US indices ended the week slightly lower, closer to neutral. Overall, defensive sectors led the gains - an expression of some caution on the part of investors. Retail sales rose in October by 1.3% strongly above analysts' expectations. This is negative news for the market, as it betrays that there is buying power, which in turn could push prices and inflation upward. Hence investors' concern that the Fed may continue with its aggressive tightening policy. On the flip side are suggestions that we are at the beginning of an economic slowdown that will lead to less excess funds with consumers and hence less headwind for inflation. This could describe the range of expectations in which the market fluctuates with short-term sharp moves in both directions.
Bonds
Since 2009, the fed funds rate has averaged 0.6%, spending only 469 days above 2% (9% of the time). Similarly, the 10-year Treasury yield has averaged 2.3% during that time, exceeding 3% in less than 600 days (17% of the time). As a result, the term "TINA Market" has been widely used to describe the investment environment over the past decade and a half, with TINA standing for There Is No Alternative. This is in reference to the conditions created by monetary policy stimulus where ultra-low bond yields offer no compelling alternative to stock market returns. With inflation hot and the Fed embarking on a historic tightening campaign, interest rates have not been this high since before the iPhone existed, suggesting there is now an alternative. The return of high bond yields puts the fixed income market back in the game. We may see an increased appetite for bonds next year and an outflow from the equity market.
What will drive the market in the week ahead?
Wednesday's Federal Reserve meeting minutes will be the main focus in the holiday-shortened week, with investors on the lookout for any indications that the pace of rate hikes may slow. Any indication from central bankers that a slowdown in the pace of interest rates is expected will support the stock market or at the very least keep it around current levels.
Disclaimer:
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Risks:
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1) Market risk with the following components: a) interest risk related to a decrease of the value of the investment due to a change of the interest rates levels b) currency risk related to a decrease of the value of the investment, denominated in a currency which is different from BGN and EUR c) price risk related to a decrease of the value of the investment in the case of unfavorable changes of the market’s prices;
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5) Concentration risk – in case of incorrect diversification of exposures to groups of related clients, from the same economic branch, geographic area, etc.
6) Position risk which is related to the change of price of a certain instrument in result of factors related to the issuer or in case of a derivative instrument – related to the issuer of the base instrument;
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