After a delay of hours wherein Israel said it was reviewing a list of Israeli hostage names for release issued by Hamas, the fourth and final planned round of a swap is back on, regional reports indicate.

“The Prime Minister’s Office announced that Israeli authorities have notified the families of the hostages slated to be released in the coming hours, as the deal appears to be back on track following an earlier dispute,” Times of Israel writes.

The hold-up has centered on efforts of Hamas to separate children from their own mothers in today’s release – something which Israeli officials now say they’ve successfully blocked.

In total eleven hostages are being released, which includes nine children and two women, who are the mothers to some of the children. They are from one of the hardest hit Kibbutz communities from Oct.7 – Nir Oz. The day prior, 4-year old Israeli-American Avigail Idan was among 14 Israelis and three Thai citizens set free as part of the third day of the temporary truce which began Friday.

By Monday’s end, the original four-day truce wherein some 50 Israelis are exchanged for hundreds of Palestinians freed from Israeli prisons will reach a conclusion. 

However, there are emerging reports out of Qatar that Israel and Hamas have agreed to extend the truce by two days. This presumably will involve the release of more captives, per the prior terms of the deal. According to The New York Times, nothing is finalized and the truce is still on shaky ground:

Israel and Hamas were at odds over the hostages and prisoners set to be released on Monday, the final day of a four-day cease-fire, putting their truce on shaky ground even as mediators tried to secure a two-day extension of the pause.

Israel and Hamas each signaled a willingness over the weekend to prolong their truce if it allowed for more hostages and Palestinian detainees to be freed. But both sides have taken issue with the names presented by the other for the final day of exchanges under the deal, according to a person familiar with the negotiations, who said that officials from Qatar, the lead mediator, were trying to address the differences.

Prior reports indicated that an extension would include the release of 20 Israeli hostages as part of the extension, and in return 60 Palestinian prisoners held in Israeli jails would be freed.

Hamas now says it is drawing up a new list of hostages held in Gaza “in order to extend the truce” with Israel. But at some point, major fighting is likely to return. The government of Iraq has warned that if the truce does not become permanent, the risk of major regional war grows.

“We are continuing until the end, until victory.”

Israeli prime minister Benjamin Netanyahu has visited troops in Gaza during the truce with Hamas.

Latest: https://t.co/BGv8ivw8lv pic.twitter.com/f2MQY63myF

— Sky News (@SkyNews) November 27, 2023

Below are some of the latest updates via Al Jazeera:

• Egypt and Qatar are close to reaching a deal to extend the truce by two days, says Diaa Rashwan, head of Egypt’s State Information Service.
• A suspect has been arrested for the shooting of three Palestinians in the US state of Vermont, police have said, as the attack is investigated as a suspected hate-motivated crime.
• Doctors Without Borders has described the situation in Gaza as dire.
• The Palestine Red Crescent has condemned the detention of two prominent hospital chiefs and has demanded their release, stressing that they have protections under international humanitarian law.
• UN Secretary-General Antonio Guterres is pushing for a complete humanitarian ceasefire over a temporary truce, saying the “humanitarian catastrophe in Gaza is getting worse by the day”.

#Israeli official quoted on Israeli TV says that if Hamas releases the list of 20 names of hostages who will be released in the coming two days, then the ceasefire will be extended.

— Michael A. Horowitz (@michaelh992) November 27, 2023

The pattern so far has been that nothing is ultimately final or certain until the hostages are with the Red Cross and are crossing borders to be greeted by awaiting Israeli officials.

In the first of the day’s two auctions courtesy of a truncated issuance schedule, moments ago the US Treasury sold $54BN in 2Y paper (5Y auction to follow in a few hours), in what was a lousy auction.

The high yield of 4.887% was down from last month’s 5.055% and the lowest since July’s 4.823%, however the auction tailed the When Issued 4.876% by 1.1 bps, the first tail since July and followed two “on the screws” auctions in September and October.

The bid to cover of 2.54 was below last month’s 2.64 and was the lowest since March 2023 and clearly far below the six-auction average of 2.81%.

The internals were even uglier, with Indirects (foreign buyers) sliding to just 57.4%, down from 62.1% in October and the lowest since March (and far below the recent average of 65.7%). And with Directs awarded 23.4% (the highest since March), Dealers were left holding 18.8%, of the auction, the highest since April.

Overall, this was a lousy, tailing auction where foreign buyers continued to pull back, forcing both directs and dealers to pick up the slack.

What is surprising is that whereas a less ugly TIPS auction last week sent yields spiking, today there has been virtually no adverse market reaction to what was unquestionably an ugly 2Y sale.

Elon Musk showed up in southern Israel on Monday at the personal invitation of Prime Minister Benjamin Netanyahu, where he was given a tour of an Israeli kibbutz left desolate by the Oct.7 Hamas terror raids. 

Musk while on a tour of Kfar Aza heard details from Israel Defense Forces (IDF) troops of the massacres in the kibbutz. Israeli media has described it as a scene of “horrors”—one among more than 20 communities ravaged, where in some cases entire families were butchered. Musk later in the day said it was “it was jarring to see the scene of the massacre.”

Musk heard briefings and personal stories both of tragedy and heroism, including the story of kidnapped Israeli-American toddler Avigail Idan, who turned 4 in captivity but was released Sunday as part of the third round hostage swap between Hamas and Israel. Her parents were murdered directly before her eyes, with accounts saying her dad was holding her when he was shot.

After also being shown a short film of the Hamas attacks, Musk commented that it was “troubling” to see the “to see the joy experienced by people that were killing innocent civilians.”

As part of Musk’s visit, he and PM Netanyahu held a live talk via X Spaces (recently known as Twitter Spaces) wherein the prime minister repeated his call for Hamas to be destroyed. Musk responded, “There’s no choice,” and said after touring ravaged kibbutzes: “I’d like to help as well.” The full section of that exchange is below: 

Netanyahu laid out that his main priority is to neutralize Hamas, after which he will turn to rebuilding Gaza: “You first have to get rid of this poisonous regime.”

Musk agreed and offered to be involved in the post-war recovery.

“I think that makes perfect sense that those who are intent on murder must be neutralized, then the propaganda must stop … and then making Gaza prosperous,” Musk said.

“Well, I hope you’ll be involved,” Netanyahu responded.

“I’d love to help,” Musk said.

In statements which are likely to prove controversial, particularly to the pro-Palestinian side, Musk also voiced that civilian casualties are “unavoidable” and generally appeared to back Israel’s position that it is trying hard to avoid them while seeking to target only terrorists. 

Lately Israeli officials have tried to make controversial historical comparisons to WWII, which hasn’t always gone well in Western media encounters at a moment the Palestinian death toll has reached the grim milestone of 15,000 killed. Musk said in the Spaces chat:

“You need to pair firmness and taking out the terrorists and those intent on murder, and at the same time help those that remain, which is what happened in Germany and Japan,” he adds.

“Usually the victor punishes the loser,” he continues, and points to the rehabilitation of Germany and Japan by the allies after World War II as examples of how reconstruction efforts after a major war and a clear-cut victory helped secure peace for a long period of time.

Picking up on what the FT reported last week, namely that OPEC+ is considering an additional 1 million bpd oil production cut, moments ago Bloomberg added some color on that story and also on why the OPEC+ meeting which was supposed to take place over the weekend was delayed, when it reported that Saudi Arabia is asking others OPEC+ members to reduce their oil-output quotas in a bid to shore up global markets but some oil producers are resisting.

The OPEC+ leader – which has been at the forefront of what is now dubbed the OPEC+ put…

… has been making a largely unilateral supply cutback of 1 million barrels a day since July, and is now seeking further support from across the oil producing cartel and its partners (mostly Russia), said anonymous delegate sources.

