“Politics: a strife of interests masquerading as a contest of principles.”
Ambrose Pierce; “The Devil’s Dictionary
The last few of days in October brought some welcome respite for equity markets thanks to month-end positioning, robust earnings and better tone around US/China trade. Markets were in positive territory last week across the board.
Equity-market declines were broad-based across the globe, although the US market didn’t fare as bad as some others. Emerging markets—as measured by the MSCI Emerging Markets Index—fell more than 8%, while the MSCI Asia ex-Japan Index fell more than 10%.1
As one would expect, traders favoured defensive stocks in October. By sector, utilities stocks generally performed the best while consumer staples, telecommunications and health care also outperformed compared with other global sectors.
Corporate earnings were for the large part reassuring last week. Facebook calmed investor nerves on Tuesday with a positive third-quarter earnings report; weak earnings from the tech giant in the second quarter had unsettled markets in July. With more than 50% of companies in the S&P 500 Index now having reported third quarter earnings, we would expect corporate share buybacks to likely start once again. We think that could lend some support to markets.
So what caused the bloodshed?
- The era of central bank continual infusions of liquidity is over. The flow has not only stopped, but in the case of the US, reversed course.
- We are facing trade wars and tariffs. The recent Federal Reserve Beige book was packed full of executives complaining about the impact of such on their businesses.
- A decent portion of the domestic economic acceleration has been thanks to unsustainable fiscal deficits. The market is just starting to figure that out as the headlines move from cheerleaders to more rationale skeptics.
- The Italian problem is not going away. It is too big to save and to say its current leadership is incompetent is putting it mildly and the clock is ticking on its sovereign debt bomb. As an example of the breathtaking level of incompetence, after two months basically no progress has been made on replacing that bridge despite its vital importance to not only Italy’s economy but to the greater Eurozone given its link to a major port.
- China is in a full bear market, its economy is saddled with a staggering level of debt, and the Chinese yuan has dropped to its lowest level versus the dollar in a decade. We are watching these and other data points with an eye toward our Rise of the Global Middle-Class investing theme.
- Geopolitical tensions are mounting around the world and the current Saudi situation highlights just how much the balance of global power is shifting.
Meanwhile, over the weekend we have seen fresh criticism from President Xi of what he called the “law of Jungle”. Commentators are seeing this as a veiled swipe at Trump.
Xi added that China would continue to promote globalisation, pledging to cut import tariffs and boost domestic consumption.
All eyes now will be on the G20 summit in Argentina on December 1 where Presidents Trump and Xi are due to meet. There is added pressure on these talks as US import tariffs are due to increase to 25% from 10% on January 1 if no deal is reached.
I expect this week’s US midterm elections to be a driver of market sentiment this week. With the control of both the Senate and House at stake, the fate of the future of Trump’s administration could also be at stake.
Polls suggest that the Democrats are likely to take control of the House but will struggle to make the necessary gains in the Senate.
Markets seem to have largely priced Democrats winning the House, but Republicans controlling the Senate. However, if the Republicans win both the Senate and House, one might expect a boost for US equities as Trump’s administration will have a free reign to push on with his so-called “market friendly” agenda.
Should we get the surprising result of Democrats taking the Senate and House, I believe there could be a negative knee-jerk reaction in US equities.
Hedge fund managers were net sellers of petroleum-linked futures and options for a fifth week running last week as concerns about sanctions on Iran evaporated and investors refocused on economic worries.
The net long position in the six most important petroleum-linked futures and options contracts was cut by a further 73 million barrels in the week to Oct. 30.
Portfolio managers have been net sellers of 371 million barrels since the end of September, taking their net long position to the lowest level for 15 months, according to records published by regulators and exchanges.
The sharpest sell-offs last week were in Brent (-54 million barrels) and U.S. gasoline (-11 million) with smaller reductions in NYMEX and ICE WTI (-2 million), U.S. heating oil (-4 million) and European gasoil (-2 million).
Position changes are no longer confined to long liquidation. Fund managers have started to establish short positions betting on further price falls
Coming up this week:
Tuesday: AU RBA Rate Decision, UK BRC Retail Sales Monitor, GE Factory Orders, SP/IT/FR/GE/EU Final Services PMI, UK 10-yr bond auction, EU PPI, US JOLTs Job Openings, IBD/TIPP Economic Optimism, 10-yr auction, Weekly API Inventories, Congressional Elections
Wednesday: NZ Employment Change, Unemployment Rate, Inflation Expectations, GE Industrial Production, UK Halifax HPI, EU Retail Sales, GE 10-yr bond auction, CA Ivey PMI, Weekly DoE Inventories, 30-yr bond auction
Thursday: NZ Rate Decision, Press Conference, JN Current Account, Core Machinery Orders, BoJ Summary of Opinions, CN Trade Balance, UK RICS house Price Balance, GE/FR Trade Balance, ECB Economic Bulletin, EU Economic Forecasts, SP/FR 10-yr bond auction, CA Housing Starts, US Weekly Jobless Claims, FOMC Rate Decision
Friday: CN CPI/PPI, Foreign Direct Investment, Money Supply, New Loans, FR Industrial Production, UK Prelim GDP, Manufacturing/Industrial Production, Prelim Business Investment, Construction Output, Goods Trade Balance, NIESR GDP Estimate, US PPI, Final Wholesale Inventories, Prelim University of Michigan Confidence, Fed’s Quarles speaks
In addition, 77 S&P 500 companies (including 1 Dow 30 component) are scheduled to report results for the third quarter.