It IS the best of times, it IS the worst of times, it is the age of wisdom, it is the age of foolishness, it is the epoch of belief, it is the epoch of incredulity, it is the season of light, it is the season of darkness, it is the spring of hope, it is the winter of despair, we have everything before us, we have nothing before us, (I switched the Tale of Two Cities lines from Was to Is and to Have from Had), etc… The former because the most bizarre and embarrassing presidential campaign in our life time is about to end. The latter because someone is going to win.
In terms of the market and its possible response on Wednesday, today’s reaction to the FBI news is obvious evidence that market participants have wrapped up the world in a nice and easy box. Hillary wins, good for stocks. Trump wins, bad for stocks. But, anyone who thinks deeper than this knows that the response is going to be much more nuanced. Ask any owner of a healthcare, financial or defense stock. Ask any business person who cares about taxes, regulation and global trade. Also, no matter who wins, the FOMC will be most likely raising interest rates again next month just as the economy has slowed to a 1.5% growth rate. And lastly, who’s going to win the Senate?
Over the 9 day market losing streak, the S&P 500 lost just 66 pts, thus this rally in the S&P 500 is retracing most of that loss.
China’s FX reserves continued to shrink in October. It’s pile now stands at $3.12T, down $66b m/o/m and was $12b less than expected. This level was last seen in 2011 and is now down $870b from its peak in 2014. Some of the decline is certainly outright outflows but some is the impact from valuation changes of the US dollar that rallied against many currencies in the China basket in October. I saw one estimate that said almost $30b of the decline was FX valuation related and about $10-15b was due to PBOC intervention. The dollar rallied about 1.5% against the yuan in October. China is fighting economic battles on many fronts. The War is the massive debt burden they now carry. The daily battles are how to keep growth continuing, how to transition the economy away from huge investments, and how to manage orderly weakness in its currency in the face of the fog of its debt war. The yuan is lower while the Shanghai comp index was up slightly. The H share index jumped 1.2% and the Hang Seng was up by .7% but property stocks in Hong Kong got slammed after Friday’s announcement of a hike in the stamp tax to 15% (from 8.5% for residents) for all purchases of residential housing except for 1st time buyers that are full time residents. The Hong Kong housing market is in an epic bubble.
A few days after BoJ Governor Kuroda basically waved the white towel on achieving his 2% inflation obsession, the Ministry of Health, Labor and Welfare said base earnings for Japanese workers in September grew .4% y/o/y vs a .3% gain in August. It was 1997 the last time wage growth was 1% and it was 1994 the last time it saw 2%. Thus, it is a good thing Kuroda is waving that towel because he would have greatly damaged the standard of living of his citizenry. Of course all central bankers believe that higher wages come with higher inflation but theory doesn’t always work in practice. Overtime pay fell 1.3% y/o/y and bonus’ were down by 2.9%.
In Europe, German factory orders in September fell .6% m/o/m instead of rising by .2% as expected. Orders domestically fell as they did to the rest of the eurozone. This was only partially offset by an increase in orders from non eurozone countries. While the number was a miss, the German Ministry put a positive spin on it, “The brightening of relevant sentiment indicators suggests a certain recovery of industrial production for the rest of the year.” They are likely citing the IFO, Markit’s manufacturing index and the European economic confidence index but these just measure the direction of change, not the degree.
Industrial production in Spain in September also missed expectations with a 1.4% m/o/m drop vs the forecast of down .5%. Retail sales in the eurozone fell .2% m/o/m but were up 1.1% y/o/y, aboutas expected. European stock markets also want a Clinton presidency with all up 1%+.