The Bloomberg report goes on to note that the Saudi proposal comes amid difficult talks for the producers’ group, which was forced to delay its policy meeting by four days to Nov. 30 as Angola and Nigeria resist reductions to their own quota limits for 2024, which were set out at the cartel’s last conference in June. Some speculated that the internal conflict may even lead to several members leaving the cartel, although the latest news is that the producers were progressing toward a compromise on this matter before the weekend, but have yet to clinch an agreement.

In any case, the 23-nation OPEC+ alliance faces pressure to intervene in crude markets, following a 17% drop in prices over the past two months amid plentiful supplies and what Bloomberg calls a “darkening economic backdrop”, which is ironic since the same Bloomberg keeps praising the economy when it comes to Joe Biden’s politics. Markets could weaken further in early 2024, when forecasters including the International Energy Agency anticipate the emergence of a new supply surplus.

With Saudi Arabia’s voluntary production cut of 1 million barrels a day, implemented in tandem with a 300,000 barrel-a-day export reduction from Russia, set to continue until the end of the year, most analysts expect Riyadh and Moscow to extend those curbs into 2024.

Meanwhile, as reported previously, JPMorgan’s commodity team has flagged the possibility that OPEC+ may cut deeper, and some — such as Commerzbank AG and hedge fund manager Pierre Andurand —  have warned that prices may buckle further if they don’t. Brent futures traded near $80 a barrel on Monday.

Supply reductions across the alliance would probably win back oil bulls, but they could be hard to orchestrate. Iraq, Russia and Kazakhstan have recently been pumping over their quotas, while others like the African members have lost so much production capacity they’re in no position to cut further.

The price oil oil briefly pumped to session highs on the Bloomberg report, then quickly dumped as it always does in kneejerk reaction to speculation – not fact – that OPEC+ may cut more output as the market is hard-wired to interpret this as an indication that if the oil producers are set to trim production more then it means that demand is collapsing and so you must sell, in the process making even more output cuts likely and so on.

Authored by Paul Joseph Watson via Modernity.news,

A transgender TikToker gushed about studying the Quran, claiming that Allah was “beyond gender”.

The clip, which went viral on X, features an effeminate biological male wearing make-up and sporting a thin mustache talking about how excited he is having “just started reading the Quran.”

The they/them explains how he started studying the book after seeing posts about it on social media and teaching materials for both Muslims and non-Muslims.

More and more “progressives” are becoming fascinated by Islam after starting to attend anti-Israel marches at university.

This young man is so thrilled by reading the Quran that he just might move to Gaza or Iran at some point

Good luck! pic.twitter.com/rBRXmNIYzB

— Visegrád 24 (@visegrad24) November 26, 2023

“The way that the Quran describes things actually makes sense to me,” he states before asserting, “Did you know Allah is beyond gender?”

“This whole book is just blowing my mind, and I am so excited,” he adds, remarking on how the book had sparked a personal “revolution” that might finally lead him to believe in God.

“There are a lot of people who are converting, I’m not saying I’m gonna convert, I’m not saying I wouldn’t,” he adds.

The clip is so patently bizarre that some wondered whether it was satire, although it seems to be genuine (very hard to tell the difference these days).

As we previously highlighted, TikTokers got similarly excited over Osama Bin Laden’s “letter to America” which justifies terrorism and the 9/11 attacks, with many asserting that Bin Laden was right.

One imagines what kind of welcome these people would get in strictly Islamic countries and whether or not they would still be as excited about the Quran afterwards.

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Authored by Michael Maharrey via SchiffGold.com,

The financial crisis that kicked off in March continues to bubble under the surface…

Total outstanding loans in the Federal Reserve’s bank bailout program jumped by just over $5 billion in November.

There was a sudden spike in banks tapping into the bailout program during the first week of the month with financial institutions borrowing $3.87 billion from the Bank Term Funding Program (BTFP). There was another surge in borrowing between Nov. 15 and Nov. 22, according to Fed data.

As of Nov. 22, there was $114.1 billion in outstanding loans in the BTFP bank bailout program.

As you can see from the chart, borrowing had leveled off in August before the sudden spike in November. Keep in mind that banks were still tapping into the bailout even as the total balance in the program plateaued. Some banks were paying off loans as others borrowed.

The fact that banks are still accessing the bailout program, and suddenly at a faster rate, would seem to indicate that the banking sector remains shaky.

After the collapse of Silicon Valley Bank and Signature Bank, the Fed created the BTFP, allowing banks to easily access capital “to help assure banks have the ability to meet the needs of all their depositors.”

The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging US Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. Banks can borrow against their assets “at par” (face value).

According to a Federal Reserve statement, “the BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.”

The ability to borrow against the face value of their bond portfolios is a sweetheart deal for banks given the big drop in bond prices.

As the Fed jacked up interest rates to fight price inflation, it decimated the bond market. (Bond prices and interest rates are inversely correlated. As interest rates rise, bond prices fall.) With interest rates rising so quickly, banks were not able to adjust their bond holdings. As a result, many banks have become undercapitalized on paper. The banking sector was buried under some $620 billion in unrealized losses on securities at the end of last year, according to the Federal Deposit Insurance Corp.

The BTFP gives banks a way out, or at least the opportunity to kick the can down the road for a year. Instead of selling bonds that have dropped in value at a big loss, banks can go to the Fed and borrow money at the bonds’ face value.

In the first week of the BTFP, banks borrowed $11.9 billion from the program, along with more than $300 billion from the already-established Fed Discount Window.

The Discount Window requires banks to post collateral at face value and loans come with a relatively high interest rate and must post collateral at fair market value. While Discount Window borrowing surged in the weeks after the collapse of SVC and Signature Bank, the balances were quickly paid back down, and Discount Window borrowing returned to normal levels.

But borrowing through the bailout program never slowed down and then suddenly accelerated this month.

It’s notable that the sudden spike in bailout borrowing happened even as the bond market rallied and bonds regained some of their value. This ostensibly provided some relief on banks’ balance sheets.

Granted, the $114 billion outstanding is insignificant compared to the $22.8 trillion in commercial bank assets held by the 4,100 commercial banks in the US. The fact that some troubled banks are still tapping into a bailout program eight months after the crisis doesn’t necessarily mean the banking system is on the verge of collapse. But while the bailouts might not be a fire, it’s at least smoke. There are still problems in the banking system bubbling under the surface.

This is a predictable consequence of the Fed raising interest rates to battle price inflation.

Artificially low interest rates and easy money are the mother’s milk of this bubble economy. With everybody from corporations, consumers, and the federal government buried in debt, this economy and the financial system simply can’t function long-term in a high interest rate environment. The banking crisis earlier this year was the first thing to break as a result of rising interest rates. Other things will follow. We’ve already seen some tremors in the commercial real estate market.

While you might be tempted to blame the Fed’s recent rate hikes for these issues, the real problem started years ago.

After the Great Recession, Federal Reserve policy intentionally incentivized borrowing to “stimulate” the economy. It cut rates to zero and launched three rounds of quantitative easing. After an unsuccessful attempt to normalize rates and shrink its balance sheet in 2018, the Fed doubled down on easy money policies during the pandemic. This monetary inflation inevitably led to price inflation. That forced the Fed to raise interest rates. The central bank appears to have cooled price inflation (for now), but it also broke the financial system.

In effect, the Fed managed to paper over the financial crisis with this bailout program. It basically slapped a bandaid on it. But it has not addressed the underlying issue – the impact of rising interest rates on an economy and financial system addicted to easy money.

And it’s only a matter of time before something else breaks.

Data from Adobe Analytics revealed that online sales on Black Friday reached $9.8 billion, marking an increase of about 7.5% compared to the previous year, according to Bloomberg. This trend indicates encouraging signs of consumer spending despite dismal sales forecasts for the holiday season. Nevertheless, data showed consumers were putting more purchases on flexible payments. 

