View: Sit with trends buying stocks into weakness, bearish UST’s and short EUR/USD
Election-day and markets are typically sedate, more out of habit than anything else. We find it difficult to become overly excited at the outcome whoever wins seeing rather limited room for policy manoeuvre going forward. While much has been written about the positive prospects for the US economy should Romney receive a mandate we’re not convinced it would herald any marked shift in trajectory, certainly a sustainable one. We have no concerns Romney would be a Tea Party-ite, more the moderate he has spent most of his career and the more radical campaign promises should be whittled back accordingly, including many of his tax reform ideas which look incomplete to put it modestly. But he would face similar obstacles to Obama in dealing with the fiscal cliff, particularly if the Democrats remain in control of the Senate and the debt ceiling might even be more of a contentious issue with a Republican at the helm as expectations shift accordingly. There has been much chatter about the impact Romney would have on the dollar, which seems to centre on the hostility towards Bernanke and his QE programmes. While this might mean Bernanke takes the easy way out by standing down when his term expires in January 2014 we doubt it will have any immediate impact on easing with any President likely to be seduced by the prospect of the easy stimulus/scapegoat package.
Full report below…
View: Buy S&P 500 dips with new highs in mind, leaning on 1,361 support
There is something of a mismatch between our short-term bullish expectations and more cautious mid-term equity views, built around how the longer-term charts have been developing, which makes the current corrective price action rather tricky to interpret. This degree of ambiguity is also reflected in the more immediate fundamental drivers, specifically what has so far been a disappointing earnings season not to mention the closely fought US election contest which has added to concerns surrounding the fiscal cliff. One could perhaps tack on the immediate failure of the market to rally on all that liquidity goodness delivered by Bernanke, QEinfinity as some have dubbed the open ended programme, as a further sign that the rally has exhausted.
Full report below…
View: View any further UST curve steepening opportunistically, like flatteners vs. 5yr
Resurgent equity markets continue to take centre stage with a raft of analysts’ papers regurgitating the likely benefits of more quantitative easing, cobbling this move together with evidence of economic green shoots (which higher equity markets supposedly tell us are there). That other favourite topic, what all this means for bond yields, is also back in the spotlight, centring on the fact that this uptrend in stocks will invariably trigger rotation out of safe haven bond markets into riskier assets, as evident during both previous instances of QE. But with the Fed committed to holding rates low until mid-2015 at the earliest now, with an additional bias for directing policy to flatten the curve via the twist, it’s difficult to see this juncture as a significant inflection point for core yields. Indeed, higher yields are one thing that would kill a recovery in a still debt heavy economy where dynamics are still ultimately deflationary. Rather it should exert shorter-term corrective pressures within the broader trading range, particularly at the longer-end of the curve, before yields edge lower once again.
Full report below…
View: OMT helpful, but not unexpected. Should temper Fed doves demands for easing
While the crux of what the ECB was working on was well flagged in advance of Thursday’s policy meeting thanks to the usual ‘official’ leaks there seems to have been enough doubters to trigger a very positive market response to the official unveiling of its new bond purchasing plan. It is perhaps partly down to timing; we didn’t actually expect such explicit detail until the German Constitutional Court had dealt with the ESM issue and the fact that there was not any immediate pressure to finalise a strategy thanks to effective verbal support over the summer was another reason to pursue things in the usual Eurozone timeframe, i.e slowly. Furthermore the hostility of the Bundesbank to debt monetisation, as they see it, was (and still is) problematic. It appears Draghi just accepted that this wasn’t something that could be resolved with Weidmann clearly the sole dissenter when the board came round to voting. Another factor might be worth mentioning is the proximity to the FOMC meeting from which the market also expects support, admittedly aimed at addressing growth rather than solvency/survival of the Euro. We’d normally have expected some buck passing to the more proactive Fed, although in this instance the opposite might be true, more on that later.
Full report below…
View: Investors will reward measures for growth, see any Fed easing as DXY positive
Often the market makes demands on policy makers and often they are unwarranted, triggered by swings in short-term sentiment rather than changes in trend. However the monetary policy decisions we’ve seen over the past week or so seem to be somewhat different, highlighting a number of key issues that run deeper and are likely to have prolonged implications for markets and possibly mark the trigger point for the breakdown of some of the relationships that have driven markets since the onset of the financial crisis. More specifically we think we could be at that point where growth steps into the driving seat as investors focus more directly on debt sustainability. Central bank stimulus, or lack of it, should also be seen in this light. The impact of resultant interventions are also likely to differ to the inflationary effect we saw previously, be it equity prices or commodity moves.
Full report below…
View: DAX bounce should be used to rotate to US equities
You have to admit the equity bulls have control when a batch of very dire European PMI releases are shrugged off when a modestly higher US equivalent turns up later in the afternoon as was the case on Monday. It is perhaps more surprising given that this was the manufacturing survey, when we all know that in the US services make up 70% of the economy and the (currently rather cold) boiler room of the European economy is those hyper-efficient German manufacturers. Of course the market had already had a heads up following the flash European numbers but it’s hardly as if US consumption is going to come to the rescue of Europe, in fact there has been debate on how weak European demand is dragging on growth in Asia.
Full report attached:
View: S&P bull/recovery move has room to run, target 1,374+
One of the more overused words so far this year has been de-coupling as the market caught up with the relative outperformance of the US economy vs. the Eurozone. But we doubt this is a buzzword that will disappear anytime soon. The challenges facing Europe can’t be resolved overnight with the current policy mix if anything adding to downward pressure on the periphery economies. The US of course has yet to fully tackle its fiscal imbalances but unlike Europe there are signs that the economy has found some momentum of its own, which while short of the pace of the noughties still look like it could be self-sustaining.
