Futures Fall Despite Solid EPS, Retail Sales Miss, Brexit Deal Remains Elusive

Futures Fall As Worries Creep  Back Into Focus

The U.S. equity market is indicated lower in early Wednesday trading despite signs 3rd quarter earnings are better than expected. The Dow Jones Industrial Average and S&P 500 are both indicated lower by 0.20% while the NASDAQ Composite is down about -0.30%. The move is driven by growing concern China will not follow through on its pledge to buy more U.S. agricultural products. If this is the case it is likely additional tariffs will be enforced later this year. China has pledged as part of the Phase I trade deal to buy up to $50 billion in U.S. products.

In earnings news, financial stocks Bank of America and Bank Of New York Mellon both reported better than expected EPS. Both companies reported strength in consumer segments that helped drive share prices higher. Shares of BAC are up more than 2.5% while BNY-Mellon is up about 1.5%. In economic news, Retail Sales were weaker than expected. September retail sales fell -0.3% versus an expected gain of 0.3%. The mitigating factor is an upward revision to the past month of 0.2%. Later in the session traders will have an eye out for the NAHB Index and the FOMC’s Beige Book.

Europe Mixed, Brexit Deal Is Still Elusive

European markets are flat and mixed at midday as traders fret over trade and the Brexit. On the trade front, China’s demands the U.S. remove the threat of more tariffs before signing the Phase I deal has thrown a wrench into the works. At this stage it is becoming less and less likely Phase I will come to fruition. In Brexit news, negotiations stalled on Wednesday despite a narrowing of differences. The Irish PM confirms the back-stop is yet to be resolved but there is hope. The two sides will begin a two-day summit tomorrow that will, hopefully, result in a deal.

The German DAX is in the lead at midday with a gain of 0.22% while the FTSE and CAC are both edging lower. In stock news, shares of UK tech giant Micro Focus is up 4.3% on its results as is seafood producer Mowi. At the other end of the rankings, IMCD and DBA Aviation are both down more than -4.0%.

Asia Mostly Higher On Brexit Hopes

Asian markets are mostly higher at the end of Wednesday’s session. The Nikkie and ASX are both up more than 1.0% while the Hang Seng and Kospi are up closer to 0.70%. The moves are driven by hope for a Brexit deal, however elusive it may seem right now. In Hong Kong, leader Carrie Lam is under intensifying pressure as she rejects HK’s bid for autonomy. The Shanghai composite is the only index to move lower, it posted a loss of -0.41%.

Wrong Response by Trump to China’s Countermeasures Threat Could Blow Up Trade Deal

There’s a breaking story out of Asia early Wednesday that could blow up into something major later in the day if U.S. President Trump decides to exacerbate the issue. The current price action in the financial markets indicates a sense of caution may be developing in the financial markets with safe-haven assets – Treasury bonds, Japanese Yen and gold turning higher, while demand for risky assets is edging lower.

According to reports, China is threatening to take countermeasures against the U.S. in response to a bill that favors the Hong Kong protesters, the Chinese Foreign Ministry said Wednesday.

That is a pretty bold threat to make while the United States and China are trying to finalize the first phase of a partial trade deal agreed upon on Friday. It’s also closely similar to the threat China made against the National Basketball Association (NBA) before it caved to pressure from the Chinese government last week after an NBA team official made comments supporting the Hong Kong protesters.

The Background

Three bills were approved in the House of Representatives Wednesday evening, one supporting the right of individuals to protest, another allowing for the U.S. to check on Beijing’s influence over the territory and a third aimed at preventing U.S. weapons from being used by police against protesters.

China’s Response

“If the relevant act were to become law, it wouldn’t only harm China’s interests and China-U.S. relations, but would also seriously damage U.S. interests,” said Geng Shuang, China’s Foreign Ministry spokesperson, in a statement on the body’s website. “China will definitely take strong countermeasures in response to the wrong decisions by the U.S. side to defend its sovereignty, security and development interests.”

Geng said while China was working to restore law and order in Hong Kong, U.S. lawmakers were “disregarding and distorting facts,” by turning criminal acts and violence against police into issues of “human rights or democracy.”

“That is a stark double standard. It fully exposes the shocking hypocrisy of some in the U.S. on human rights and democracy and their malicious intention to undermine Hong Kong’s prosperity and stability to contain China’s development,” said Geng, who urged the U.S. to “stop meddling.”

Trump’s Problem

Last week, CNN reported, Trump, in a call with Chinese President Xi Jinping, promised that the U.S. would stay quiet on the Hong Kong protests while the two countries continued to negotiate a possible end to the ongoing trade war.

Early Wednesday, traders are taking precautionary positions in response to the comments from China’s Foreign Ministry Spokesperson. Bonds, gold and Japanese Yen are being bought and stocks in the U.S. and Europe are being sold.

What traders could be waiting for is Trump’s response. Will he defy his promise to Chinese President Xi Jinping, or will he remain silent?  It’s highly unusual for Trump to remain silent for too long especially when a foreign country threatens the U.S. with “strong countermeasures.”

Traders should keep an eye on this story because it could develop into something major during the trading session. Somewhere, somehow, somebody in the press may try to push Trump’s button’s to get a response, and if they push the wrong one, Trump could say something to shake up the financial markets.