Consumers were gobbling up electronics, smartwatches, TVs, and audio equipment last Friday, with sales of those electronics up 7.5% compared with the previous year. Data showed consumers were increasingly resorting to buy-now, pay-later options, which jumped 72% compared to the week before Thanksgiving. 

The buy-now, pay-later option is surging because consumers are balancing other debt, such as student loans or credit cards, amid the highest interest rates in a generation. These short-term loans allow consumers to make installment payments over a few months. 

According to the Federal Reserve Bank of New York, younger consumers struggling with access to credit cards are frequently turning to buy-now, pay-later options. 

And none of this should come as a surprise to readers, as we pointed out in a recent note titled “Dear Santa, Can I Pay Later This Year?” 

Like many retailers, Best Buy warned in the weeks ahead of Black Friday that consumer demand is ‘unpredictable and inconsistent.’ Retailers have been rolling out higher discounts in response to the increase in deal-hunting consumers. 

In a separate report, Salesforce said online sales on Black Friday increased by 9% versus the same day last year. Sales data showed consumers mainly purchased footwear, sporting goods, health, and beauty. 

Online sales data ahead of Cyber Monday (today) can give company executives an early indication of sales performance through the Christmas shopping season.

Some estimates suggest that Cyber Monday sales might see a 21% increase to $13.7 billion, potentially exceeding Black Friday spending. This trend could imply that a larger number of holiday shoppers are completing their purchases sooner this year. 

This month, we pointed out the number of times execs in earnings calls for the third quarter used “choiceful” soared to a record. The word was used to describe ‘thrifty’ consumers. 

For the cash market today, Bloomberg said to watch these consumer stocks: Amazon, eBay, VF Corp, TJX, Nike, Coach owner Tapestry and Lululemon, following the Adobe data. 

Deal-hunting consumers search for stores with the highest discounts. Also, an increasing number of them are opting for buy-now, pay-later.

Authored by Steve Watson via Modernity.news,

UFC star Conor McGregor has continued his flurry of offence against the Irish government, branding the Prime Minster Leo Varadkar “a disgrace” over comments made about a child who was kidnapped by Hamas terrorists.

The five time world champion responded to a post on X made by Varadkar about Emily Hand who was returned to her family over the weekend.

Varadkar described the child as being “lost” and claimed she “has now been found and returned.”

McGregor noted that the 8-year-old child was “abducted by an evil terrorist organisation,” adding “What is with you and your government and your paid for media affiliates constantly down playing / attempting to repress horrific acts that happen to children.”

The MMA legend continued, “You are a disgrace. The day after a stabbing of children in Ireland, NOT ONE PAPER HAD IT ON THEIR FRONT COVER. We will not forget.”

She was abducted by an evil terrorist organization. What is with you and your government and your paid for media affiliates constantly down playing / attempting to repress horrific acts that happen to children. You are a disgrace. The day after a stabbing of children in Ireland,… https://t.co/YKyviZDLfW

— Conor McGregor (@TheNotoriousMMA) November 26, 2023

As we previously highlighted, McGregor has been outspoken about the impact mass migration is having on his homeland, remarking, “Ireland, we are at war,” and following the stabbing of three children by an Algerian migrant in Dublin last week, he slammed authorities for targeting Irish people who rioted in the streets in response.

McGregor’s comments have prompted Irish authorities to start an investigation to determine if the fighter has violated ‘online hate speech’ laws.

Do not let any irish property be took over unannounced. Evaporate said property. It’s a war.

— Conor McGregor (@TheNotoriousMMA) November 22, 2023

Innocent children ruthlessly stabbed by a mentally deranged non-national in Dublin, Ireland today. Our chief of police had this to say on the riots in the aftermath. Drew, not good enough. There is grave danger among us in Ireland that should never be here in the first place, and… https://t.co/ac6j1GIjXD

— Conor McGregor (@TheNotoriousMMA) November 23, 2023

The new ‘laws’ were quickly put into place after the rioting in Dublin, with many, including X owner Elon Musk, noting that Irish people now face potential criminal records just for posting memes, or even just having memes saved on their devices.

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US equity futures and global markets are in the red, amid a broader risk-off tone to start the week as a renewed slowdown in China’s industrial profits growth dented sentiment in global financial markets, as they were seen as a sign of weak domestic demand and a reminder of the country’s economic slowdown. As of 7:35am, S&P and Nasdaq futures were both down 0.1%, off the worst levels of the session. 10-year TSY yields climbed as much as five basis points to 4.51%, the highest in more than a week, before reversing the entire move; gold climbed to the highest since May, rising over $2,100 while the dollar was little changed and bitcoin slumped under $37,000. Oil was down a fourth day before this week’s delayed OPEC+ meeting. Retail Sales numbers for Black Friday showing +2.5% YoY gain with online sales +7.5% to a record $9.8bn; this could be driven by discount/bargain hunting. Today we will get the October new home sales data, with economists expecting a decline after September’s surprise surge in sales volumes as higher mortgage rates and increased inventories of existing homes weigh on sales. The Dallas Fed manufacturing activity index is also due later for November.

In premarket trading, Foot Locker dropped 3% after the sports apparel retailer was downgraded to sell at Citi, which sees third-quarter earnings per share missing estimates. Here are some other notable premarket movers:

• Crown Castle gains 4% after a report that activist investor Elliott Investment Management plans to push for changes at the wireless tower owner.
• Shopify jumps 4% after the e-commerce company said merchants set a Black Friday record with a combined $4.1 billion in sales.
• GE HealthCare Technologies drops 3% as UBS gives the stock its only sell rating.

Today’s cautious start comes despite the VIX index falling belkow 13, its lowest level since January 2020, as markets have been buoyed by a growing assumption that further interest-rate hikes from the Fed and ECB are unlikely. In earnings due this week, Crowdstrike Holdings Inc. will underscore how businesses are prioritizing cybersecurity after recent high-profile corporate hacks, while Salesforce and Dell are expected to post slower sales growth as overall corporate expenditure tightens.

A slowdown in China’s industrial profit growth added to concern about deflation in the world’s second-largest economy. Fresh economic data this week will help traders gauge whether the gains for stocks and bonds seen so far this month can extend into December. Statistics include euro-zone inflation figures, China PMIs and US personal consumption numbers on Thursday, and US and euro-area PMIs on Friday.

“There’s not much fundamental reason for high market optimism,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG. “A lot of clients I am talking to are getting more pessimistic about long-term growth prospects.”

Meanwhile, after the bounce back in Treasuries this month, many US debt watchers say the path is clearing for a real revival in the market. The Bloomberg US Treasury Index is showing a positive return for the year after spending chunks of 2023 underwater, helped by of slowing inflation and measured jobs growth.

