Short-term, bear market rally more likely than sustained recovery

Current market commentary

Equity markets have recently recovered from their lows of the year despite rising interest rates. On the one hand, the Q3 reporting season has so far turned out better than many bears expected. For another, there is a lack of incremental sellers, given the extremely negative investor sentiment and investors' low risk positioning. Moreover, corporate share buyback programmes are about to start again. So, without another negative trigger (e.g. inflation data, Fed), the "pain trade" for the markets should be up for now, even though there is a lot of fundamental evidence to suggest that it will be another bear market rally that will eventually be sold off again. As long as economic and inflation data do not weaken significantly and stress in the markets, especially the bond markets, does not get out of hand, the Fed will continue to raise interest rates for the time being and keep expected real rates high. Only when the Fed signals a pause is a more sustained recovery in equities to be expected.

Short-term outlook

Apart from the Q3 reporting season, central banks are likely to keep markets busy over the next two weeks. The ECB meets on 27 October, the Fed on 1 November and the BoE on 3 November. The market expects a rate hike of at least 75 basis points from all three central banks. Today's preliminary Eurozone Purchasing Managers' Indices (PMIs) for October will be followed on Tuesday by the Ifo Business Climate Index (Oct) for Germany and US Consumer Confidence (Oct). Preliminary Q3 economic growth and new orders for durable goods (Sep) for the US will be released on Thursday. On Friday, preliminary Q3 GDP and inflation figures (Oct) for Germany and France are due, as well as US housing data. Next week, the US labour market data (Oct) and the preliminary US purchasing managers' indices (Oct) are likely to be decisive for the market.