LIVE MARKETS-Equity fundamentals look OK but the past is no guide -Citi

Dow Jones Industrial Average -0.16%
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VanEck Vectors Indonesia Index ETF

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Dow Jones Industrial Average

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Main U.S. indexes gain: DJI out front, up ~1.2%

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Euro STOXX 600 index up ~0.4%

Dollar, gold dip; crude down ~3%; bitcoin up >2%

U.S. 10-Year Treasury yield rises to ~4.89%

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EQUITY FUNDAMENTALS LOOK OK BUT THE PAST IS NO GUIDE -CITI (1215 EDT/1615 GMT)

It's not that this time is different, it's that this time has never happened before, says Citi's U.S. equity strategy team, acknowledging the pandemic era of the past four years represents an abnormal period without comparison for investors.

In short, U.S. unemployment jumped to 14.7% from 3.5% in just 60 days when the global economy shut, then unprecedented fiscal and monetary stimulus spurred an economic reopening as part of a full business cycle in just 24 months, before the Federal Reserve started to hike interest rates in March 2022.

"We have since seen the fastest tightening cycle in 40 years and sticky inflation, all while a large portion of market participants have only ever experienced zero interest rate policy and a low inflation environment," says Scott Chronert, part of the U.S. equity strategy team at Citi.

"One should expect a plethora of historical correlations to break down," Chronert says in a note on Monday.

While Citi's equity strategy team is constructive on the fundamental outlook for the S&P 500 heading into 2024, thanks to a perceived peaking of Fed hawkishness and the gradual deceleration in inflation metrics, there are headwinds.

"We know we are at risk of a pollyannaish view toward S&P 500 fundamentals. With that, there are many 'elephant in the room' issues that ultimately need resolution," Chronert says, pointing to government fiscal and foreign policy; monetary policy and demographics.

Interest outlays for Treasury debt have climbed to nearly 15% of federal tax receipts and if the Fed remains higher for longer well into 2024, new issuance to fund deficit spending and the refinancing of maturing Treasuries at higher coupon rates will add more pressure, the Citi note says.

Even if rates back off a bit to ease interest expense, the fiscal situation could be become too large to ignore and may become an important election issue next year.

The Fed may not want to return to zero interest rate policy and quantitative easing again unless absolutely necessary.

"A fear for us is that some portion of equity market participants expect significant monetary stimulus in the event of a modest economic slowdown. The downside may be more severe if we find out the Fed put is no longer in place," Chronert said.

Finally, demographics may constrain labor force growth for the next decade and pose a headwind to potential GDP growth.

"With labor markets still fairly tight and limited labor force growth expected in the medium-term, higher wage inflation may be more persistent," he said.

Corporate America has had ample time and warning to prepare for the eventual response to Fed rate policy, a positive sign for equities, but the list of outlined concerns cannot be taken lightly, he said.


(Herbert Lash)

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BOND MARKETS DUE TO CONSOLIDATE, BUT REPRIEVES WILL BE SHORT-LIVED (1130 EDT/1530 GMT)

The U.S. 10-Year Treasury yield US10YT=RR has been on a march higher. In fact, the yield, which is now just shy of 5%, is on pace to rise for a sixth-straight month.

Bob Doll, chief investment officer at Crossmark Global Investments, believes value in bonds has improved considerably, however, he also says that the catalyst for a sustained bond bull market is still absent, and therefore any easing in yields is likely to prove temporary.

He does, however, now tilt toward being a buyer of bond price weakness, rather than a seller on strength.

"It is possible that another Silicon Valley Bank type bond rally could emerge since many financial institutions have additional portfolio losses as the bond bear market regained momentum in recent months. In addition, the rapid and significant rise in yield increases the probability of a financial accident," writes Doll in his latest "Deliberations."

Still, Doll believes that oversold bond markets are due for a period of consolidation, which should ease selling pressure in struggling equity markets.

However, he believes reprieves will be "short-lived."

Although Doll thinks the bond bear market is in it its latter stages he also says that "The growth outlook for the U.S. while weakening, still remains positive. However, cracks are developing in China, emerging markets and some parts of the U.S. economy while debt servicing burdens will continue to rise."

