Weekly Market Update for 31st October
|S&P 500 USD||2126||-0.69%||-0.67%||4.03%||5.88%|
|NASDAQ COMP USD||5190||-1.28%||-1.27%||3.65%||4.68%|
|EURO STOXX 50 EUR||3079||0.05%||0.07%||-5.76%||-3.14%|
|NIKKEI 225 YEN||17446||1.52%||1.52%||-8.34%||-6.71%|
|HANG SENG CNY||22955||-1.80%||-1.80%||4.75%||8.65%|
|MSCI EMERGING MKTS USD||904||-0.85%||-0.84%||13.77%||16.09%|
|FTSE WMA Income||2936||-0.75%||-0.73%||10.11%||13.11%|
|FTSE WMA Balanced||3962||-0.59%||-0.56%||12.23%||15.24%|
|FTSE WMA Growth||4634||-0.45%||-0.42%||13.92%||17.07%|
|BARCLAYS STERLING GILTS GBP||264||-1.90%||9.79%|
Notable events over the last week
Sovereign bond yields continue to climb
Global bond yields extended their recent tick up last week against a backdrop of stronger economic fundamentals. German 10-year bund yields ended the week positively at around 0.17%, while UK 10-year gilt yields are now at post-Brexit highs of 1.26% and US 10-year yields are trading near 1.85%. Firming growth and inflation expectations coupled with broadly accommodative central bank policy with awareness of yield curve steepness, and the increasing emphasis on fiscal policy, are the most likely factors moving yields.
US fundamentals remain strong
US GDP surprised to the upside last week in a busy week for economic data worldwide. GDP increased to 2.9% year-on-year (YoY) in Q3 (vs. 2.5% expected), rising from 1.4% last quarter, driven by a rise in inventories and on a narrower trade deficit. Despite a deceleration in consumer spending in Q3 to a 2.1% increase YoY, down from 4.3% in Q2, a pickup in wages and strengthening household balance sheets may see spending tick up again in Q4. Elsewhere, October’s consumer confidence reading disappointed, printing at 98.6 (vs. 101.5 expected) from the downwardly revised September reading of 103.5. The details showed that both the present conditions (120.6 from 127.9) and expectations (83.9 from 87.2) gauges fell, while the share of those who said jobs were plentiful also decreased to 24.3% from 27.6%. Despite the dampened sentiment, expectations of a rate hike remain high with markets pricing in a 69.2% chance of a rate rise at the December meeting.
Despite challenges, Clinton remains favourite
Despite a disruptive week for US politics, Clinton remains favourite to win. According to FiveThirtyEight forecasts Clinton currently has a 78.8% chance of winning, reduced from 86.3% last Monday following the Obama Care premium controversy and the reopening of the FBI’s Clinton email investigation. It is not yet clear why the investigation was reopened or what information has been collected on Clinton, however the news alone has dented her campaign reducing her lead to 5.7 percentage points, in the FiveThirtyEight polls only model, down from 7.1 points early last week. Although a Clinton victory remains most likely, her campaign will be tested over the next week or so in light of the recent inquests and the potential for further Wikileaks releases.
UK economy proves resilient
UK GDP also remained robust growing 0.5% quarter-on-quarter (QoQ) in Q3, well above the 0.3% rise expected, albeit a touch lower than the 0.7% increase seen in Q2. The reading was boosted by a 0.8% increase to service sector growth, while industrial production and construction contracted marginally by 0.1% over the same period. The economy expanded at 2.0% compared with the same period last year although economists expect this to slow to circa 1.5% growth in 2017 driven by the increased likelihood of a “hard” Brexit, dampening business sentiment and investment. Adding to this was the October’s CBI Industrial Trends Survey which indicated headline total orders falling to -17 (from -5 previously), as post-Brexit uncertainty begins to weigh on the manufacturing sector. However despite the fall in the output expectations balance from +22 to +13, its three-month average is still consistent with a quarterly rise in manufacturing output of over 0.5%.
Europe defies Brexit concerns
Euro-zone flash composite PMI rose to 53.7 in October, consistent with quarterly GDP growth of 0.4% while the manufacturing PMI accelerated to a 30-month high of 53.3. Elsewhere the latest economic confidence reading for the Euro area rose to 106.3 from 104.9 in September, marking the highest reading this year. There was also further supportive rhetoric from ECB President, Mario Draghi. Draghi defended the central bank’s policies whilst recognising the need to raise the natural rate, noting that policies need to address the ‘root causes of excess saving over investment – in other words, fiscal and structural policies’.
Q3 2016 Earnings
With one third of US companies now having reported Q3 earnings, the season so far is currently proving upbeat. 76% of S&P500 companies beat EPS estimates, surprising positively by 6%. Q3 EPS growth prints at +2% YoY for the overall market, marking the first quarter of positive YoY EPS growth since Q2 ’15, with Financials largely contributing to the rebound. However, while a majority of US companies have delivered positive surprises, the market reaction has been rather muted and asymmetric to the downside.
Alongside reported earnings, October has been a significant month for M&A activity with circa $250bn worth of transactions announced. Until recently the improved election clarity and the potential for higher borrowing costs are the most likely reasons behind the large tick up in deals.
Coming up this week (Source Bloomberg)
|Monday||Eurozone GDP SA QoQ 3Q A||0.30%||0.30%|
|Eurozone GDP SA YoY 3Q A||1.60%||1.60%|
|United States Personal Income Sep||0.40%||0.20%|
|United States Personal Spending Sep||0.40%||0.00%|
|United Kingdom Mortgage Approvals Sep||61.5k||60.1k|
|United States Chicago Purchasing Manager Oct||54.0||54.2|
|Tuesday||United States ISM Manufacturing Oct||51.7||51.5|
|Japan Nikkei Japan PMI Mfg Oct F||—||51.7|
|China Caixin China PMI Mfg Oct||50.1||50.1|
|United Kingdom Markit UK PMI Manufacturing SA Oct||54.5||55.4|
|United States Markit US Manufacturing PMI Oct F||53.2||53.2|
|China Manufacturing PMI Oct||50.3||50.4|
|United States Construction Spending MoM Sep||0.50%||-0.70%|
|Wednesday||United States FOMC Rate Decision (Upper Bound) Nov||0.50%||0.50%|
|United States MBA Mortgage Applications Oct||—||-4.10%|
|United Kingdom Nationwide House PX MoM Oct||0.20%||0.30%|
|Eurozone Markit Eurozone Manufacturing PMI Oct F||53.3||53.3|
|United Kingdom Nationwide House Px NSA YoY Oct||4.90%||5.30%|
|United States ADP Employment Change Oct||165k||154k|
|Thursday||United Kingdom Bank of England Bank Rate Nov||0.25%||0.25%|
|United States Initial Jobless Claims Oct||255k||258k|
|United States Durable Goods Orders Sep F||-0.10%||-0.10%|
|United States Factory Orders Sep||0.20%||0.20%|
|Friday||United States Change in Nonfarm Payrolls Oct||175k||156k|
|United States Unemployment Rate Oct||4.90%||5.00%|
|United States Trade Balance Sep||-$38.5b||-$40.7b|