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U.K. Bonds, Chipmaker Earnings, U.S.

October 17 to 21, 2022


U.K. Bonds, Chipmaker Earnings, U.S.

October 17 to 21, 2022

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Weekly Commentary

Market Recap

  • Equity markets were challenged with another volatile week, alongside ongoing uncertainty in the U.K. and another sticky U.S. inflation report.
  • The S&P 500 fell 1.6%, with gains in banks and consumer staples outweighed by declines in consumer discretionary and technology.
  • The TSX gave back 1.4%, as 3%-plus slumps in energy and materials dragged on the index.

U.K. Bonds

Over the past week, we’ve seen more chaos in British bond yields as the Bank of England put an end to its emergency bond-buying program. Combined with the U.K. government’s poorly received fiscal policies, which have resulted in the firing of Chancellor of the Exchequer Kwasi Kwarteng, there’s definitely elevated risk in the region. At this point, the true extent of the crisis is still unclear. But it was enough for the Bank of England to step in, which tells us that they perceive the problem as significant. There are already other issues elsewhere in Europe, with Germany and Italy dealing with their own economic and political challenges and the Russia-Ukraine conflict persisting. Together, these headwinds add to our rationale for being underweight Europe.

Bottom Line: The U.K. bond crisis is yet another reason why we’re bearish on Europe.

Chipmaker Earnings

Semiconductor chipmakers have begun to report earnings, and there are a few aspects we’re examining closely. When Nvidia reported Q2 earnings in August, it was the start of a negative outlook for the industry. They’ve had somewhat disappointing results over the last couple of quarters, so expectations were fairly low. But markets’ takeaway seemed to be that there was still some bad news there, and that chipmakers in general could potentially move a leg lower. They’ve been behind on the supply side, and work-from-home during COVID brought a lot of their demand forward, meaning that there may not be as much growth in the short term. That being said, we wouldn’t expect these companies to be out of favour for an extended period of time, because prices are relatively attractive, and semiconductors are still a crucial input to so much of the economy. Outlook will be very important to watch, and we’re hoping to hear that supply chains—and the overall situation—are improving for these companies. Another quarter of disappointing earnings may lower expectations to the point where these names would become more attractive. If a potential recession prompts chipmakers to implement cost-saving measures and become more efficient, that’s when we’d like to own them, especially coming out of a downturn.

Bottom Line: Chipmakers may move another leg lower in the near term, but we see potential opportunities in the longer term.

U.S. Inflation

The U.S. annual inflation number for September came in at 8.2%, just shy of the 8.3% from August. This was not a surprise for us—we knew that inflation would still be hot despite the energy component cooling off. However, it was surprising that the market went down as much as it did in response. All along, we’ve believed that we’d be fortunate to reach 5-6% inflation by the end of the year. That level is still possible, or it may be a little higher given energy prices have risen again. At present, there is no reason to think that the U.S. Federal Reserve will slow down its rate hike schedule, or that inflation will suddenly drop off. Remember: The Fed doesn’t care about lower inflation—it cares about low inflation.

Bottom Line: As long as markets continue to hope that the Fed will suddenly change its tune, we’ll continue to see knee-jerk reactions.


There are no major changes to positioning on the equity front. Recently, we asked ourselves two questions. First—are we still bearish on equities? Yes, we are. And second—are we still bearish to the same degree? Again, yes, we are. At some point, as markets continue to decline, we’ll consider adding to equities. But we still believe that earnings declines haven’t been fully priced in, and we’re waiting for that shoe to drop. We’re a little more optimistic about bonds and cash. If we’re going to begin to take on more risk, the first trade will likely be from cash to bonds. Only down the road, when we believe markets have bottomed out, will we move from bonds to equities.


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