Global Economy & Markets, Weekly Roundup 21/11/23

Global equities rallied, as risk-free rates declined sharply due to lower-than-expected inflation data

Key Takeaways
Global equities edged higher due to lower-than-expected US inflation data. The S&P500 ended the week up by +2.2% (+18% ytd), with the cumulative increase since October 27th now at +10%. The index is only circa 5% below the all-time high of January 2022 (4797).
US Treasury 10-year yields decreased by -17 bps wow to 4.44%, as headline US CPI decelerated to +3.2% yoy from +3.7% yoy in September. Financial markets price in that policy rates have peaked, while expecting 100 basis points of interest rate cuts in 2024. 

The Eurostoxx index increased by +3.4% in the past week (+11% YtD), with the banking index up by +4.1% (+20% YtD). Nevertheless, bank equity prices remain -1% below their March levels, prior to the US banking turmoil and the collapse of Silicon Valley Bank, despite solid earnings. Indeed, bank equity valuations have declined to 0.65x, down from 0.76x in February 2023.

On the other hand, expected earnings-per-share for 2023 stand at a multi-year high of €18.4, well above €13.8 in 2022 due to, inter alia, higher net interest margins. For 2024, EPS are expected at €19.1. According to the ECB, stagnant banks’ valuations reflect investors’ perception of subdued growth opportunities, with their future dividends’ net present value being reduced by elevated risk-premia, along with uncertainty regarding possible higher taxes on bank profits. 

German 10-year yields decreased by -13 bps wow to 2.58%. Periphery sovereign bond spreads against the Bund narrowed in the past week, ahead of the latest Moody’s credit ratings update. In Portugal, the 10-Year bond spread declined by 7 bps wow to 64 bps, its lowest level since June, while the BTP/Bund spread decreased by 10 bps wow to 176 bps, its lowest level since September.   

Eventually, Moody's upgraded the Portugal's issuer credit rating to A3 from Baa2, with a stable outlook, despite higher political uncertainty, following Costa’s resignation, with the country heading for snap elections in March 2024. The revised rating reflects the positive credit effects of economic and fiscal reforms, private sector deleveraging and ongoing strengthening of the banking sector.   

Furthermore, the rating agency cited that due to robust growth and broadly balanced budgets, the debt burden will continue to decline at one of the fastest paces among advanced economies. Portugal’s debt-to-GDP ratio was 112% in 2022, the third highest in the euro area, with the European Commission projecting a sizeable decline to 97.2% in 2025 (the sixth highest), below the ratios of France, Spain, and Belgium.   

Moody’s decision follows the upgrade by Fitch to A- from BBB+ in September. Notably, Portugal now has A-level ratings from three out of the four major rating agencies (Moody’s, Fitch and DBRS), with S&P Global’s rating standing at BBB+ with a positive outlook. 

Finally, Moody’s kept Italy's credit rating unchanged at Baa3 (debt-to-GDP ratio of 141.7% in 2022 with the European Commission projecting a slight decline to 140.9% in 2025) but upgraded the outlook to "stable" from "negative", mentioning a stabilization of the country’s economic prospects and the health of its banking sector.  
Global Economy & Markets, Weekly Roundup 21/11/23