De Gaetano Andrea Analista indipendente BondWorld

BondWorld : Italy with the wind in its sails.

BondWorld : Italy with the wind in its sails. Autumn correction highlights new equilibrium.

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Andrea De Gaetano – Independent Analyst

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After the traditional September correction, equities are rebounding.

In September, the S&P500 index fell by 4.76%, the Eurostoxx600 by 3.41% and the DAX by 3.63%.

Italy’s FTMIB index fell only 1.25%, showing signs of relative strength.

Italy with the wind in its sails. Since the beginning of the year, the Italian FTMIB stock index is one of the best in the world, with a performance of 18.11% (19.5% considering dividends), higher than that of the S&P500, +17.15%.

The Recovery Fund, of which Italy is the biggest beneficiary, and the political stability brought by Draghi have changed the country’s face, regaining investors‘ confidence. BTP yields, at 0.90%, despite inflation climbing to 2.6% in September, and Italian equities outperformed German equities by around 6%.

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China has been in the red since the beginning of the year, overwhelmed by the real estate turmoil generated by Evergrande and the energy crisis. GDP was below expectations, down 4.9% in the third quarter, but economic data recovered in September, as shown by the Caixin index on business activity, at 53.4, up from 46.7% in the previous month.

Germany, Europe’s largest exporter to China, was hit by the Asian giant’s slowdown, election uncertainty and inflation, which was 4.1% year-on-year in September. Factory orders fell 7.7% in August from the previous month.

US equities slowed as big tech stocks corrected, and were more sensitive to the rise in bond yields since early August, with the 10-year yield rising from 1.20% to 1.6%.

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The European economy, which reached its highest growth rate in 15 years in July, showed signs of slowing in August and September.

Despite the expansionary phase, the Eurozone’s final production index fell to 56.2 and tertiary activity to 56.4. New orders and employment slowed down.

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Eurozone grew by 2% in Q2 2021, compared to the previous quarter and by 13.7% compared to Q2 2020. Data on Q3 will be released on 29 October.

Goods shortages hamper manufacturing and services production.

The Chinese crisis is exacerbating the problem of supply bottlenecks and energy prices are driving up inflation, to 3.4% in September, above expectations. 

Energy rallies.

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In the US, the economy was briskly growing at 6.7% year-on-year in the second quarter, driven by consumer spending. Retail sales rose 0.7% in September, up 13.9% from September 2020. Economists had expected a 0.2% decline and, after a robust 12% annualised jump in the second quarter, expect consumer spending to slow in the third quarter. US inflation at 5.4% is putting pressure on consumers and a global shortage of microchips is forcing automakers to cut production. There are shortages of other goods, with congestion at ports due to a lack of workers. The Atlanta-based Federal Reserve expects the US economy to grow more slowly in the fourth quarter, at a 1.3 per cent annualised pace.

Disappointing US employment data in September. Only 194,000 new jobs in the US non-farm sector, well below the 500,000 expected. The increase in private sector jobs, + 317,000, was offset by job losses in the public sector, particularly in schools. Unemployment rate down, to 4.8%.

The fall in equities in September was due to three factors 1) Fear of reduced monetary stimulus from central banks with high inflation and rising government bond yields. US T-Note from 1.25% in August to 1.6% in September. 2) economic slowdown 3) more conservative corporate earnings forecasts.

The current rebound coincided with the postponement of the raising of the US debt ceiling until the end of the year. Another factor in the market’s favour is the resumption of dialogue between China and the US, after months of tension. Then, the Chinese central bank’s liquidity injections to stem the Evergrande crisis. Finally, the start of the US quarterly earnings season got off on the right foot, with profits exceeding expectations for the main US banks.

The technology sector continues to be a driving force, despite the correction seen in recent months, partly due to sector rotation from „stay at home“ technology stocks (e.g. Amazon, Netflix) to cyclical stocks (oil, banks).

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Energy stocks and banks still in the money, sector rotation is driving investors into more defensive stocks such as consumer staples.

The start of tapering, expected at the next FED meetings on 3 November and 15 December, and the subsequent market reaction, will be the next test for the market.