In Europe the Stoxx 600 was down 0.1% as traders brace for inflation data due later in the week. Energy stocks are the worst performers, tracking losses in oil prices as Brent crude futures fall 1.8% to trade below $79.20. Real estate and telecom stocks are the biggest gainers, while energy and autos shares lag. BASF drops after a downgrade from Morgan Stanley while Bpost slumps after Belgian newspaper L’Echo reported the company is set to lose its newspaper and periodical delivery contracts. Turkish banks got a boost after Bank of America issued a broad buy reconmmendation on the group. Here are some of Monday’s biggest movers:

• Rightmove shares rise as much as 7% after the real estate portal said its revenue is tracking marginally ahead of expectations since July, helped by higher revenue by per advertiser. That’s despite a becalmed UK housing market, analysts noted. Its long-term revenue and profit guidance met analyst expectations.
• Elior shares rise as much as 7.7%, to the highest since July, after Deutsche Bank upgraded the French caterer to buy from hold, saying “the worst is probably over” and the focus is shifting to accretive growth and de-leveraging.
• Shaftesbury shares gain as much as 2.6% after the London landlord said customers reported sales in aggregate 12% above 2022 levels and 16% above 2019 levels in the period from July 1 to Nov. 15, according to a trading update.
• Turkish Banks’ shares surged the most in a month after Bank of America issued an across-the-board buy recommendation on major private-sector lenders, predicting they would benefit from the central bank’s pivot back to orthodox monetary policy.
• Julius Baer shares fall as much as 2.9% after the wealth manager said it is reviewing a lending business after confirming an exposure of 606 million Swiss francs to a single client.
• BASF shares fall as much as 2.9% after being cut to underweight from equal-weight at Morgan Stanley. The broker highlights a structural shift in the global chemicals cost curve that it says doesn’t appear to be fully discounted.
• BPost shares fell as much as 14% after L’Echo newspaper reported on Saturday that the company was set to lose its newspaper and periodicals delivery contracts.
• Frontier Developments shares sink as much as 24% after the UK video-game maker cut its revenue forecast for the fiscal year ending May next year, saying sales from a newly released real-time strategy game missed projections.
• Entain shares fall as much as 2.9% as Goldman says its buy rating on the Ladbrokes bookmaker parent was “wrong” and changes it to sell. Goldman is only sell-rated firm among 21 tracked by Bloomberg.

Earlier in the session, Asian stocks fell, led by declines in China after data showed profit growth at the nation’s industrial companies slowed, adding to concerns over the region’s largest economy. The MSCI Asia Pacific Index dropped 0.4%, with TSMC and Alibaba among the biggest drags. Stocks in Japan, Taiwan, Australia and Singapore also slipped. Markets in India and the Philippines were closed for holidays. China’s benchmark CSI 300 Index fell more than 1% after a report that industrial profit growth slowed for a second-straight month. The nation’s economy remains fragile despite continued measures from authorities to stimulate consumption and support the ailing real estate sector.

• Hang Seng and Shanghai Comp declined following soft Chinese Industrial Profits and amid shadow banking concerns after Chinese authorities opened a probe into struggling shadow bank Zhongzhi, while the PBoC’s notice to strengthen financial support for private companies did little to spur risk sentiment.
• Nikkei 225 wiped out its opening gains after hitting resistance just above the 33,800 level and as participants digested Japanese Services PPI which showed a slight acceleration.
• ASX 200 finished lower as weakness in the defensive and mining-related sectors overshadowed the gains in tech.

In FX, the Bloomberg Dollar Spot Index slipped 0.1%, edging closer to a 2 1/2-month low touched last week; USD/JPY fell as much as 0.4% amid month-end trading flows, with market participants citing possible month-end demand for yen from Japanese exporters.

In rates, treasuries were little changed; the 10-year yield was flat at 4.465% after edging up as much as 5bps higher to 4.51%, its highest in more than a week. US TSYs trailed bunds and gilts outperforming by 4bp and 2.5bp in the sector; curve spreads are also within 1bp of Friday close levels. Core European bonds outperform, led by gilts after dovish comments from BOE Governor Andrew Bailey, who said recent inflation figures were “very good news.” Main focal point of US session is supply as two coupon auctions are slated — 2-year and 5-year notes.  Compressed auction cycle begins with $54b 2-year note sale at 11:30am and $55b 5-year at 1pm; WI 2-year yield is around 4.910%, 14.5bp richer than last month’s, which stopped on the screws; WI 5-year at around 4.46% is ~44bp richer than previous.

In commodities, oil fell for a fourth day as traders looked ahead to this week’s delayed OPEC+ meeting. Gold closed above $2,000 an ounce on Friday, capping a second weekly gain and bolstering confidence that higher prices are justified. The metal has been lifted in the second half of November by weaker US economic data that added to expectations for early rate cuts by the Fed next year.  The narrative for iron ore keeps swinging between China property stimulus (bullish) and Beijing’s resolve to clamp down on speculation (bearish).

Today’s macro data focus is new home sales and Dallas Fed; later this week we receive consumer confidence, GDP/PCE, and ISM-Mfg.

Market Snapshot

• S&P 500 futures down 0.2% to 4,558.00
• STOXX Europe 600 down 0.2% to 458.86
• MXAP down 0.3% to 161.05
• MXAPJ down 0.3% to 501.89
• Nikkei down 0.5% to 33,447.67
• Topix down 0.4% to 2,381.76
• Hang Seng Index down 0.2% to 17,525.06
• Shanghai Composite down 0.3% to 3,031.70
• Sensex little changed at 65,970.04
• Australia S&P/ASX 200 down 0.8% to 6,987.64
• Kospi little changed at 2,495.66
• German 10Y yield little changed at 2.64%
• Euro little changed at $1.0947
• Brent Futures down 0.9% to $79.89/bbl
• Brent Futures down 0.9% to $79.89/bbl
• Gold spot up 0.7% to $2,015.01
• U.S. Dollar Index little changed at 103.33

Top Overnight News

• Taiwan’s presidential election coming up on Jan 13 risks reigniting tensions with China as opposition parties more friendly to Beijing fail to unite, clearing a path for the current pro-independence Democratic Progressive Party to stay in power. WaPo
• The Beijing Stock Exchange has de facto implemented a new policy that prevents major shareholders of companies listed on its bourse from selling stock, worried that such sales could douse a long-desired rally, three people familiar with the matter said. RTRS
• US and Germany are starting to place pressure on Ukraine to negotiate an end to the war with Russia based approximately on the current battlelines. London Times
• Russia launched its largest drone attack of the war in the early hours of Saturday morning, targeting Kyiv in what Ukrainian officials fear is the start of a winter campaign aimed at destroying the country’s energy infrastructure. FT
• OPEC+ is close to resolving a dispute over 2024 production quotas with certain African members, potentially paving the way for incremental action on curbing supply at the upcoming 11/30 meeting. RTRS
• Bank of England Governor Andrew Bailey suggested that interest-rate cuts are unlikely for the “foreseeable future” as he warned that the second half of the inflation battle will be “hard work.” BBG
• A healthcare hiring boom is helping offset weaker job growth in other areas of the softening U.S. economy, boosting its chances of skirting a recession. The industry could serve as a strong job generator for years to come as an aging population and Covid-19 fuel widespread worker shortages and greater needs for healthcare services. WSJ
• An upcoming sale of shares in OpenAI is set to test how much the past week’s leadership chaos has cost the company and its backers, though big investors are bullish about securing a high valuation. The employee stock sale, which had been planned before the sacking last week of chief executive Sam Altman and expected to value the company at $86bn, will continue as planned, according to two investors with direct knowledge of the matter. FT
• Mastercard said overall spending rose ~2.5% Y/Y (ex-autos) on Black Friday, with in-store up a bit more than 1% while online climbed 8.5% (the 8.5% online spending increase isn’t that far from the +7.5% number published by Adobe). CNN

A more detailed look at global markets courtesy of Newsquawk

APAC stocks declined heading into month-end and after newsflow over the weekend was mainly dominated by geopolitical headlines with a question mark hanging over whether the Israel-Hamas truce will be extended beyond the initial four-day agreement. ASX 200 finished lower as weakness in the defensive and mining-related sectors overshadowed the gains in tech. Nikkei 225 wiped out its opening gains after hitting resistance just above the 33,800 level and as participants digested Japanese Services PPI which showed a slight acceleration. Hang Seng and Shanghai Comp declined following soft Chinese Industrial Profits and amid shadow banking concerns after Chinese authorities opened a probe into struggling shadow bank Zhongzhi, while the PBoC’s notice to strengthen financial support for private companies did little to spur risk sentiment.