Trump certainly knows how to pick his battles. He’s usually quick to respond to comments from CEO’s, coaches, athletes, politicians and celebrities. However, if he doesn’t speak up, he’ll show the world that he just gave in to pressure from China, the country he keeps saying is weaker than the United States.

Asian Shares Rise as Upbeat Brexit News Offsets IMF’s Prediction of Lower Global Growth

The major Asia Pacific stock indexes are trading mostly higher on Wednesday, boosted by upbeat news regarding Brexit from the previous day. Brexit hopes were boosted by news that the European Union and United Kingdom were close to a deal. However, gains may have been limited by a warning from the International Monetary Fund (IMF) on Tuesday that the U.S.-China trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis.

At 07:09 GMT, Japan’s Nikkei 225 Index is trading 22472.92, up 265.71 or +1.20%. Hong Kong’s Hang Seng Index is at 26644.67, up 140.74 or +0.53% and South Korea’s KOSPI Index is trading 2082.83, up 14.66 or +0.71%.

In Australia, the S&P/ASX 200 Index is trading 6736.50, up 84.50 or +1.27% and in China, the Shanghai Index is at 2976.77, down 14.28 or -0.48%.

Brexit Traders Eye Imminent Draft Deal

Asian shares were supported on Wednesday after optimistic comments on Brexit from European negotiator Michel Barnier were backed up by reports that a draft legal text over the divorce was being drawn up.

“Our team(s) are working hard, and work has just started now today, this work has been intense over the weekend and yesterday, because even if the agreement will be difficult, more and more difficult, to be frank, it is still possible this week,” Barnier told reporters in Luxembourg on Tuesday morning.

He added that “any agreement must work for everyone,” saying it is “high time to turn good intentions into a legal text.”

By mid-afternoon (Tuesday), one report suggested that a draft deal was in the works according to two separate sources familiar with negotiations.

IMF Says Trade War Will Cut Global Growth

The U.S.-China trade war will cut 2019 global growth to its slowest pace since the 2008-2009 financial crisis, the International Monetary Fund (IMF) warned on Tuesday, adding that the outlook could darken considerably if trade tensions remain unsolved.

The IMF said its latest World Economic Outlook projections show 2019 GDP growth at 3.0%, down from 3.2% in a July forecast, largely due to increasing fallout from global trade friction.

The World Economic Outlook report spells out in sharp detail the economic difficulties caused by the U.S.-China tariffs, including direct costs, market turmoil, reduced investment and lower productivity due to supply chain disruptions.

Other News

South Korea’s central bank cut its interest rate for the second time in three months on Wednesday, as expected, following its first cut in July.

In Australia, the listing of lender Latitude Financial, what was to be the biggest Australian IPO of the year, has been canceled, according to Reuters. The IPO was canceled because a large proportion of demand for shares was coming from hedge funds rather than desired long-term investors.

In New Zealand, the Reserve Bank signaled more rate cuts, or even unconventional stimulus measures, may be needed to counter global headwinds, as figures on Wednesday showed the country’s annual inflation rate slowed in the third quarter.

Inflation fell to 1.5% in the year to end-September from 1.7% previously, Statistics New Zealand said, moving further away from the central bank’s target, but slightly ahead of a 1.4% rise predicted in a Reuters poll of economists.

Two-Weeks Before Fed Meeting, Policymakers Remain Divided Over Rate Cut

It’s not too early to start thinking about the U.S. Federal Reserve’s next move on interest rates. With two weeks to go until their next monetary policy meeting on October 29-30, U.S. central bank policymakers appear unconvinced phase one of a partial U.S.-China trade deal is enough to dismiss the policy uncertainty that has weighed on U.S. economic growth for months.

At the same time, Federal Reserve decision-makers remain far from united behind additional rate cuts beyond the two cuts they made in July and September with unemployment at a 50-year low and consumer spending strong.

On Tuesday, it was San Francisco Fed President Mary Daly and St. Louis Federal Reserve President James Bullard’s turn to voice their opinions about the direction of interest rates.

Off-Setting Views

On Tuesday, Daly told reporters after a speech at the Lost Angeles World Affairs Council & Town Hall, “Right now, I see the economy in a good place, and policy accommodation in a good place.”

However, businesses retain an overarching sense of uncertainty, Daly said, even though “the gusting (of headwinds) seems to have gone down a little bit on the news of some progress on Brexit, some progress on trade negotiations between the U.S. and China.”

Current weak inflation levels, and a three-year inflation outlook among U.S. consumers falling to its lowest level on record, has caught her eye.

On Tuesday, a report showed the inflation outlook among U.S. consumers remained muted in September, rising slightly over the near-term but falling to the lowest level on record over a three-year time frame since the New York Federal Reserve began its monthly survey of consumer expectations in 2013.

Although Daly expressed some concerns over low inflation, she still expects it to rise back to the Fed’s 2% target, and believes the Fed’s two rate cuts so far this year, in July and September, will help sustain the longest U.S. expansion in history.

“In terms of what to do going forward, I would like to see additional data, because the economy is in a really good place right now,” Daly said.

Speaking in London, Bullard painted a gloomier picture. Like Daly, he sees what he called continued “trade regime uncertainty” as a key risk to the U.S. economy. However, he also put more emphasis on continued weak inflation and slowing global growth.

Unlike Daly, who sees Fed policy as currently “slightly accommodative”, Bullard said on Tuesday in his view policy may be “too restrictive”.

