Market index returns

Week to date since November 13, 2024 as of November 20, 2024

Index definitions: Global Real Estate = FTSE EPRA/NAREIT Developed Index; Global Infrastructure = Dow Jones Brookfield Global Infrastructure Index; Natural Resource Equities = S&P Global Natural Resources Index; Commodity Futures = Bloomberg Commodity Index; TIPS = Barclays US TIPS Index; Global Equities = MSCI World Index; Real Assets Index = 30% FTSE EPRA/NAREIT Developed Index, 30% Dow Jones Brookfield Global Infrastructure Index; 15% S&P Global Natural Resources Index; 15% Bloomberg Commodity Index, 10% Barclays TIPS Index. Source: Bloomberg, DWS. Past performance is not indicative of future results. It is not possible to invest directly in an index.

Market commentary:

Global equities reversed course during our review period, giving up some of the gains seen after the initial “Trump bump” following the conclusive outcome of the U.S. presidential election. Markets also became wary as the U.S. gave Ukraine the go-ahead to use long-range weapons to strike inside Russian territory (which they immediately did), prompting new nuclear threats from Russia. This led to an increase in equity market volatility, with the VIX Index ending our review at a high for the week at 17.2 after having ended the prior week at 14.0. Despite this, bond yields maintained a relatively tight trading pattern, with the U.S. 10-year Treasury yield ending our review down just 4 basis points (bps) to 4.41%. Inflation breakevens were virtually unchanged for the week. The dollar strengthened, crude oil prices moved marginally higher, while spot gold prices climbed 3% to end our review at $2,651 per ounce and continued to move higher into the weekend but are still short of the record highs of almost $2,800 per ounce seen at the end of October.^[1]

Against this backdrop, Real Assets rose this week, with all Real Asset classes outperforming broader global equities. Global Infrastructure securities led the pack with a swift rebound seen in Japanese infrastructure stocks and the North American midstream energy complex performing distinctly well. Commodity Futures and Natural Resource Equities followed, finishing solidly in positive territory, with natural gas futures and metals & mining stocks among the biggest winners. Treasury Inflation-Protected securities (TIPS) finished with soft gains, while Global Real Estate securities saw a marginal loss overall (but still exceeded the broader market’s return) as UK and European property stocks held the group in check.^[2]

Why it matters: An escalation of the Ukraine-Russia conflict would be worrisome, especially for Europe, which is already suffering economic woes. We can’t rule out that the recent rise in missile attacks (and rhetoric) could also signify final posturing tactics before some sort of truce next year. Separately, the incoming U.S. administration has signaled some bold plans to cut government spending, which could go far towards balancing a budget, but a swift layoff of (millions of) government employees would likely rankle the economy. There is also the looming specter of the economic impacts from likely increase in tariffs. The level and scope of goods included have yet to be announced; nonetheless, economists are concerned about inducing a new bout of inflation in the U.S. The U.S. Federal Reserve (Fed) appears determined to stay in easing mode (for now), but expectations of when the next rate cut could occur are being pushed back with the current Fed Funds Futures market indicating a ~50% chance of a cut in December and only an ~80% chance of one cut occurring by the January meeting.

Macro Dive: This week, we review the U.S. advance retail sales numbers for October. We also look at the recent S&P release of Purchasing Managers’ Index (PMI) data. Then we cross the pond to look at GDP and inflation numbers in the UK.