Top Asian News

• PBoC issued a notice to strengthen financial support for private companies and will encourage institutional investors to actively and scientifically allocate private companies business process modelling, development and support. PBoC said it is to support private enterprises in listing and financing, mergers and acquisitions and restructuring, while it also said to use monetary policy tools and fiscal subsidies to incentivise financial institutions to service private companies and will reasonably meet the financing needs of private property companies.
• China’s Global Times noted multiple central government departments pledged to support private enterprises’ growth and outlined 25 concrete measures to ensure their financing needs and bolster their technological innovations.
• Chinese authorities opened a probe into struggling shadow bank Zhongzhi after it recently warned of severe insolvency.
• Japanese Foreign Minister Kamikawa said they sought an immediate lifting of the Japanese maritime product ban by China in a meeting with Chinese Foreign Minister Wang and were able to have a meaningful exchange on common challenges such as climate change and North Korea. They also shared the common view that Japan and China should hold security talks in the near future, while it was also reported that China, Japan and South Korea agreed to boost ties and seek a summit, according to Reuters.
• Australia’s government will introduce a bill this week that would give the RBA’s independent expert members more responsibility for setting interest rates with a new specialist monetary policy board. Furthermore, the bill would implement the recommendations of the RBA review announced in April including switching to fewer meetings in a year and a dual mandate of price stability and full employment, according to Reuters. In relevant news, Australia named BoE’s Andrew Hauser as RBA Deputy Governor who is expected to start before the first RBA board meeting next year, according to Reuters.
• China to hold CCP Politburo meeting on November 27th, according to state media.
• Beijing Stock Exchange has reportedly de facto implemented a new policy preventing major shareholders of Cos from selling stock, via Reuters citing sources; amid concerns that sales could extinguish the desired rally.

European bourses are in the red, Euro Stoxx 50 -0.2%, with trade ultimately indecisive; whilst the FTSE 100 -0.3% underperforms amid energy action. Sectors are mixed, but with a clear negative tilt; Energy resides at the foot of the pile hampered by crude benchmarks while Telecoms outperform. Stateside, futures are subdued with clear underperformance in the Russell -0.5% vs. -0.1% in the ES & NQ. Black Friday US online sales rose 7.5% Y/Y to USD 9.8bln, while shopper traffic to physical stores rose 2%-5% Y/Y, according to CNBC citing Adobe Analytics. Online sales are boosted by demand for electronics, smartwatches, TVs and audio equipment, according to Bloomberg; UK Retail footfall +7.9% W/W in Black Friday week, +2.0% Y/Y, via MRI Software. Deutsche Bank sees the S&P500 ending 2024 at 5,100 (vs Friday’s close of 4,559.34).

Top European News

• UK PM Sunak reportedly eyes more tax cuts in spring as he weighs the UK election date, while he also stated in an interview that claims the UK is headed for austerity are unfounded, according to Bloomberg.
• UK PM Sunak is to highlight almost GBP 30bln of investment pledges by international companies at the Global Investment Summit on Monday which will create thousands of jobs across the UK in the most innovative sectors, including tech, life sciences, renewables, housing and infrastructure, according to the UK government website.
• UK Lords’ economic affairs committee is advocating for a revision in the accountability mechanisms for the BoE, according to the Times. This call for change is driven by the significant expansion in the Bank’s powers and objectives since it gained operational independence 25 years ago.
• National Infrastructure Commission chair Armitt warned that UK PM Sunak’s funding plan to get private developers to fund an expensive tunnel under London to connect the HS2 line to Euston is set to fail and that the government needs to be ready to fund the core civil engineering for the final miles of the project, according to FT.
• ECB’s Nagel called on the German government to resolve the budget situation and create budget clarity soon, according to Bloomberg. Nagel also said the ECB’s rates were slowing inflation but added that inflation is not yet back down to a level where they want it.
• EU’s commissioner for jobs and social rights Schmit said EU consumers will have to pay higher prices to cover the costs to provide better rights for gig workers but added that price increases will not kill the industry’s business model, according to FT.
• BoE Governor Bailey says a lot of the recent fall of inflation is due to the unwinding of energy cost surge, according to ChronicleLive; getting inflation back down to 2% will be hard work.

FX

• Greenback remains top heavy, but DXY derives some support from firmer US Treasury yields within a 103.22-53 range.
• Loonie undermined by renewed weakness in oil as USD/CAD climbs from 1.3623 to 1.3661.
• Aussie probes 200-DMA vs Buck and touches 0.6600 on hawkish RBA vibes, Sterling regains 1.2600+ status after another pushback against rate cuts by BoE Governor Bailey.
• Euro consolidates gains on 1.0900 handle and Yen pares declines from 149.67 in the wake of a pick-up in Japanese producer prices.
• PBoC set USD/CNY mid-point at 7.1159 vs exp. 7.1461 (prev. 7.1151).

Fixed Income

• Bonds regain recovery momentum after a pull-back and bout of consolidation.
• Bunds pick up the baton from Gilts within 130.56-16 and 95.90-39 respective ranges.
• T-note lags between 108-14/06 parameters ahead of front-loaded refunding auctions, US new home sales data and the Dallas Fed Manufacturing Business Index.
• German gov’t spokesperson expects the Cabinet to agree on a supplementary 2023 budget this afternoon.

Commodities

• Crude benchmarks continue to slump, with light newsflow unable to change sentiment; Energy Intel’s Bakr reports African states have not reached a resolution yet with regards to their baselines ahead of the OPEC+ meeting on Thursday.
• WTI & Brent Jan’24 are under marked pressure, at session lows of USD 74.07/bbl and USD 79.13/bbl respectively.
• Base Metals are mixed with overall sentiment tentative, whilst Precious Metals remain propped up, with spot Gold holding above the USD 2000/oz level.
• Iraq’s Oil Ministry said UAE-based Crescent Petroleum won the rights to two oil fields in the country’s 5th oil and gas leasing round, while another company won rights to the Howaiza oil field, according to Reuters.
• African states have not reached a resolution yet with regards to their baselines and the OPEC+ meeting is still due to take place on November 30th, according to Energy Intel’s Bakr.
• Panama’s Trade Ministry said Canada’s First Quantum sent notifications of intent to begin arbitration proceedings amid protests demanding to scrap the miner’s contract to run a key mine.
• China’s State Planner conducts a survey on price indices for steel and iron ore.