(Terence Gabriel)

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THE ENORMOUS ECONOMIC POTENTIAL OF GENERATIVE AI (1049 EDT/1449 GMT)

Goldman Sachs is upgrading its global gross domestic product (GDP) forecasts over a 10-year horizon to account for the impact of generative AI.

"Based on historical productivity gains... we anticipate that any GDP growth boost won’t exceed 0.1pp until 2027 in the US, 2028-2032 in other DMs and advanced EMs, and 2034 or later in other EMs," said Goldman Sachs economists led by Jan Hatzius.

The economists believe that the net effect of generative AI on GDP is likely to be smaller, despite baseline estimates implying a 10-15% cumulative long-run boost to GDP globally.

One of the reasons for the smaller effect of generative AI on GDP is that continued technological progress is already built into existing estimates of trend growth as information and communication technology investment has already been the main driver of productivity growth in major economies over the last 20-30 years.

Another reason is that the underlying productivity growth trend has been slowing and would likely continue to do so in a non-AI counterfactual.

Regulatory or technical barriers to the adoption of AI may delay productivity growth, adds GS.

"Nevertheless, the enormous economic potential of generative AI suggests growth upside even after taking these offsets into account."


(Reshma Rockie George)

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U.S. STOCKS ADVANCE IN EARLY TRADE (1020 EDT/1420 GMT

Major U.S. averages are higher in the early stages of trading on Monday, with the Dow .DJI and S&P 500 .SPX on track to snap three-session losing skids, which put the benchmark S&P index down more than 10% from its July high at Friday's close.

Gainers are led by the S&P 500 communication services .SPLRCL sector, which is up roughly 2%, while energy .SPNY is the sole declining sector as crude prices dropped more than 2% on easing concerns about the Israel-Hamas war affecting supply from the region.

McDonald's MCD.N is gaining more than 1% after posting its quarterly results, buoyed by new launches, promotions and demand for its more affordable burgers and fries, helping to lift the Dow.

Western Digital WDC.O is jumping more than 8% after the company said it would spin off its flash memory business that has been grappling with a supply glut after talks of merging the unit with Japan's Kioxia stalled.

Below is your market snapshot:



(Chuck Mikolajczak)

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S&P 500 INDEX: MIGHT SCARY A OCTOBER, LEAD TO A DARING NOVEMBER? (0900 EDT/1300 GMT)

The S&P 500 index .SPX, which ended Friday down about 4% so far this month, is on track for a third-straight monthly decline. In fact, the benchmark index is on pace for its biggest October slide since 2018.

Bulls are hoping for a better November. Since 1950, on average, with a 1.7% rise, November has been the best month of the year for the S&P 500 index.

That said, with the SPX having ended Friday down 10.3% from its July 31 closing high, traders have been forced to eye deeper support levels:

The SPX did end Friday at 4,117.37, which was just above a weekly Gann Line, proving support around 4,116. Gann Lines are trend lines running at certain angles off significant highs and lows).

This line dips to around 4,107 this week, and as stands e-mini-S&P 500 futures EScv1 are suggesting an opening bounce for the SPX of more than 20 points.

The index will now confront initial resistance in the at 4,155-4,175 area, which includes the 50% retracement of the 2022 decline and the 100-week moving average.

The 23.6% retracement of the March 2020-January 2022 advance is at 4,198.70, and the early October low was at 4,216.45. There is a weekly Gann Line proving resistance this week around 4,245.

On the downside, a break of last week's 4,103.78 low would suggest the SPX can threaten the early-May trough at 4,048.28, while the 38.2% Fibonacci retracement of the 2022 decline is at 3,998.51.

The rising 200-WMA should be around 3,945 this week. There is a weekly Gann Line around 3,868 this week. The 38.2% retracement of the Mar 2020-January 2022 advance is at 3,815.20, and the March 2023 low was at 3,808.86.

Meanwhile, the Nasdaq Composite .IXIC has also taken a dive this October, though one internal measure, which is now down to 7%, suggests it may be ripe to re-group - click here:


(Terence Gabriel)

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FOR MONDAY'S LIVE MARKETS POSTS PRIOR TO 0900 EDT/1300 GMT - CLICK HERE










(Terence Gabriel is a Reuters market analyst. The views expressed are his own)

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