Barbenheimer 

“Now I am become Death, the destroyer of worlds.” Vs. “Living in a Barbie world’. The contrast seemed appropriate this morning. Whilst Meta delivered a thumping earnings report – though shares dipped after-hours- Alphabet stock was certainly a more dour affair; tumbling 10% in its worst day in more than three years. The gap filled at Alphabet is a monster move and worst day since March 2020 as cloud revenues disappointed. Meanwhile Mattel reported Barbie sales rose 16% in the third quarter thanks to the movie - the $1.4bn box office hit of the year.  But again Mattel shares also fell…maybe we’re just in more of an Oppenheimer world than a Barbie world right now, with a rip in yields sending risk to the cleaners.  

Go Woke - Go Broke 

Here’s Unilever: “Ice Cream underlying sales were down (2.8)%, with price growth of 8.2% and volume decline of (10.1)%.” Bad luck…ok it’s not just Ben & Jerry’s but Walls and Magnum too, and it seems consumers feeling the pinch have been trading down. All this this seems aptly juxtaposed with big oil rather unapologetically stating, “‘We are not in the business of ice cream” earlier this month. Overall Unilever delivered underlying sales growth of 5.2% for the third quarter – all from price. Let’s see what Schumacher can do with this ageing beast. 

Stocks Slumped Again as Bond Yields Rose 

The US 10yr re-approaching the 5% barrier to send tech down hard along with disappointing results from Google-owner Alphabet that sent its shares down almost 10%. That dragged on the tech-heavy Nasdaq, which slid almost 2.5% for the session whilst the broader S&P 500 declined almost 1.5%. Meta beat but shares fell after-hours on comments from the CFO, who said “the revenue outlook is uncertain”...margins up a lot, profits up a lot but questions over VR, AI, ,Metaverse and so on re the terms of the amount of investment required.  

European stock markets took their cue from the softness in US tech and a broad decline in Asia led by notable softness for Tokyo – Nikkei 225 sliding more than 2% as Japanese yields also climbed and the yen cracked at 150. The FTSE 100 slipped another three-quarters of a percent whilst shares Frankfurt and Paris fell more than 1% in early trading, with banks sliding hard and the Stoxx 600 bank index at its weakest since June...mirroring some real weakness in regional banks in the US of late. Standard Chartered led the declines in London – shares down 12% on a $1bn impact from China property exposure. Pre-tax profits slide 33%, well below analyst expectations. 

The ECB and Me 

The European Central Bank is expected to go for a pause today. At its last meeting it signalled it was ready to coast in and developments since lend further support to a pause. Downside economic risks have become more pronounced and in particular the sharp rise in bond yields and market volatility in credit markets pose challenges for the ECB. Given the firm conviction in the market that the ECB stands pat on rates and will not alter forward guidance much, market participants are interested in QT and any acceleration in this programme – will there be an early end to reinvestment of the Pandemic Emergency Purchase Program (PEPP). In short given the market volatility and widening in Bund-BTPs spreads it seems unlikely that the ECB will want to adjust this right now and prefer to see things calm down a bit first.   

At the September meeting the ECB hiked rates by 25bps, taking the cumulative total tightening to 450bps and the deposit rate to a record high.  But the message from the ECB was clear – it believes it has done enough and the hiking cycle is over.  And developments since are hardly conducive to more tightening, given the outlook for growth (PMIs at 3-year lows) and inflation – down to 4.3% in September from 5.2% in August.  In its last statement the ECB said: “Based on its current assessment, the Governing Council considers that the key ECB interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.”    

Some called it at the time a low conviction pause, and several hawkish members of the ECB’s Governing Council were out afterwards to say that they could hike again in December if wages keep rising and inflation sticks around for longer. Certainly, Lagarde made sure there is still a crack in the door for another hike, but it’s obvious that the GC is fairly confident that it won’t or shouldn’t take it further. The question is now one of duration- how long do you maintain rates here?  The GC will be very cautious about leaning in early towards cuts.  

Possible outcomes for traders? Hawkish – a leaning towards leaving door wide open to another hike, emphasising the potential inflation risk from the geopolitical situation – oil etc. Base case is that they stick to the September view – leaves door ajar for a further hike but is of the opinion it’s finished. Dovish – slams door shut on any hikes, starts talking about timing for cuts. EURUS trades at 1.0550 this morning, hitting a one-week low as the dollar firms on higher Treasury yields. 

Elsewhere... 

Oil is firmer this morning along with gold – maybe some geopolitical premium at work given developments in the Middle East. Benjamin Netanyahu said Israel was “preparing a ground invasion” whilst Israeli ground forces carried out a targeted raid inside Gaza. US GDP later is expected to show economy grew 4.7% on annualised basis in the third quarter. Also watch unemployment claims data and durable goods orders. USDJPY – intervention at 150 much?