Geopolitics

• Israeli authorities released 39 Palestinian prisoners including 6 women and 33 children as part of the exchange deal with Hamas and Hamas released 17 hostages on Saturday, while it was also reported that more Palestinians were released from Israeli prisons and that Hamas released another 17 captives including 14 Israeli civilians on Sunday which took the total number of prisoners released by Israel to 117 and the total number of captives released by Hamas to 58.
• The release of hostages was reportedly delayed by seven hours on Saturday after allegations from Hamas including that Israel was not allowing humanitarian aid to reach parts of northern Gaza, while it was separately reported that Israeli media quoted an unnamed security source on Saturday that had warned the military offensive in Gaza would resume unless hostages were released by midnight.
• Israeli PM Netanyahu spoke with US President Biden and told him Israel will resume the Gaza operation in full force at the end of the truce but would welcome extending the truce if it facilitated the release of ten additional hostages daily, according to Reuters.
• Hamas announced in a statement on Sunday that it is seeking to extend the truce with Israel if there are serious efforts made to increase the number of Palestinian detainees released from Israel, according to Reuters.
• Hamas armed wing said on Sunday that 4 of its leaders were killed including the commander of the North Gaza brigade. It was separately reported that the Palestinian Red Crescent said a Palestinian farmer was killed and another was injured on Sunday after they were targeted by Israeli forces in the Maghazi refugee camp in Gaza, while the Palestinian health ministry said two Palestinians were killed by Israeli occupation forces in Nablus and Jenin early on Sunday.
• US President Biden said a 4-year-old American hostage was released by Hamas and they expect additional Americans to be released by Hamas but do not have firm news, while he noted that his goal is to keep the pause in fighting going beyond Monday.
• US Secretary of State Blinken held a call with Egypt’s Foreign Minister to discuss obstacles threatening Israel’s truce with Hamas and ways to reach a comprehensive ceasefire, according to a statement by Egypt’s foreign ministry cited by Reuters.
• Qatar’s PM said Hamas must locate dozens of more hostages held in Gaza by civilians and gangs to extend the truce, according to FT.
• Turkish President Erdogan and Iranian President Raisi discussed in a phone call the importance of taking a stance against Israeli brutality in Palestinian territories, according to Reuters.
• Syria’s army said air defences intercepted Israeli missiles flying from Golan Heights which put Damascus Airport out of service, according to Reuters.
• Unidentified armed individuals have seized an Israeli-linked tanker carrying a cargo of phosphoric acid in the Gulf of Aden on Sunday, according to Reuters citing the vessel management company and a US official. It was later reported that a US warship responded to a distress call from a chemical tanker taken in the Middle East and the tanker is now safe, while Houthis reportedly fired two ballistic missiles at a US destroyer on Sunday evening which failed to hit the target following the US Navy rescue of the Israeli-linked tanker.
• Israeli PM Netanyahu’s office confirms receipt of the list of detainees held by Hamas to be released in the fourth batch; notes of major problems in the list of those scheduled to be released and intensive negotiations to change it, Al Arabiya reports. Subsequently, Israel is waiting for Hamas’ response to extend the truce for two days in exchange for the release of 20 Israelis, via Al Arabiya.
• “The Israeli army opened fire east of the Maghazi refugee camp in the central Gaza Strip”, according to Al Arabiya (Translated via Google);

US Event Calendar

• 10:00: Oct. New Home Sales MoM, est. -4.7%, prior 12.3%
• 10:00: Oct. New Home Sales, est. 723,000, prior 759,000
• 10:30: Nov. Dallas Fed Manf. Activity, est. -16.0, prior -19.2

DB’s Jim Reid concludes the overnight wrap

I went out to play golf yesterday and came back to find the house fully decorated for Xmas. A bit early but we’re off skiing in only 2 and a half weeks. I also learnt that a fortune has been spent on a new posh huge artificial tree. I’ve been told that over the long-run it will be more economical. I’ve entered it all into a spreadsheet and I think the break even point is 2033! My best hope of an earlier breakeven is a burst of tree hyperinflation.

From 2033 to 2024, and this morning we’ve just published our 2024 World Outlook entitled “The Race Against Time…”. See it here. Over the last 2-3 years we’ve had a fairly consistent macro narrative, viewing this as a classic policy-led boom-bust cycle that would culminate in a US recession towards the end of 2023. We think our narrative still holds even if the exact timing is more uncertain. Monetary policy famously operates with lags which are highly uncertain in their timing and impact. A US recession before this point would have been early historically relative to the start of the hiking cycle. T he race against time narrative refers to the fact that funding has dried up or tightened considerably over the last couple of years for various parts of economies as rates have risen. Can lending standards loosen, and can yields fall, quickly enough to avoid a funding accident that could see contagion? Non-linearity risk that can turn a mild downturn into a deeper recession remains high .

We expect global growth at 2.4% in 2024 (from 3.2% in 2023), with 2.5% generally seen as the upper bound of being deemed to be in a global recession. Even this pace of global growth relies heavily on the EM world with India (+6.0%) and China (+4.7%) big contributors. The lag of policy will help trigger a mild US recession in H1 2024 with 175bps of Fed cuts and 0.6% GDP expected in 2024. The Euro Area is on course for nearly two years of stagnation by mid-2024 when the recovery slowly starts (2024 GDP of 0.2%). The ECB will likely cut 100bps from June to YE 2024. Germany’s 2024 growth has been downgraded around half a percent to -0.2% in the week of this publication due to the Constitutional Court hearing. We also have all our 2024 asset class forecasts updated in the doc.

While our economic forecasts for the DM world suggest a sober outlook at best, the next 12 months could see more evidence that AI will revolutionise productivity growth later this decade. So the medium-term future looks more promising than it has done for some time. So try to remember that as the world flirts with recession in 2024.

This week has a few data points that will sharpen the forecasts further for economists especially in the US where the personal income and spending data (Thursday) will include the all i mportant core PCE which is of course the Fed’s preferred measure of inflation. Elsewhere in the US the highlights are the second reading of Q3 GDP on Wednesday, the ISM manufacturing and Auto Sales (Friday), and Chicago PMI (Thursday). There’s also a 2 and 5yr auction today and a 7yr equivalent tomorrow. Supply has been a big mover in recent weeks in both directions so although this is relatively short duration it will give some idea of demand, something that will be consistently needed over the next few months and quarters. In Europe, all eyes will be on the preliminary CPI reports for November on Wednesday and Thursday. There will also be labour market data across key economies in the region on Thursday, and a few sentiment gauges, including consumer confidence indices for Germany and France (tomorrow), as well as the final manufacturing PMIs on Friday.

In China, the most important releases will be the November PMIs on Thursday as well as the Caixin manufacturing gauge on Friday after the October prints disappointed. Consensus only expects a slight pick up. It’s a busy week in Japan with various labour market and economic activity gauges that you can see in the day-by-day calendar at the end as usual.

Central bank speakers include Fed Chair Powell (Friday), ECB President Lagarde (today) and BoE Governor Bailey (Wednesday). More are noted in the day-by-day calendar.

Elsewhere the delayed OPEC+ meeting that was expected yesterday is now planned for Thursday. That follows oil price volatility in recent weeks with Brent crude currently hovering near $80.5/bbl, down from nearly $97/bbl at the end of September. Also on Thursday, COP28 will kick off in Dubai, lasting a couple of weeks. So expect plenty of climate headlines.

Finally expect more reports of how Black Friday and Cyber Monday went in terms of US retail sales. So far for Black Friday, Mastercard have said sales (ex-autos) were ‘only’ up +2.5% YoY but split +1.1% for in-store and +8.5% for online. Adobe have confirmed the online sales momentum by suggesting they were up +7.5% and at a record. The only thing i would say is that I’ve been receiving so many pre-Black Friday emails alerting me to early -60% discounts here and -40% discounts there. So I suspect these sales are happening earlier than they use to so you probably have to look at sales across a longer period now.

Asian equity markets are largely lower at the start of the week with the CSI 300 (-1.20%) leading losses followed by the Hang Seng (-0.99%) and the Shanghai Composite (-0.76%) driven by weakness in China’s property stocks. In addition, Chinese industrial profits decreased -7.8% in the January-to-October period from a -9.0% decline in September. The YoY number fell to +2.7% from +11.9% previously. This was probably a bit disappointing given the base effects were impacted by Covid a year ago.

Elsewhere, the Nikkei (-0.51%) and KOSPI (-0.20%) are also lower alongside S&P 500 (-0.28%) and NASDAQ 100 (-0.45%) futures. Yields on 10yr USTs (+2.7bps) have moved higher, trading at 4.495% as I type. Finally in terms of Asia data, Japan’s services PPI hit a 45-month high of 2.3% y/y in October (v/s +2.1% expected) after a downwardly revised rate of +2.0% the previous month.

Looking back at last week now and markets continued their strong performance with risk assets advancing across the board. In fact, a global 60:40 portfolio of equities and bonds is on track for its best monthly performance in three years since we got the positive vaccine news in November 2020. And on Friday we even saw the VIX index of volatility close at a post-pandemic low of 12.46pts, which gives you a sense of how buoyant markets are right now.

