U.S. companies seem to be preparing for a possible oil embargo by investing heavily in U.S. energy production. It is in this environment, which would give the impression that inflation expectations (upward) today are strictly dependent on the evolution of oil prices globally, as a more tacit oil embargo by oil exporting countries, in the face of an escalation of the conflict in the Middle East, and we will quickly see how the correlation between the price of oil and gasoline will increase.
In conclusion, the FED will keep the monetary instance rate unchanged (at 5.5%) while waiting to see how the conflict in the Middle East evolves and the impact on the price of oil and gasoline.
This Week
Monday (October 30)
Quarterly Reports
HSBC Holdings plc
McDonald's Corporation
Public Storage
Simon Property Group, Inc.
Pinterest, Inc.
Loews Corporation
Economic Reports
Manufacturing Index Report, FED Dallas.
Tuesday (Oct. 31)
Quarterly Reports
Pfizer, Inc.
Advanced Micro Devices, Inc.
Amgen, Inc.
Caterpillar, Inc.
Anheuser-Busch Inbev SA
UBS AG
Marathon Petroleum Corporation
Stellantis N.V.
Financial Reports
Red Book Annual Change Report
House Price Index Report.
Housing Price Index Monthly Change Report.
Housing Price Index Annual Change Report.
S&P/Case-Shiller House Price Index Monthly Change Report.
S&P/Case-Shiller Home Price Index Annual Change Report.
Wednesday (November 1)
Quarterly Reports
QUALCOMM Incorporated
Mondelez International, Inc.
CVS Health Corporation
Airbnb, Inc.
PayPal Holdings, Inc.
Estee Lauder Companies, Inc. (The)
MercadoLibre, Inc.
Economic Reports
Manufacturing Sector Purchasing Managers' Index Report, ISM
Job Openings Report (JOLTS Openings)
New Monetary Policy Decision, FED
New Monetary Policy Speech, FED
Thursday (Nov. 2)
Quarterly Reports
Apple Inc.
Shell PLC
Novo Nordisk A/S
ConocoPhillips
Starbucks Corporation
Economic Reports
Initial Unemployment Assistance Report
Friday (November 03)
Quarterly Reports
Berkshire Hathaway Inc
Enbridge Inc
Sempra
Dominion Energy, Inc.
Gartner, Inc.
Economic Reports
Nonfarm Payroll Report.
Unemployment Rate Report.
Services Sector Purchasing Managers' Index Report, ISM.
Now you have more information about your investments. See you next week with more news.
*This is an illustrative example and does not represent an investment recommendation.