As a result, the Fed “may choose to provide additional accommodation going forward, but decisions will be made on a meeting-by-meeting basis,” Bullard said.

Fed Still Divided

Two weeks before the Fed’s interest rate decision, and policymakers still haven’t budged from their September meeting positions.

One group like Fed Chair Jerome Powell believes the outlook is generally positive. Another believes the U.S. economy needs even easier policy to avoid sinking into a recession. Still a third group believes the Fed has gone far enough or even a little too far in trying to revitalize the economy. Their biggest fear is a too-easy policy could lead to financial instability if investors take on too much risk and asset values get stretched.

As of Tuesday’s close, investors expect Fed policymakers to reduce rates when they meet October 29-30. According to the CME FedWatch Tool, the latest probability of a 25-basis point Federal Open Market Committee (FOMC) rate cut is 75.4%.

The focus ahead of the next Fed meeting will be on U.S. economic data. This week, the key report is Retail Sales. Next week, it’s Durable Goods. On October 29, the Conference Board releases its Consumer Confidence report. On October 30 while the Fed is meeting, a report on Advance GDP will be released.

Unfortunately, Fed members won’t have the chance at this meeting to react to data on Personal Spending and the Core PCE Price Index.

Additionally, ISM Manufacturing, which last month posted its second consecutive contraction, will be released on November 1 along with the October Non-Farm Payrolls report.

This could be a problem for Fed members because some may favor another rate cut in anticipation of a weak ISM Manufacturing report, and some may pass on a rate cut due to expectations of a solid jobs report.

Impressive Earnings Reports Provide Clarity for Investors

What a relief! Finally a day when we didn’t have to watch the box all day scanning for meaningless U.S.-China trade talk headlines Yes, earnings season began with a flurry of activity on Tuesday, allowing us to focus on the reports and only the reports. It certainly made trading easier because the numbers were cut and dry. There was very little to read into, very little was left to interpretation. The reports were either bullish or bearish.

In the cash market on Tuesday, the benchmark S&P 500 Index settled at 2995.68, up 29.53 or +1.01. The blue chip Dow Jones Industrial Average finished at 27024.80, up 237.44 or +0.91% and the technology-driven NASDAQ Composite Index closed at 8148.71, up 100.06 or +1.27%.

The big takeaway this week for traders is the impact of clarity. We learned on Monday that a lack of clarity usually has a negative impact on investor decisions, encouraging them to shed risky assets. Tuesday taught us that clarity over earnings brings them right back then.

Since it’s “the market”, I don’t expect bullish earnings reports to line up like they did on Tuesday. We’re likely to see days featuring mixed reports. Furthermore, we’re likely to see both bearish and bullish headlines on the progress of the trade talks. For that matter, you can throw in headlines about Brexit. Since we’re coming down to the deadline set for October 30, this phenomena has been capturing its share of headlines lately. It was reported on Tuesday that upbeat news over Brexit contributed to the rally.

Investors Bullied by Headlines

As I wrote earlier, this week’s price action in the stock market has been all about the impact of clarity on an investor’s decision process. I’m sure you heard the old adage, “when in doubt, stay out” for investors looking to enter a new position, and “when in doubt, get out” when holding a position.

In my opinion, trying to keep up with the headlines is primarily behind trader indecision. Furthermore, traders have even built algorithms to generate buy and sell signals on key words. This could be the source of stock market volatility also. Additionally, even the headline writers at Bloomberg, Reuters and CNBC aren’t telling you anything useful. Most of the time the headline is late and the story is stale by the time traders act upon it.

I think you’ll have more success if you react to numbers in a report and the price action than a headline unless the headline is stating a fact. Any headline implying hope, fear or greed is dangerous.

Last week, CNBC’s Jim Cramer warned against trading stocks on the roller coaster of U.S.-China headlines. Markets are “hostage to events that are not only totally out of our hands, but totally out of the president’s hands,” Cramer said on “Squawk on the Street.”

“I am describing an unfathomable market,” declared, “where if you have conviction, you are out of your mind,” meaning fundamental cases for buying or selling are useless.

Just the Fact Ma’am

If you’re going to trade the headlines then look for something that states a fact. On Tuesday, Reuters said, “JPMorgan Hits Record High, Lifts Bank Stocks, UnitedHealth Eyes Best Day in Eight Years, and JNJ (Johnson & Johnson) Set for Biggest One-Day Percentage Gain Since January. Those are facts.

“Brexit Deal Hopes Brighten Sentiment” – “Hope and Sentiment” – the kiss of death for traders. Clarity breathes life into a market.

European Equities: Brexit, Earnings and Economic Data in Focus

Economic Calendar:

Wednesday, 16th October

  • Italian CPI (MoM) (Sep) Final
  • Eurozone Core CPI (YoY) (Sep) Final
  • Eurozone CPI (MoM) (Sep)
  • Eurozone CPI (YoY) (Sep) Final
  • Eurozone Trade Balance (Aug)

The Majors

It was a bullish day for the European majors on Tuesday. The DAX30 led the way, rallying by 1.15%, with the EuroStoxx600 and CAC30 up by 1.11% and 1.04% respectively.

Following a bearish start to the week, the majors were able to brush aside continued uncertainty over the ongoing U.S – China trade war.

