What Happened Last Week
- Geopolitical Volatility: Oil soared over 9% as investors weighed Israeli retaliation against Iran’s energy infrastructure.
- U.S. Jobs: A blow-out jobs figure contributed to a surge in Treasury yields.
- China Rally: Chinese equities rallied, supporting broad emerging markets despite a stronger dollar.
What We’re Watching This Week
- U.S. CPI: Focus turns back to an update on inflation on Thursday following last week’s strong jobs data.
- China Reopening: Golden Week holiday ends with markets reopening and a China NDRC press conference on Tuesday.
- Earnings Season: Friday is the official kick-off of 3Q earnings season with some of the mega-banks reporting.
Investment Management Team’s Views
- Last week, geopolitical developments overshadowed the sharp move in U.S. Treasury yields (2-year +36 basis-points) fueled by strong U.S. economic data. Investors’ nervous anticipation of Israel’s response to Iran’s missile strike contributed to a firmer Volatility Index (VIX) and the largest 1-week rally in the dollar since 2022. Oil rose over 9% last week, its largest weekly gains since last March, as markets braced for a potential retaliatory strike on Iran’s energy infrastructure. The energy sector, the only sector of the U.S. market with a loss last quarter, gained the most since the 4Q ‘22 equity market bottom.
- Despite the difficult geopolitical backdrop, policy and economic news improved last week, which is a more important medium-term development in our view. A much stronger-than-expected jobs report, which bested every economist surveyed by Bloomberg, caused an equity rally on Friday. Although interest rates surged on the payrolls beat, rate-sensitive small-caps led; this price action reinforces our view that good news for the economy is good news for stocks, even if that means higher interest rates. Markets in Asia rallied last week as well, with Japanese equities gaining on soothing comments from the new prime minister around Bank of Japan policy and emerging markets benefitting from the continued rally in Chinese stocks.
- Thursday’s U.S. CPI release will take center stage as the mega-banks kick off earnings season in the U.S. on Friday. Although we believe that jobs data still matters more for policy expectations, a hot CPI print could catalyze another leg higher in interest rates. Outside the U.S., we turn to China. On Tuesday, Chinese local markets reopen, and their macroeconomic management body, the NDRC, will hold a conference. We are monitoring onshore sentiment and any new fiscal policy initiatives.
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