Thursday's Markets Update (November 21, 2024)

22 Nov 2024 by rate3

On Thursday, equities closed higher, with the Dow leading the gains despite major manufacturing indexes continuing their decline. After-hours trading saw positive results for Gap and Ross Stores, driven by strong earnings reports, as traders shifted towards cyclical stocks. Risk-on investors are disregarding worsening economic fundamentals and focusing on long-term perspectives, overweighting some positive but shaky data, such as strong employment and rising consumer sentiment. At the same time, markets are notably undervaluing sharply increasing geopolitical risks. Consumer confidence in the Euro Area declined, while it rose in Argentina, marking a growing success of Milei's libertarian economic reforms. BTC came a whisker close to making a historic 100K, while ETH surged 10%, jumping to 3.4K as some momentum traders quickly shifted to it from BTC. In other news, Gensler announced his resignation, effective Jan 20, 2025.

Details

The Philadelphia Fed Manufacturing Index declined to -5.5 in November, indicating a contraction in regional manufacturing activity. While new orders and shipments remained positive, employment increased. Firms expect future growth, but inflationary pressures persist. 1Y trend: "Up" (Phil)
Jobless claims fell to a seven-month low of 213K, defying expectations of an increase. This indicates a resilient labor market, despite recent rate hikes. The four-week moving average also declined, suggesting continued strength in the labor market. However, outstanding claims rose to a three-year high. 1Y trend: "Up" (DOL)
Existing home sales increased 3.5% in October, rebounding from a 14-year low. The median sales price rose 4%, and housing inventory increased slightly. While the housing market shows signs of stabilization, high mortgage rates remain a challenge for first-time buyers. 1Y trend: "Down" (NAR)
The Kansas City Fed Manufacturing Index improved to -2 in November, indicating a slight improvement in regional manufacturing activity. While this is a positive sign, the index remains in contractionary territory. 1Y trend: "Side" (KFed)

Crypto

SEC Chair Gary Gensler announced his resignation effective January 20, 2025, coinciding with President-elect Trump's inauguration. Gensler's tenure, marked by aggressive crypto regulation and enforcement actions, ends as Trump's pro-crypto agenda begins. His departure, three months short of a 4-year term, fulfills Trump's campaign promise to remove him. The SEC credited Gensler for market reforms and investor protection, while the crypto industry anticipates a shift in regulatory approach under the new administration. (source)

World Markets

Consumer confidence in the Euro Area declined in November, falling below its long-term average. This suggests a worsening consumer sentiment in the region. 1Y trend: "Up" (EU)
Argentina's consumer confidence index rose to a one-year high in November. Consumers expressed increased optimism about their personal finances, the overall economy, and future purchases. However, compared to the previous year, consumer confidence remains lower. 1Y trend: "Up" (Utdt)
Mexican retail sales declined 1.5% YoY in September, extending a five-month downward trend. While online sales increased, categories like hardware, stationery, and healthcare saw significant declines. This suggests a continued slowdown in consumer spending. 1Y trend: "Down" (MX)
Macau's tourist arrivals increased by 13.7% YoY in October 2024 reaching 97.7% of the October 2019 level. The number of visitors from mainland China, Taiwan, and international destinations rose, contributing to the overall increase. However, the average length of stay decreased slightly. For the first ten months of the year, overall visitor arrivals increased by 28.1%. (Dsec)

Currencies

The dollar index remained near 2-year highs, supported by concerns about geopolitical tensions and expectations of less aggressive Fed rate cuts. Fed officials' comments on inflation and the economy have added to uncertainty about the future path of monetary policy. The dollar strengthened against the Euro and Pound but weakened against the Yen. 1Y trend: "Side"

Commodities

Gold prices rose to $2,660 per ounce, driven by increased geopolitical tensions between Russia and Ukraine. Russia's expanded nuclear doctrine and Ukraine's use of Western-supplied missiles have heightened concerns about a potential escalation of the conflict. While the Fed is expected to cut rates in December, uncertainty remains about the magnitude of future cuts. 1Y trend: "Up"
WTI crude oil prices rose 2% to $70.1 per barrel, driven by escalating geopolitical tensions between Russia and Ukraine. The use of long-range missiles by both sides has increased concerns about a wider conflict. While OPEC+ is expected to delay output increases, rising US crude inventories may limit further price gains. 1Y trend: "Side"
Natural gas prices surged 7%, reaching a one-year high. This increase was driven by forecasts of colder weather, leading to higher heating demand. Additionally, lower-than-expected natural gas storage levels and increased LNG exports have contributed to the price rise. 1Y trend: "Up"

Comment: What's Up With The Nukes

Currently, the markets are notably undervaluing geopolitical risks. If it's true, Russia firing an ICBM (AlJazeera) at a Ukrainian city (after Ukraine launched British Storm Shadow cruise missiles, following its use of ATACMS missiles earlier) is a very serious and unprecedented development that significantly increases (by at least 2x-3x from current ~9%) the risks of a tactical weapon deployment in the next 6-12 months.

It's, of course, difficult to predict how the market will behave if Russia decides to deploy a tactical warhead. However, we can assume it won't be as positive as in August-September 1945 (**).

According to various estimates, the least yield will be about 70 kilotons (Hiroshima was about 12 kilotons). If it is deployed in a populated area, the immediate casualties are in the hundreds of thousands (depending on how far from a concentrated population location it will explode), with potentially millions directly affected as a result of fallout.

However, that scenario is the least likely. The most considered variant is an atmospheric or underwater explosion. In that case, the casualties will be very limited, if any, but the political ramifications will be tremendous, leading to a sudden sell-off across a broad range of markets, primarily risky assets. In that scenario, BTC might drop at least 40-50% at once.

Therefore, before geopolitical conditions clarify (e.g., due to new Trump initiatives), it's advisable to keep taking some profits regularly and maintain a portion of cash readily available.

*) There has been no confirmed instance of Russia deploying an intercontinental ballistic missile (ICBM) equipped with a conventional (non-nuclear) warhead against a foreign city.

**) When the United States dropped atomic bombs on Hiroshima (Monday, August 6, 1945) and Nagasaki (Thursday, August 9, 1945), the immediate reaction of the stock markets, including the Dow Jones Industrial Average, was influenced by the general sentiment during this period, which leaned towards optimism regarding the end of the conflict. After the surrender of Japan and the formal end of World War II on September 2, 1945, the stock market saw a boost, reflecting hopes for economic recovery and peace.