Positive updates on Brexit from the EU on the possibility of a Brexit deal this week provided strong support for the majors.

Michael Barnier, the EU’s chief negotiator, spoke on Tuesday of a deal still being possible this week.

From the U.S, corporate earnings were a boost for the global equity markets, with JPMorgan earnings impressing.

The Stats

It a relatively busy day on the Eurozone economic calendar on Tuesday. Economic data included Germany and the Eurozone’s ZEW economic sentiment figures for October.

Of less influence on the day were Germany’s ZEW current conditions and French finalized September inflation figures.

According to the latest ZEW report,

  • The German ZEW Current Conditions Index fell from -19.9 to -25.3 in October. Economists had forecast a decline to -26.0.
  • Germany’s ZEW Economic Sentiment Index fell from -22.5 to -22.8 in October, which was better than a forecast of -27.0
  • The Eurozone’s ZEW Economic Sentiment Index fell from -22.4 to -23.5 in October. Economists had forecast a decline to -33.0.

Concerns over a possible recession weighed on consumer sentiment at the start of the 4th quarter, with progress in the U.S – China trade talks having provided little comfort.

From the U.S, a modest pickup in manufacturing sector activity in New York State was enough to avoid stressing the majors. The NY Empire State Manufacturing Index rose from 2 to 4 in October.

The Market Movers

For the DAX: Autos found strong support, with BMW leading the way, rallying by 2.45%. Daimler was also amongst the best performers on the DAX, rallying by 2.26%. Continental and Volkswagen weren’t far behind, with gains of 1.8% and 2.20% respectively.

Bank stocks also found further support. Deutsche Bank rallied by 2.88% to lead the way on the DAX30, while Commerzbank rose by 0.97%

From the CAC, it was also a bullish day for the banks. BNP Paribas and Soc Gen led the way with gains of 3.64% and 2.12% respectively. Credit Agricole saw a more modest rise of 1.51%. For the autos, it was also positive with Renault rising by 1.36%, while Peugeot rallied by 2.85%.

On the VIX Index

The VIX Index saw red for a 5th consecutive day on Tuesday, declining by 7.07%. Following on from a 6.48% fall on Monday, the VIX ended the day at 13.5.

Progress on Brexit and U.S corporate earnings, with JPMorgan Chase earnings, in particular, supported risk appetite on the day.

VIX 16/10/19 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Economic data includes finalized September inflation figures for Italy and the Eurozone. Alongside the inflation figures, the Eurozone’s August trade data is also due out.

We would expect the inflation figures to have a relatively muted impact on the majors, however, with Brexit and corporate earnings in focus.

A material narrowing in the Eurozone’s trade surplus could test the majors in the early part of the session.

From the U.S, September retail sales figures will provide direction later in the day. With recession talk continuing to do the rounds, any unexpected slide in sales will impact.

On the earnings front, corporate earnings from the U.S will also have influence. Bank of America and Morgan Stanley’s 3rd quarter results are in focus.

While U.S stats and corporate earnings will be key, expect Brexit chatter to have the ultimate say on the day. With just days remaining until the EU Summit, it’s crunch time for Boris and the Brexiteers.

In the futures market, at the time of writing, the DAX30 was down by 11 points, with the Dow down by 50 points.

US Stock Market Overview – Stock Rally Driven by Healthcare and Robust Bank Earnings

Stock prices moved higher on Tuesday as riskier assets gained traction. As stock prices move higher, US yields move in tandem. The higher yields reflect the market’s belief that a trade agreement could occur. Better than expected earnings were released on Tuesday in the banking sector which buoys the US stock market, raising yields and pushing gold lower. Most sectors were higher, driven by healthcare, and technology shares, consumer staples, and utilities bucked the trend. Financials were also a robust performer following stronger than expected earnings.

Banks Beat the Street

In the banking sector, shares of JPMorgan Chase, rose 3.25% after the bank reported better than expected financial results. The company continued to see strength in both its consumer and investment-bank businesses. JPMorgan reported a profit of $9.08 billion, or $2.68 a share. Expectations had been for earnings of $2.45 a share. A year earlier, the bank reported a profit of $8.38 billion, or $2.34 per share. Revenue from non-lending operations at the bank jumped 13% to $15.11 billion. In the bank’s consumer unit, revenue rose 7% to $14.26 billion and in the corporate and investment bank it rose 6% to $9.34 billion.

Citi also beat on the top and bottom line. Citi reported earnings of $1.97 per share versus expectations that the company would earn $1.95 per share. Revenue came in at $18.6 billion versus expectations that the firm would post revenue of $18.545 billion. Fixed-income trading posted revenue of  $3.211 billion versus expectations of $3.09 billion. Net interest margin came in at 2.56% versus 2.66% forecast.

Not all the banks beat. Goldman Sachs disappointed. The company said that profit slumped 26% to $1.88 billion, or $4.79 a share, below the $4.81 expected. Revenue fell 6% to $8.32 billion, slightly above the $8.31 billion expected, on lower results in the firm’s investing and lending and investment banking divisions.

Healthcare Rallies on J&J Earnings

Healthcare was the best performing sector in the S&P 500 index following robust financial results from Johnson & Johnson. The company reported earnings per share $2.12 versus $2.01 expected. Revenue came in at $20.73 versus $20.07 billion expected. J&J also raised its full-year guidance and now sees earnings of $8.62 to $8.67 per share, with revenue in the range of $81.8 billion to $82.3 billion. Prior to the report, analysts were expecting full-year earnings guidance of $8.53 to $8.63 a share on revenue of $82.4 billion to $83.2 billion.