In several respects it was a quiet week, with US markets closed on Thursday for the Thanksgiving holiday, followed by a half-day on Friday. But there was no sign of the more positive sentiment abating, with the S&P 500 up +1.00% (+0.06% Friday) to a 3-month high, whilst the STOXX 600 was up +0.91% (+0.33% Friday) to a 2-month high. Likewise in credit, US HY spreads tightened for a 5th week running, falling -14bps (-5bps Friday) to 375bps. Meanwhile in Europe, the iTraxx crossover index fell -12.2bps (-0.4bps Friday) to its tightest level since April 2022 .

The boost in risk appetite meant that the sovereign bond rally stumbled by the end of last week, with investors growing a bit more doubtful about the prospect of near-term rate cuts. That wasn’t helped by the latest US data prints, with the University of Michigan’s indicator of long-term inflation expectations remaining at a 12-year high of 3.2% on the final numbers for November. That doubt about rate cuts was then given further support on Friday from the US flash PMIs, with the composite reading for November remaining at 50.7 (vs. 50.4 expected). Alongside that, central bankers themselves continued to push back on the chance of easier policy anytime soon, and markets lowered the chance of a Fed rate cut by May from 77% to 51% over the week .

Against this backdrop, US Treasury yields moved higher last week, with the 10yr yield up +3.1bps (+6.2bps Friday) to 4.47%. There was a similar selloff in Europe too, with yields on 10yr bunds up +5.6bps (+2.5bps Friday) to 2.64%, whilst 10yr gilts saw a sizeable +17.9bps move (+2.7bps Friday) to 4.28%. That followed a fiscal easing from the UK government in the Autumn statement, an upside surprise in the flash PMIs, and then a stronger-than-expected reading on Friday in the GfK’s consumer confidence data. Meanwhile in Germany, the Ifo’s business climate indicator for November came in at a 4-month high of 87.3 (vs. 87.5 expected). However the shock of the Constitutional Court ruling last week will likely impact this going forward and as we saw at the top, this has led our economists to downgrade growth 0.5pp for 2024 versus their thoughts prior to this.

Finally, in commodities, oil lost ground for a 5th consecutive week, with Brent crude down -0.04% (-1.03% Friday) to $80.58/bbl. That comes ahead of this week’s meeting of the OPEC+ group, which is now set to happen on Thursday as discussed above. WTI also lost ground, falling -0.46% (-2.02% Friday) to $75.54/bbl.

Via Crescat Capital,

Despite the growing popularity of the soft-landing narrative, the current scenario presents a multitude of macro factors forewarning a major recession. The dangerous disconnect of highly inflated valuations of financial assets within a market environment substantially different from the easy money conditions of the past few decades defies logic. With the US economy teetering on the brink of a downturn, the broader equity market is now at risk of a violent selloff and a significant compression of fundamental multiples.

Crescat’s macro model, encompassing 17 macro, fundamental, and technical indicators, is now at one of its most alarming levels in the data record. It’s worth noting that this model has proven highly effective in identifying pivotal shifts in the US business cycle, which inherently oscillates between expansion and contraction in tandem with fluctuations in asset valuations and credit availability. Presently, nearly all indicators have reached historic extremes, corroborating our perspective on the high risk of an impending hard landing.

We currently stand at a crucial juncture in financial markets and the global economy, supported by an extensive list of compelling macro reasons:

• Global central bank assets are contracting and significantly deviating from overall stock trends.

• Yield curve inversions are steepening after being extensively inverted, a classic signal in credit markets that typically coincides with the onset of an economic decline.

• The unemployment rate has surpassed its 2-year moving average, an indicator that has consistently foreshadowed a recession over the last 50 years.

• Every time the ISM manufacturing index remained below the key 50 level for 12 consecutive months, a recession ensued.

• Household saving rates are nearing historic lows.

• The Conference Board Leading indicator has declined for 19 consecutive months, a trend observed only during the Stagflationary recession of 1973-4 and the Global Financial Crisis.

• Market leadership has narrowed with technology mega-cap stocks isolated from the rest of the market, reminiscent of the times preceding the 2001 Tech Bust.

• The recent enormous value destruction in fixed-income assets worldwide

• The perilous divergence between falling Treasury prices and the Nasdaq 100 Index, which continues to defy gravity in a markedly higher cost of capital environment.

• Typical late-cycle valuations among equity markets are historically overblown across several fundamental multiples: price-to-book, price-to-free cash flow, price-to-sales, cyclically adjusted price-to-earnings, overall market cap of US stocks relative to GDP, and others.

• Monetary policy operates with a lag and the Fed has been in a rate hike cycle for 21 months and 20 months into quantitative tightening.

• Banking credit is starting to contract, reaching levels only experienced during the Global Financial Crisis.

• An aggregate index of cyclical industries such as banks, retail, homebuilders, autos, and small caps is now down 20% relative to the S&P 500.

• Trucking employment is contracting at a faster rate than it did during the 2000 and 2008 cycles.

• Consumer sentiment, in terms of present situation versus future expectations, is currently near record levels, serving as an incredibly reliable contrarian indicator.

• Federal tax receipts have declined for seven consecutive months, a sequence only observed during recessions.

• An overwhelming amount of corporate and sovereign debt obligations are maturing in the next 12 months, with effective interest rates on the verge of a drastic rise from historically low levels.

• Corporate margins are yet to feel pressure from rising wage increases as the cost of living remains high and labor strikes continue to unfold.

• Less than one-third of all small-cap stocks in the US have turned a profit in the last three years.

• Aggregate corporate earnings currently reside at the upper boundary of a 70-year channel, historically marking a critical juncture with profits declining significantly in the subsequent years.

• Warren Buffett has made a strategic move to accumulate the largest cash position in Berkshire Hathaway’s history, comprising 52% of cash relative to total assets.

Tech Companies Are the Most Capital-Intensive Sector in the Economy Today

While it has been relatively unnoticed, US companies have recently engaged in one of the most extensive capital spending booms in history. Conventional wisdom would think that most of these corporate investments in the economy are currently being driven by highly capital-intensive businesses, but the truth is that technology businesses have been by far the biggest contributor to this investment expansion. Megacap technology companies currently carry most of the weight in the economy and have been prominent players in the capital expenditure witnessed over the past 12 months. Nonetheless, their growth potential is nearing a point of exhaustion, making it increasingly crucial for them to reinvent themselves and explore alternative avenues to expand their businesses. However, the challenge lies in the fact that, despite investing billions of dollars in artificial intelligence (AI), these expenditures have only resulted in marginal improvements in their revenues.

The Goldilocks era where technology companies could sustain high earnings and free cash flow growth with minimal capital investment is gone. To put this in historical context, the current real growth in earnings in the decade-to-date is already the second largest in history, closely trailing the prior decade’s performance. Apart from the 2010s, the only two instances of notable long-term increases in profits occurred in the 1920s and the 1990s, both preceding severe earnings recessions. We believe the 2010s will mark the pinnacle of corporate-profit growth for any calendar decade in history and for many to come. The 2020s-to-date growth is entirely unsustainable. Nominal earnings are poised to turn negative over the next year, and real earnings are likely to remain negative for much of the rest of the decade due to structural inflationary factors.

CAPEX at the Apex

It’s important to note that the aggregate capital expenditure cycle of S&P 500 index members typically follows an upward trend, and we currently find ourselves at the upper limit of this range, likely at a pivotal juncture that often signifies the onset of a contraction in capital expenditure.

A similar situation occurred at the peaks of the Tech Bubble in 2000, the Housing Bubble in 2007, and the Oil and Gas Boom in 2014. Considering the increased leverage of corporations today, we believe it’s only a matter of time before most U.S. businesses are compelled to scale back their investment plans as an integral part of the unfolding downturn in the economic cycle.