• October retail sales driven by automobiles: U.S. retail sales, which have been a point of strength, slowed in October. The month-on-month print of 0.4% did exceed expectations of 0.3%, but minus automobile sales or automobile and gas sales, growth fell to just 0.1% as compared to expectations of 0.3% in both cases. Some of the decline was due to the denominator effect as August’s sales growth was revised higher to 0.8% headline and 1.0% excluding automobiles, both double their advance prints. Digging deeper into October, automobile sales grew by 1.9% from the month prior, which we previously mentioned drove the headline number, but Electronics & Appliance Stores was actually the fastest growing segment at 2.3%, though we would note Electronics & Appliance Stores sales are down 2.3% on a year-over-year basis. Declining the fastest in October were Miscellaneous Store Retailers, down 1.6%, and Furniture & Home Furnishings, down 1.3%. Looking ahead, we expect a sequential pickup in sales into November and December with the seasonal holiday spending stretch approaching, but year-on-year data will give a good indication as to just how resilient the U.S. consumer is.^[3]
• Surprise in PMIs: S&P released PMI data just after our review period which exceeded expectations in the U.S. but told a different story for the Eurozone. In the U.S., the November Composite PMI of 55.3 exceeded estimates of 54.3 and showed the economy expanding faster than October’s 54.1. and was the highest read in the past 31 months. The underlying data showed a familiar story with Services PMI at a robust 57.0 exceeding estimates and October’s print (both at 55.0), but Manufacturing PMI still landed in marginal contraction at 48.8, just below estimates of 48.9, but improving from October’s 48.5. Giving the Fed more breathing room for additional rate cuts, it was noted that employment declined for the fourth month in a row, while output price growth hit the lowest level seen since June 2020. Meanwhile, in the Eurozone, the Composite PMI for November surprisingly slipped into contraction at 48.1, with Services PMI at 49.2 and Manufacturing PMI at 45.2. All three of these data points fell below expectations and declined from the month prior, further reinforcing the difficulties facing the European economy and the potential for GDP contraction in 4Q of this year.^[4]
• UK, inflation picked up: There’s been loads of economic data coming from the UK in the past week. First, preliminary 3Q GDP growth was released at 0.1% quarter-on-quarter, below estimates of 0.2% and falling from 0.5% in Q2, yet year-on-year GDP growth was 1.0%, in line with estimates and accelerating from 0.7% last quarter, but still at a level showing less than robust growth. Perhaps more concerning, CPI for October was released days later, exceeding estimates and September’s levels. The headline month-on-month read of 0.6% was 10 bps ahead of expectations and higher than the flat level seen in September. Year-on-year headline was 2.3%, climbing from September’s 1.7%, and core (excluding food, alcohol, tobacco, energy) showed 3.3% higher than an expected 3.1% and marginally higher than September’s 3.2%. The combination of low growth and higher inflation puts the UK at risk of experiencing stagflation. Recall, the UK Finance Minister Rachel Reeves’ budget plans, released last month, were not well received and sent longer-term UK gilt yields higher, but this week some of the UK’s largest retailers have suggested the proposed budget could send prices higher still and cause job losses, a situation the country can ill afford.^[5]

Real Assets, Real Insights: We’ll first look at a recent report from DWS on housing affordability and associated impacts on rental markets. Then, we’ll review the dynamics of toll road pricing that has operators and the government pointing fingers at each other in part of Australia. Finally, we‘ll take a look at the latest “hot thing” in precious metals.

• Can you afford the rent? (Real Estate): Our DWS peers in private real estate released their global “Housing Affordability Review” report, and we can emphatically say it is worth a read. The report focuses on housing costs from a rental perspective rather than ownership (which might warrant its own report) and looks at population statistics such as median income and average rent to rank major metropolises by an affordability score. While you might complain about your own rent, the U.S. markets were generally more affordable, while the Asia Pacific region was the least affordable. We won’t give away the full rankings here as we encourage you to peruse the report, but of the cities reviewed, Salt Lake City, UT was found to be the most affordable, while Bangkok, Thailand, was listed as the least affordable. To read the full report, click here.^[6]
• For whom the road tolls (Infrastructure): And if you live in New South Wales (NSW), it tolls for thee. Sydney’s vast toll road network has become the latest battleground between government and private entities. Infrastructure has boomed over the past decade, and to help fund these projects, the NSW State Government sold stakes in its toll roads, ports, and electric grid. However, the politics of privatization have shifted. After the 2023 elections and the current “cost of living crisis,” the government proposed reforms to motorway pricing. The reforms have put one of the world’s largest toll road operators, Transurban, in a delicate spot as they operate 11 roads in Sydney, each with a long-term contract that dictates toll pricing. For example, fares on the WestConnex rise annually at 4% or the rate of inflation, whichever is higher. The government recently legislated for a new body to manage tollways not owned by private concessions and for an independent ombudsman to address customer-toll road operator disputes. Importantly for Transurban, the new legislation does not override existing contracts. However, the government plans to own all concessions not currently in private hands, which could curtail future growth. Transurban boss Michelle Jablko is confident private capital will still be needed to build Australian roads and that the company was already working on a radically different way of charging tolls. How this all plays out will be closely watched, with implications for future infrastructure investment across Australia.^[7]
• A precious metal with a catalyst (Commodities): Palladium was the top-performing commodity we track this week, with the active month futures contract (December 2024 delivery) rising by 10.1% and the spot price rising by 9.5% to $1,026 per ounce at the end of our review. Palladium prices were already rising in October following previous production curtailments taking effect and new threats of sanctions on Russian-produced palladium, but new factors are also coming into play. With Donald Trump set to become the U.S. President in January, tax credits on electrical vehicles (EVs) will likely end and mileage standards will likely be relaxed for automobile manufacturing, which could lead to more internal combustion engine (ICE) vehicles being produced. Additionally, recent data shows expected improvement in global vehicle production for both 2024 and 2025, especially from vehicles produced in China. As palladium is used in catalytic converters required in most ICE vehicles, the rare, silvery-white metal is once again seeing demand. There could be more room for palladium prices to run as the current price is still well below the $1,200 per ounce prices seen in December of 2023 and its all-time high of almost $3,200 per ounce set in March of 2022, just following the Russian invasion of Ukraine.^[8]