Futures Rise, Earnings Season Off To Shaky Start, Trade Concerns Dampen Investor Appetite

The U.S. Futures Are Rising In Early Trading

The U.S. indices are indicated higher in early trading as earnings season kicks off. Today’s news includes reports from more than a half-dozen important names and the results are mixed. The big banks are the main focus as JP Morgan, Goldman Sachs, Wells Fargo, and Citigroup all report. JP Morgan posted a nice beat on the top and bottom lines driven by strength in consumer lending. Citigroup, Goldman Sachs and Wells Fargo are all trading lower after reporting weaker than expected numbers.

In other news, United Health and Johnson & Johnson both beat expectations. Johnson & Johnson also reports strength in the consumer units while United Health upped its full-year guidance. Both stocks are moving higher by roughly 2.0%.

The Down Jones Industrial Average, S&P 500, and NASDAQ Composite are all up about 0.25% in early trading. The sentiment is buoyed by trade hopes but also tempered by caution. While China and the U.S. have signaled a Phase 1 deal is at hand there is still no deal in place. Until such time traders are cautioned to be prepared for negative headlines. On the economic front, the Empire State Manufacturing Survey rose modestly to 4 from last months 2.0 as production and employment edge higher.

European Markets Are Mixed, Hope For A Smooth Brexit Persist

European markets are mixed at midday on Tuesday after remarks from the EU’s Brexit team renewed hope. Michel Barnier said that despite the increasing difficulty it is still possible to reach a deal this week. The DAX and CAC are both up about 0.35% to 0.40% while the FTSE is down roughly -0.25%. Retail is in the lead with a gain of 0.90%.

In economic news, unemployment ticked higher in the UK. The 3rd quarter figure came in at 3.9%, a tenth higher than the previous. In stock news, shares of Hays are up 5.5% after it reported flat results. The good news is weakness in the UK was offset by strength in offshore markets. Share of Wirecard, however, are not so buoyant. The Financial Times did an expose on the company’s accounting practices and shares are down -17% because of it.

Asia Mixed, Trade Hopes Clash With Trade Fears

Asian markets are wildly mixed after Tuesday’s session. The Japanese Nikkei led the market with a gain of 1.9% after being closed Monday for holiday. Chinese indices are broadly lower following the release of inflation data. CPI rose 3% on a 69% increase in pork prices while PPI fell. The Shanghai Composite is down -0.56% on the news, the Hang Seng a more tepid -0.07%. Elsewhere in the region, the ASX and Kospi are both up mildly.

Wall Street Investors Gearing Up for Earnings Season

After Monday’s lackluster trade, due to the extended holiday week-end, stock market investors will be gearing up for the start of earnings season, which kicks off on Tuesday with 52 S&P 500 companies expected to report by the end of the week. Here are the most important factors to consider before trading on Tuesday.

Big Banks on Deck

Investor focus will be on the big Wall Street banks as J.P. Morgan Chase, Citigroup, Goldman Sachs and Wells Fargo are expected to report on Tuesday, Bank of America on Wednesday and Morgan Stanley on Thursday.

According to Reuters, “The big U.S. banks are expected to report a 1.2% decline in earnings due to falling interest rates, a raft of unsuccessful stock market floatation and trade tensions.”

FactSet is expecting S&P 500-financial company earnings to drop 2.6% this quarter, weighed down by the Federal Reserve lowering interest rates twice since July, which pressures bank’s main business of deposits and lending.

Overall Earnings Weakness

Reuters also said, “Overall, analysts are forecasting a 3.2% decline in profit for S&P 500 companies for the quarter from a year earlier, based on IBES data from Refinitiv.

Analysts at FactSet presented a more bearish outlook, saying as the season kicks into gear this week, S&P 500 firms are expected to report a 4.6% earnings decline over the same period a year ago. If the period ends up with a negative number, that will make three quarters in a row, the first time that’s happened in three years.

Quarterly Market Outlook

Analysts at Edward Jones are saying, “Stocks appear on track to finish the year strong, with the S&P 500 near a record high, despite a volatile past quarter during which slower global growth and trade tensions caused recession fears to spike.”

“Twists and turns on the U.S./China trade front continue to drive market swings, with stocks rising last week on optimism that both sides are looking at a phased approach to a trade deal, which was announced after market close on Friday.”

“This incremental progress is encouraging, but additional phases of agreement or a larger deal that includes key issues like intellectual property, technology transfers and enforcement will likely take more time.”

“Thus, trade issues will remain a source of volatility. More broadly, we expect stocks to continue to rise but at a slower pace than they have over the past few years, supported by ongoing economic growth, earnings growth and lower interest rates.”

US Stocks Retreat on Trade Deal Uncertainty, but Losses Dampened by Light Holiday Trade

The major U.S. equity indexes settled slightly lower on Monday in a generally lackluster trade due to the U.S. Columbus Day holiday. Although it was not an official U.S. bank holiday, several banks were closed as well as the Treasury market. The price action suggests many of the major investment firms took advantage of a long-holiday weekend.