This sentiment has been seen both in the dollar (which we continue to view very positively) and the relative health of US equity markets. As we noted in the weekly (16th Jan) the near-term technical picture for the S&P is bullish and the positive close we saw on Wednesday, which marked a clean break of the 1,300 line, is further evidence of improving sentiment. Even bad news is having a minimal effect at the moment, S&P’s Eurozone ratings downgrades failing to dampen the mood nor has the so far disappointing US earnings season which is often a sure fire way of squeezing out those less committed hands
Click for full report ………………………
View: Market downplaying risks of a weak final quarter, Oct rally mature
Over the past few weeks US economic news flow has improved in tone, highlighted by the bounce in the October Philly Fed index (+8.7 compared with –9.4 median) and jobs data amongst others, which has helped steady equity markets after the rout of the summer. But it’s questionable whether this modest improvement the start of a sustained recovery or is simply noise in what remains a hostile economic environment. We’d be tempted to ascribe a large chunk of the perceived improvement to economists catching up with reality, adding a pessimistic bias to their models having failed to pick up on the slowdown in growth mid-year, in turn increasing the prospect for less bad outcomes now. There has also been a significant positive contribution from expectations that politicians in Europe have now grasped what needs to be done to ring fence Greece and recapitalise the banks, even if technicalities mean final negotiations are as protracted as ever.
But looking directly at the macro risks in isolation there is still plenty to concern, underlined by this morning’s October consumer confidence print which slumped to 39.8 vs. market estimates of 46.0, a level that fits well within the bounds of a recession. The principle headwinds of weak housing, high unemployment and creeping inflation further eating into incomes are unlikely to disappear anytime soon and additional steps by the Fed to inject some pace into the economy, via the ‘twist’ don’t really look to have got off the ground, underlined by chattering from several members – Fed Vice Chairman Janet Yellen and NY Fed President William Dudley included – that as more aggressive QE3 type programme could yet be implemented.
Thursday’s advance Q3 GDP print is expected to provide a supportive balance to Tuesday’s confidence number – trader talk focusing on an upside surprise – but as we move into November it’s doubtful the rebound from the particularly weak August/September outcomes can really be sustained. There are a number of confidence indices due (including NAPM and Chicago PMI) which should evidence this, the most useful being the October ISM figures due ahead of the next Fed meeting on Nov 2nd. This measure has been the more stable survey over the past few months so weakness would be a worrying development for those expecting the year to end on a firmer note. The early expectations are for a modest gain in both the manufacturing and non-manufacturing components but after the run up in markets this month there is little upside to trading positions from such a result. Indeed, markets should become more sensitive to negative surprises now recession concerns have been pushed back to the fringes of debate.
While it doesn’t appear we’re quite yet on the edge of another sharp fall in stocks (10%+), the October rally is well advanced and is now reaching levels we consider offer more formidable resistance too, namely the 61.8% Fib, 200-DMA and late June base around the 1,255 area. There is room for a swing back into the September ranges, 1,175 being a reasonable objective, on any broader reassessment of the macro picture. Another way to play this scenario is via USD which has given back the bulk of its gains in recent weeks. Looking at the DXY chart one could be forgiven for not wanting to pick the low but the 75.80/76.30 area is nonetheless strong support and consolidation here should begin to tempt buyers again. We think recent EUR strength is overdone given the underlying problems facing the Eurozone, deal or no deal, and while the economic story in the US is weak it is still far better than the euro block which should feed into dollar performance, albeit on a longer-term basis. We’d also pick up on renewed mutterings from Japan on the yen which has continued to firm despite improved risk appetite.
- WSJ Economists On Recessions And GDP: The Great Disconnect (businessinsider.com)
View: Payrolls nuances distort true jobs picture, plenty of risks into year-end
September’s non-farm payroll’s report has provided some confidence to the market, the reading for the past month at 103k comfortably beating the 60k median and more encouragingly we saw an upward shift in the reported numbers of July (84k to 117k) and August (zero to 57k). In three month terms we’re now only just shy of the 12-month trend. There was also some upward shift in the number of hours worked (34.3 vs. 34.2 last time) too. Given the steep decline in confidence and activity data over the past three months these numbers are all the more encouraging, offering hope that the economy might be able to overcome the summer soft patch as it did last year.
However, this is only a might. We won’t get too excited just yet. While weakness last month can be partly attributed to the Verizon walk out (45k), the return to work of these workers in September would add these back. Stripping this out from the headline print would give you a 102k gain and a 58k gain in August and September respectively or more importantly renewed weakness. We know the payrolls numbers are a terribly inaccurate survey and get revised long after the market has forgotten about them but the trend does offer some help in determining the jobs picture. So do the unemployment rate. The more popular U3 rate is stuck at 9.1% and the broader U6 measure, which includes those workers bumped into part time roles but still need a full time pay cheque to make ends meet rose again, hit 16.5% (+0.3ppts m/m) – the highest level this year.
Even placing a positive spin on this afternoon’s release one has to concede that the economy remains close to or below stall speed and with negative wealth effects from falling stock markets, eurozone problems and softening demand in the emerging world all adding to existing domestic headwinds there is plenty of work to do. Next week’s data could be as important as the jobs numbers, specifically September retail sales, inventories and the Michigan sentiment survey, the latter being the first indication as to whether August and September’s malaise is lasting. If this looks weak too we’ll be left praying that consumers have held something back in readiness for the holiday season to keep GDP ticking over in positive territory into the close of 2011.
- US Data Preview: Verizon Could Mask More Jobs Weakness (forexlive.com)
- Coming up: Nonfarm payroll for September (marketwatch.com)
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