Tech Capex Alone Is Now Higher Than Resource Sectors

In an unprecedented shift, AI and other technological advancements now require more capital investment than sectors traditionally associated with natural resources. To be precise, the S&P 500 tech companies, such as Amazon and Alphabet, collectively allocate a higher annual capital expenditure than the combined spending of the energy and materials sectors.

The ongoing need for significant capital infusion by tech companies, particularly as they approach a growth ceiling in their current operations, fundamentally positions these enterprises as more cyclical in nature.

The reality is that technology companies are increasingly taking on the reputation of being more capital-intensive compared to resource companies. While it is crucial to emphasize the growing lack of capital prudence in the tech sector, our analysis shows that the overly cautious approach by commodity businesses in contrast is signaling the beginning of some remarkable long-term investment opportunities in the resource sectors.

To elaborate further, extended periods of excessive spending and misallocation of assets are typically followed by challenging phases characterized by restricted capital access. In response, management teams of resource businesses adopt a more conservative strategy, resulting in historically low capital expenditure and notable supply constraints. These phases offer enduring investment opportunities in commodities, and it seems we are currently in the early stages of this trend.

Volatility Is Poised to Rise

Throughout history, we have repeatedly witnessed the time-delayed effects of monetary policy, and this pattern holds true today, especially considering the circumstances. The upcoming year will see a significant wave of maturing debt obligations for sovereign institutions, corporations, and even individuals. The US Federal debt alone is poised to have almost one-third of its Treasuries outstanding—amounting to $8.2 trillion—mature in the next 12 months. To put this into perspective, it’s over 3.5 times the net issuances observed so far this year. Consequently, we anticipate a substantial rise in effective interest rates in 2024, leading to highly restrictive financial conditions.

The chart below provides additional insight into the delayed impact of monetary policy on market volatility, measured in this case by the VIX index. With a 2-year lead, changes in Fed funds rates have often foreshadowed significant volatility events in equity markets. The current narrowing leadership in the stock market, coupled with numerous recession indicators sounding alarms, supports the argument that volatility is currently unsustainably suppressed.

As value-driven money managers, our constant pursuit is to identify both undervalued and overvalued assets. Given our strong macro views, the current suppressed levels of equity volatility align with our short investment thesis on many popular large-cap equity names. As part of our Global Macro and Long Short funds, we are currently expressing this perspective through put options in a selection of overvalued and fundamentally deteriorating businesses identified by our fundamental models ahead of what we believe is a looming macroeconomic downturn.

A Major Liquidity Withdrawal

Global central banks’ assets have already declined by almost $6 trillion from peak levels. To be clear, that does not include any mark-to-market losses from the recent collapse in prices of sovereign bonds worldwide. Undeniably, this is a major liquidity withdrawal from financial markets. More interestingly, the chart below shows the historical correlation between the aggregate size of central banks’ balance sheets and the performance of US equity markets. We have recently noticed an important divergence in these two metrics, which in our strong views indicates that the overall equity market has significant downside potential from their current prices.

Despite the prevalent belief that the recent stock rally signifies the start of a new bull market, we align ourselves with a historical perspective that quantitative tightening is significantly draining liquidity from the system, and the economy is still on track for a hard landing.

It is worth noting that although technology stocks, particularly mega-cap companies, have carried most of the market gains so far this year, the year-to-date performance of eight out of eleven sectors is currently negative.

Narrowing Leadership Similar to the Peak of the Tech Bubble

In terms of market leadership and breadth analysis, observe the striking resemblance between the period from mid-1999 to the peak of the tech bubble in US equity markets and the current scenario. Back then, technology was leading strongly, while all 10 other sectors were already in negative territory.

The current market’s overall lack of strength raises concerns, signaling weakness and fragility in the system. While most businesses are already undergoing reevaluation at lower multiples, technology companies remain historically overvalued.

Notably, the technology sector’s aggregate market cap now represents 25% of today’s GDP, compared to 22% during the peak of the tech bubble in March 2000. In contrast, tech companies’ current profits make up only 1% of the size of the economy.

We find it highly unlikely for these companies to continue leading the market into 2024, especially given current interest rates. There’s a substantial risk of investors discounting these businesses at significantly lower present values, as fundamental growth appears to be limited relative to current estimates.

Two Companies Now Larger Than 4 Sector Combined

It’s mind-boggling that Apple and Microsoft’s weight alone in the S&P 500 is larger than four sectors combined, and, more importantly, both companies are 70x larger than the entire metals and mining industry.

For us, that’s a reflection of how distressed miners have become. During inflationary regimes, one must strive to find companies with purchasing power to navigate these types of environments. Resource companies, despite facing increased operating costs, have inherent pricing power in their businesses as underlying commodity prices tend to perform exceptionally well during such periods.

Capital Conservatism

The chart presented below effectively illustrates the historical conservatism of resource companies in terms of capital management. Examining their capex in relation to operating cash flows reveals that they allocate only 40% of their generated profits toward capital expenditure. This level is among the lowest in history, significantly below its previous lows in the mid-2000s during the bull market for commodities.

An Allocation Shift Towards Gold

From our perspective, precious metals and mining companies remain among the most appealing investment opportunities, with gold poised for a significant breakout that could signal the initiation of a new long-term cycle. There is nothing that adds more fuel to the fire of precious metals than being forced to restore financial repression in a highly inflationary environment. Interestingly, for the first time since 2021, central banks worldwide are implementing more rate cuts than hikes.

The macro reasons for owning gold are undeniably strong, and what further reinforces our confidence is the consistent neglect of the metal as a defensive alternative over the past few decades. This is evident in the significant underrepresentation of precious metals among traditional investment strategists. According to Bank of America, 71% of wealth advisors hold 0-1% of gold in their portfolios today.

What stands out to us even more from the data below is the notable absence of any investors who own 10% or more of the metal— to say the least, a striking observation.

Furthermore, over the past three to four decades, central banks have entirely disregarded precious metals. In 1980, gold constituted 75% of global central bank assets, whereas now it accounts for less than 20%. There has been a recent shift in this pattern, with certain central banks reporting notable acquisitions of the metal. However, we still have a long way to go before reaching historical allocation-size standards.

If traditional investment strategies and central banks undergo a substantial shift towards the metal, it could likely represent one of the most compelling investment opportunities in gold to date. There is an unmistakable peculiarity in the behavior of precious metals. Even with positive developments on the war front, gold continues to showcase impressive performance. A lesson from the markets is that it is consistently bullish when assets rally in response to news that would typically prompt selling pressure. In essence, it appears that a significant accumulation of the metal is taking place behind the scenes.

Keep in mind that the strong potential for a secular bull market in precious metals makes me particularly excited about silver, which remains at a historically elevated gold-to-silver ratio, at 83.

A decline in the dollar of today’s magnitude often coincides with major bottoms for gold. That perfectly aligns with the metal gearing up to break out from a historical triple top.

December Seasonality For Precious Metals Looks Compelling

What makes it timely is that December is the best month on average for the TSX-V over its 21-year history. This is followed by January and February, the next best months. For our taste, now is the perfect time to be adding money to this segment of the mining industry.

Miners: An Attractive Investment Proposition

The growing gap between gold and mining companies is about to gain significance as the precious metal gears up for a major breakout, likely marking the beginning of a new long-term cycle for precious metals. Although mining companies are complex capital-intensive businesses, there are significant stretches in history when the stocks in this industry have been exceptionally profitable investments.

If we are indeed on the verge of a secular move in gold prices, miners are arguably one of the most undervalued companies in financial markets today. In an environment where inflation remains higher than historical standards and hard assets excel, these stocks have the potential to yield significant returns, potentially including many multi-baggers.