In the cash market on Monday, the benchmark S&P 500 Index settled at 2966.15, down 4.12 or -0.14%. The blue chip Dow Jones Industrial Average finished at 26787.36, down 29.23 or -0.11% and the technology-based NASDAQ Composite closed at 8048.65, down 8.39 or -0.11%.

Stocks Pause

U.S. stocks paused on Monday after posting gains the three previous sessions as a lack of clarity over “phase one” of a U.S.-China trade agreement weighed on investor sentiment, while investors enjoyed an “unofficial” holiday, ahead of the start of the third-quarter earnings season.

Investors were upbeat at the start of the futures market session on Sunday after the S&P 500 and Dow Jones indexes ended Friday with their first weekly gain in a month and President Trump signaled the two economic powerhouses had taken a major step in easing the back-and-forth tariffs measures that have hammered global growth this year.

However, prices quickly retreated after a Bloomberg News report said that Chinese officials would like to continue trade talks before signing phase one of the deal and moving on to phase two.

Additionally, gains were capped after President Trump acknowledged that the agreement could still collapse, while Treasury Secretary Steven Mnuchin said on Monday he had “every expectation” that if a U.S.-China trade deal was not in place by December 15, additional tariffs would be imposed.

The price action suggests investors are still trying to grasp the concept of a trade deal done in phases. However, if investors were really skeptical about the matter, the markets would’ve sold off a lot harder. This indicates they may be comfortable with the idea that both sides are still talking.

Empire State Manufacturing Index Edges Higher

It was a light day on the data front. There were no early session reports, but the Empire State Manufacturing Index was released at 20:00 GMT. The report was posted about 18 hours earlier than expected, due to “technical difficulties”, according to a Fed spokeswoman.

The New York Federal Reserve’s Empire State business-conditions index showed slight improvement in October. The report showed that a rebound in sentiment pushed the headline Empire State Index up to 4 in October from 2 in the prior month. Economists were looking for a 0.8 reading, according to Econoday.

The Empire State index is closely watched as one of the first indicators of a month’s manufacturing activity. Recent reports have been flat as regional manufacturing has been impacted by the trade war between the United States and China, the sluggish global economy and the strong U.S. Dollar.

European Equities: Brexit, Corporate Earnings and Stats in Focus

Economic Calendar:

Tuesday, 15th October

  • French CPI (MoM) (Sep) Final
  • French HICP (MoM) (Sep) Final
  • German ZEW Current Conditions (Oct)
  • German ZEW Economic Sentiment (Oct)
  • Eurozone ZEW Economic Sentiment (Oct)

Wednesday, 16th October

  • Italian CPI (MoM) (Sep) Final
  • Eurozone Core CPI (YoY) (Sep) Final
  • Eurozone CPI (MoM) (Sep)
  • Eurozone CPI (YoY) (Sep) Final
  • Eurozone Trade Balance (Aug)

The Majors

It was a bearish start to the week for the European majors. The CAC40 led the way down, falling by 0.4% on Monday. The DAX30 and EuroStoxx600 weren’t far behind with losses of 0.20% and 0.49% respectively.

Uncertainty over the U.S – China trade war and Brexit weighed on the broader markets on the day.

While the U.S agreed to defer the rollout of further tariffs on Chinese goods tomorrow, a lack of commitment to removal existing tariffs weighed on risk sentiment.

On the Brexit front, a lack of progress from last week’s hopes of a deal added to the downside on the day.

The Stats

It was a relatively quiet day on the Eurozone economic calendar on Monday. Economic data was limited to the Eurozone’s industrial production figures for September.

According to Eurostat, industrial production rose by 0.4%, month-on-month in August, reversing a 0.4% decline in July. Economists had forecast a 0.3% rise.

  • The production of capital goods rose by 1.2% and intermediate goods by 0.3%.
  • Weighing in August, however, was a 0.3% fall in the production of consumer goods and a 0.6% fall in energy and non-durable consumer goods production.
  • Malta (+5.6%), Estonia (+3.9%) and Latvia (+3.0%) reported the highest increases in production.
  • Slovakia (-2.6%) and Lithuania (-2.4%) reported the largest declines in August.
  • Year-on-year, production fell by 2.8%.

With a lack of U.S stats on the day, geopolitical risk offset upbeat industrial production figures on the day.

The Market Movers

For the DAX: Autos found more upside on Monday, supported by the delay of additional tariffs on Chinese goods. Continental led the way, rising by 0.52%. BMW (+0.50%) and Daimler (+0.40%) saw more modest gains, whilst Volkswagen bucked the trend on the day, however, falling by 0.12%.

Bank stocks found further support, with Deutsche Bank rising by 0.75% and Commerzbank by 0.69%

From the CAC, it was a mixed day for the banks. BNP Paribas and Soc Gen fell by 0.79% and by 0.16% respectively. Credit Agricole managed to buck the trend with a 0.22% gain. For the autos, it was also mixed with Renault rising by 0.69%, while Peugeot slipped by 0.87%.

On the VIX Index

The VIX Index saw red for a 4th consecutive day on Monday, falling by 6.48%. Following on from an 11.33% slide on Friday, the VIX ended the day at 14.6.

Losses on the day came in spite of the U.S majors closing out the day in the red. While existing tariffs on Chinese goods remain, last week’s progress on trade talks was enough to pin back the VIX.

