AI doubts, oil fears and a defining week ahead

Good morning everyone and welcome to Julius bears moving markets podcast it's Monday the 26th of October and my name is Helen Freer. First of all I would like to quickly mention our latest view beyond podcast which was published over the weekend and this week it was me hosting and I had a very interesting conversation with my colleagues Eve Clank and Marco Radavitch. We talked about the outlook for broadening market performance where investors can find opportunities to diversify and what really are the major themes driving markets at the moment. As always it's available on this channel moving markets and it's called the view beyond what's really driving markets. But back to today and I'll be talking at first of all this morning to Mike Rauber about the latest market news and what's coming up this week and then as usual on a Monday men's opportunity the head of our technical analysis team joins us so I'll be getting his latest thoughts from the technical side. But let's start as always with a wrap up of the market news. Good morning Mike. Good morning Helen. So last week was a real yoyo week for markets with robust US data clashing with AI jitters a bond route in Europe and simmering Middle East tensions pushing oil higher. Let's start with the US shall we Mike? Sure so the US economy has been expanding and a solid pace this year a PMI data released on Friday confirmed this. It is pushing treasury yields higher and supporting the US dollar despite concerns elsewhere in markets the resilience of the US economy remained a key theme throughout the week. And how did the major US equity indices end the week then? It was a volatile week. AI stocks fell sharply on Thursday after meta spending plans and ongoing concerns over leverage at Neoclown companies. Triggered a flight to safety we saw 10-year treasury yields dropped the most in a day in nearly four years. Now even so weekly moves were relatively modest with the S&P 500 down half a percent the NASDAQ of 0.7% and the Dow Jones was actually up 0.4%. Generally these major indices were helped by solid earnings. And these AI concerns are starting to spread beyond the technology sector aren't they? Indeed interestingly American Express raised its profit outlook but the stock still fell nearly 4% on Friday this was after announcing plans to cut around 5% of its workforce. The company said it is preparing for the impact of artificial intelligence. Right now back across the Atlantic European Boards is declined last week the French economic and political situation remains in focus. Can you fill us in here please Mike? PMI data release on Friday showed a divergence within Europe. A France slipped back below the 50 level so into contraction territory while Germany remained above 50 indicating a more resilient economy. Add elevated oil prices to the mix and the Eurostocks 50 fell 2.4% on the week. But while macro concerns dominated the headlines the biggest share price moves were still driven largely by earnings. Okay what does that mean exactly? The big France is an example. L'Oreal rose 7% while caring fell 17% after announcing earnings. So these moves were driven by earnings as mentioned but not concerns about the economy or French politics. Now staying with French debt we saw some remarkable moves. What were the details here Mike? The spread between French and German tenure government bond yields widened by 33 basins points to nearly 1.7% during the week alone. Now that's the largest increase since records began in 1990. Although this morning we're seeing some bit after the nation avoided a rating downgrade by Moody's late Friday and amid no repeat of large scale violence and looting at demonstrations in France over the weekend. Turning to commodities now oil has been making waves. What's driving this surge in prices? Oil prices rose on the week due to concerns over escalating US Iran tensions. Brent crude futures settled at over 116 dollars per barrel. That's the highest level since April. Despite the geopolitical backdrop what I found interesting is a report that the world's largest oil services provided reported the gradual recovery in its Middle East business. And how did gold react amid all the turmoil? We might expect it to benefit from geopolitical tensions. Yeah unfortunately it did not. Gold fell around 4% last week touching a three month slow. High global bond yields are weighing on non-yielding gold. This morning gold is hovering around the key $4,000 per ounce level which has been somewhat as a support level over the recent months. Over the weekend we got a political earthquake in Brazil with the surprise win of Lula in the presidential election. What can you tell us on this? Indeed his surprise victory will seem returned for a forced time as president. Markets had expected his conservative rival the senator Flavio Bolsonaro to prevail after the first round. But he has since refused to concede calling the last minute extension of voting unacceptable and plans to challenge the results. Investors are already reacting. A Brazilian ETF trading in Tokyo is down nearly 50%. Reversing its post first round voting gains. And in Asia so far this week it's going to be a busy week with nearly half of the 1,200 companies in the MSCI Asia Pacific reporting. What more can you tell us from the region? The AI trade remained under pressure in Asia. This morning a South Korea's cost bill is down 1%. Goldman Sachs cut its target for the benchmark by 25%. I mean growing concerns over AI related spending although it still sees considerable upside. Chinese AI developers also were weak while chip stocks led losses in Japan. Providing some relief this Monday morning print crude is down 2% to $114 per barrel. Iran is set to host regional security talks with Saudi Arabia, Pakistan and Turkey. Okay and just lastly then what should investors be watching this week? It's going to be a busy week for markets. First, the Federal Reserve, European Central Bank and Bank of Japan are all expected to leave rates unchanged when they meet on Wednesday, Thursday and Friday. Each so the focus will be firmly on their guidance and what it signals for the months ahead. The same applies to earnings where investors will be paying close attention to outlooks from AI heavyweights, Alphabet, Amazon, Eskihannix, Intel and Samsung. And also beyond technology we have major companies reporting Coca-Cola, HSBC, Novartis, UBS, Mercedes-Benz, Eli Lilly, AstraZeneca, Volkswagen and British petroleum to name just a few. So plenty to digest for markets this week. That's all for me. All right thank you very much Mike for the very nice roundup to start the week. Thank you very much for having me Helen. And now over to you Mansoor. Good morning. Good morning Helen. Let's start with equities today and there's been a shift into defensive sectors away from technology and semiconductors. Is the outperformance of these areas over do you think? Yes so when we look at the right performance in the sectors we see that there has been a dramatic on the performance of information technology in October. So they are on the performance by about 5 percent. Nevertheless when we look at the larger picture we see that this is basically just a retest of the previous consolidation and we will assume that the long-term outperformance of information technology continues. So in that sense we view the recent outperformance of defensive sectors only a temporary move in their own long-term on the performance. So we would not recommend investors to switch into defensive stocks. Oil is continuing to rise while interest rates have seen a short-term decline. What's the impact of this on equities? Yes it's very interesting so we have these two very economic sensitive indicators diverging and surprisingly it happens basically a quarter of all time. So in a quarter of all days or weeks you have this diverging trend. Nevertheless the question is what is the impact for equities? And there we see clearly that equities react more sensitive to interest rates than oil. So when you have like right now where oil is in a short-term uptrend and interest rates the tenure treasury yield is in a downtrend the S&P has historically performed by 11% analyzed. If you have the opposite so oil falling and interest rates rising, the advance drops to about 1%. So clearly here for the equity market it's more important what interest rates to than what oil does. All right and let's talk lastly about gold and silver. They are close to the summer lows now. What's your view here manzo? Yes the gold is close to the summer lows. Silver has slightly breached the summer lows so we still view this as a retest here of the of these lows and still think that the long-term doctrine is intact. Nevertheless, for these to materialize, you will need to see here a improvement in the next one or two weeks. So, investment improvement comes. We would here need to revise our rating, which is still bullish for both. Great. Thank you very much, Menzel. Great to speak to you again this morning. Thank you for having me, Helen. So, that is all for today. Thank you again to my guests and thank you all for tuning in. Don't forget to subscribe to the show if you haven't already and do join us again tomorrow when Roman Canciani will be your host. Have a great start to the week, everyone, and bye for now. Or investment research. Please refer to www.juleasbear.com/legal/podcast for further other important legal information.