Global Economy & Markets, Weekly Roundup 28/11/23

Global equities rose further, with the S&P500 recording the fourth consecutive weekly gain 

Key Takeaways

Bullish sentiment in the equity market remained in place, due to estimates that major central banks are done with hiking. The S&P500 increased by +1.0% wow, marking the fourth consecutive week of positive returns (+19% YtD), with realized volatility declining further.   

Government bond yields moved sideways, remaining away from their recent multi-year highs (US Treasury 10-year: 4.38%, down from a 16-year high of 4.99% on October 19th). On the other hand, UK Gilt yields increased by +12 basis points to 4.22%, in view of stronger than expected economic data. In the event, the composite PMI exited contractionary territory for the first time since July 2023, at 50.1 in November from 48.7 in October, versus consensus for 48.7.   

Oil prices were roughly stable (Brent: $80.6), ahead of the OPEC+ meeting on November 30th. Although media reports suggest that the OPEC+ is contemplating further supply cuts, the postponement of the meeting, initially set to take place on November 26th, led to speculation that a consensus among country members remains challenging. The extension of the Israel-Hamas ceasefire and the declining likelihood of a wider Middle East conflict removes risk premia.  

Looking forward, the Fed’s preferred metric to gauge inflation (October’s Personal Consumption Expenditures Price Index) and November’s CPI in the euro area, both due on November 30th, will give fresh insights into inflation developments and monetary policy prospects. 

If not for an upside inflation surprise, the Federal Reserve as well as the ECB appear set to stand pat on December 13th & 14th, respectively, with attention turning on how long it will take for interest rate cuts to commence. The transmission of the insofar monetary policy tightening to the real economy, remains a key factor for the timing and the scale of the future easing.

Regarding the euro area, recall that non-financial corporations took advantage of ultra-easy funding conditions in 2021, providing themselves “breathing room” against the consequent tightening of monetary policy and higher funding costs. Recall also that 71% of households’ mortgage debt is at a fixed rate, albeit with large divergences at the country level.

In Germany, legislative mobility continues after the Constitutional Court deemed that the planned re-allocation of €60 billion (1.5% of GDP) of unused pandemic funds mainly towards projects and subsidies related to the climate crisis, was in breach of the “debt brake”. 

The latter is a self-imposed constitutional rule aiming at avoiding an increase in the public debt-to-GDP ratio, by restricting the structural budget balance to -0.35% of GDP per year at the federal level (-1.1% for 2024, according to European Commission forecasts). The temporary suspension of the brake is on the cards. In any case, the finalization of the 2024 Budget may be delayed up to end-January 2024. 

Finally, investors will keep an eye on Fitch’s rating decision regarding Greece on December 1st. A potential upgrade (current rating of BB+ with a stable outlook) to Investment Grade could pave the way for an expansion in the investor base for Greek financial assets and improving funding conditions for Greek non-financial corporations and financial institutions.  
Global Economy & Markets, Weekly Roundup 28/11/23