VIX 15/10/19 Daily Chart

The Day Ahead

It’s a relatively busy day ahead on the Eurozone economic calendar. Economic data includes October economic current conditions and economic sentiment figures out of Germany and the Eurozone.

Germany and the Eurozone’s economic sentiment figures will be the key drivers, which is forecasted EUR negative.

Of less influence on the day will be finalized September inflation figures due out of France.

From the U.S, New York Empire State Manufacturing Index figures for October will also provide direction late on.

Another pullback in the Index would add further pressure on the European majors.

On the earnings front, corporate earnings from the U.S will also have an impact. Citigroup, Goldman, JPMorgan, and Wells Fargo release 3rd quarter results later today.

Geopolitics will also influence on the day, as Johnson looks to wrap up a Brexit deal ahead of the EU Summit this weekend.

In the futures market, at the time of writing, the DAX30 was up by 17 points, with the Dow up by 16 points.

US Stock Market Overview – Stocks Slip on Concern over Interpretation of Phase One Agrement

 

Stock prices flip-flopped back and forth between positive and negative territory on Monday as investors absorbed the phase one of the US-Chinese trade agreement. The difference between the initial coverage between the US and China was stark. The Chinese coverage of a trade agreement was not nearly as upbeat. What is important to garner is that nothing was signed which means that it’s still up for interpretation. China agreed to buy more agriculture products from the US, but this was not a concession.

The US will not go forward with the increase in tariffs on around $250 billion of Chinese goods from 25% to 30%, which is largely symbolic. For this deal to really feel like its ready to be signed the Chinese are going to need more and want an agreement that the December tariff hikes will be taken off the table. Trade-in China came in weaker than expected.

Most sectors in the S&P 500 index were lower led down by Materials, while financials were the best performing sector. Apple shares hit a fresh all time high as the company is poised to continue to lift the broader markets. Chinese import and export data were softer than expected which will likely further weigh on global growth.

Trump and Xi Meeting

Trump and Xi are scheduled to meet on the sidelines of the APEC meeting next month, in the middle of November. The mid-December tariff on about $160 billion of Chinese goods, is what is now a key decision for both sides. The Chinese also have a concern that President Trump will pull the plug on an agreement even if he verbally agrees to one. They have accused the US of flip-flopping which is what the US accused China of doing. Those who surround President Xi believe that President Trump could embarrass President Xi, at the APEC meeting, if he changes his mind.

Chinese Trade Data Disappoints

China’s trade data disappointed with imports and exports coming in weaker than expected. The trade surplus widened to $39.65 billion in September from $34.78 billion. Exports were off 3.2% year-over-year after the 1.0% decline in August and forecasts for a 2.8% decline. Pork imports are 44% higher from a year ago, and beef imports are 54% higher, but overall imports contracted 8.5% in September following a 5.6% decline in August. China reported auto sales fell 6.6% year-over-year in September, the 15th decline in the past 16 months.

Futures Fall As Uncertainty Grips The Market, Brexit Deal Elusive, China Trade Data Falls

The U.S. Futures Are Down In Early Trading

The U.S. futures are down in early trading despite positive developments on trade. The Dow Jones Industrial Average, NASDAQ Composite, and S&P 500 are all down about -0.55% in early trading. Tech is in the lead. The trade deal, announced on Friday, is an interim stop-gap measure intended to produce a three-phase solution. The first phase includes China increasing its purchases of agricultural products, a pledge the country has made several times in the past. In exchange, the U.S. will postpone or delay tariffs scheduled to take effect later this week.

While both sides have hailed the deal as good there is still no actual document and details are sketchy. China’s Vice Premier Liu He says he will be back to Washington this month to hammer out those details before President Xi will sign any deal. China is expected to purchase up to $50 billion in U.S. agriculture products with those purchases ramping up over the next few weeks. The timeline to end the trade war is now 15 months. Secretary of the Treasury Mnuchin says the October tariffs will go into effect in December if China reneges on its agreements.

In business news, this week begins the peak of 3rd quarter earnings. We are expecting reports from the big banks this week, they are expected to post EPS declines. In economic news, we are expecting several key reads from the Federal Reserve. Also on tap, Retail Sales, the Beige Book, Housing Starts, and the Index of Leading Indicators.

European Indices Are Down With A Case Of Uncertainty

EU indices are down at midday due to a growing case of uncertainty. The trade-deal that is not yet a deal remains a key point of uncertainty as does the Brexit. Brexit negotiators were unable to reach a deal over the weekend raising doubts a solution to the Irish-Backstop can be found. The Queen is expected to deliver her speech to open Parliament today. In it, she will outline the governments plans for Brexit.

The French CAC is leading decliners in early trading with a loss of -0.75% while the DAX and FTSE are both trailing with losses close to -0.50%. In stock news, shares of biopharma company Chr. Hansen rebound 3.8% after last week’s massive selloff.

Asian Markets Rebound Despite Trade Uncertainty

Asian markets are broadly higher after Monday’s session as trade hope fuels optimism. The Shanghai Composite and Korean Kospi both advanced more than 1.1% while the Hong Kong Hang Seng and Australian ASX gained 0.80% and 0.50%. Japan was closed for a holiday. In South Korea chipmakers Samsung and SK Hynix led the advance.

U.S. Stocks Turn Lower as Investors Sour on ‘Phase One’ Trade Deal

The major U.S. stock index futures turned lower for the pre-market session Monday morning and hedgers returned to the Treasury bonds, gold and Japanese Yen after China said it needed to have further discussions before it would sign off on the so-called phase one trade deal President Donald Trump announced on Friday.

The early market price action has the S&P 500 Index opening about 0.42% lower, the Dow off by 95 points or 0.35% and the NASDAQ Composite trading about 0.54% lower.

China Wants More Talks Before Signing ‘Phase One’ Deal

According to a Bloomberg report, China trade officials wanted more talks by the end of October to discuss details of the “phase one” trade deal.

This now has investors wondering if the additional tariffs originally scheduled to start on October 15, and suspended as of Friday, are back on. We’ll probably hear more about this from the Trump administration later in the session.

On Friday, President Trump announced that the first phase of a deal with China had been agreed, though officials on both sides said much more work needed to be done.

However, the deal that does not include many details and Trump has warned it could take up to five weeks to get a pact written. Furthermore, analysts are saying it appears to be more of a “temporary” than a real trade pact.

Investors took no chances upon hearing the news. Besides driving stocks lower and erasing some of Friday’s gains, hedgers drove December Treasury Notes 0.46% higher. December Comex gold futures rose 0.73% and the Japanese Yen jumped 0.24% higher. These protection moves are likely to increase if investors continue to turn sour on the deal.

Asian Markets Up, Europe Down

Shares in Asia rose in reaction to Friday’s partial trade deal news. Investors had no reaction to the Bloomberg report, which came out after the Asian markets had closed.

The major bourses in Europe turned lower after the report was released. According to CNBC, the pan-European Stoxx 600 slipped 1.1% during the morning trade, with basic resource stocks losing 2.6% to lead losses as all sectors traded in negative territory.

The Bloomberg report was not a complete surprise as Citi analysts pointed out in an earlier report.

“Despite what appears to have been achieved in the October talks, we remain cautious on an eventual trade deal,” the analysts wrote in a note. “The US offers are far from what China has been demanding, as showcased in its June State Council White Paper:  reasonable purchases of US imports, removal of existing tariffs, and giving the trade document a balanced treatment.”

In other news, customs data showed that China’s import and export figures were worse than expected in September, with exports falling 3.2% on the year in U.S. dollar terms, while imports declined 8.5%, according to Reuters.

European Equities: China Trade Data and Geopolitics to Influence

Economic Calendar:

Monday, 14th October

  • Eurozone Industrial Production (MoM) (Aug)

Tuesday, 15th October

  • French CPI (MoM) (Sep) Final
  • French HICP (MoM) (Sep) Final
  • German ZEW Current Conditions (Oct)
  • German ZEW Economic Sentiment (Oct)
  • Eurozone ZEW Economic Sentiment (Oct)

Wednesday, 16th October

  • Italian CPI (MoM) (Sep) Final
  • Eurozone CPI (MoM) (Sep)
  • Eurozone Trade Balance (Aug)

The Majors

It was a bullish end to the week for the majors, with the DAX rallying by 2.86% to lead the way. The EuroStoxx600 and CAC40 weren’t far behind with gains of 2.31% and  1.73% respectively.

Support for the majors came off the back of news that the U.S administration delayed the rollout of fresh tariffs on Chinese goods. Tariffs were due to hit Chinese goods on 15th October.

Progress on trade talks in Washington led to the delay.

Brexit also provided support as the EU affirmed that progress was indeed being made on an alternative to the Irish backstop.

The Stats

It a relatively busy day on the Eurozone economic calendar on Friday. Economic data included German and Spanish finalized inflation figures for September.

Out of Germany, consumer prices held steady in September, which was in line with prelim figures. In August, consumer prices had fallen by 0.2%.

Inflationary pressures eased in Spain, however, with consumer prices rising by just 0.1%, month-on-month, which was in line with forecast. Consumer prices had risen by 0.3% in August.

From the U.S, a pickup in consumer expectations and sentiment for October also provided support on the data front.

Further upside in consumer sentiment can be expected as the U.S and China make progress on ironing out a trade agreement.

The Market Movers

For the DAX: Autos found further support on Friday, driven by updates from the U.S – China trade talks in Washington. Volkswagen led the way, rallying by 4.71%. Daimler (+3.13%), Continental (+2.50%), and BMW (+3.13%) weren’t far behind.

Bank stocks also found support, with Deutsche Bank rallying by 4.96% and Commerzbank by 4.09%

From the CAC, it was also a positive day for the banks. Soc Gen led the way, rallying by 5.27% off the back of a  3.32% gain on Thursday. BNP Paribas and Credit Agricole weren’t far behind, with gains of 4.72% and 4.52% respectively. For the autos, Renault jumped by 5.12%, while Peugeot up by 4.63% following a 3.48% gain on Thursday.

On the VIX Index

The VIX Index saw red for a 3rd consecutive day on Friday, sliding by 11.33%. Following on from a 5.74% fall on Wednesday, the VIX ended the day at 15.6.

Further progress on the U.S – China trade talks and Brexit supported risk appetite to pull the VIX back into the red.

VIX 14/10/19 Daily Chart

The Day Ahead

It’s a relatively quiet day ahead on the Eurozone economic calendar. Economic data out of the Eurozone is limited to August’s industrial production figures.

Better than forecasted production figures would provide support in the early part of the session.

A lack of stats due out of the U.S, however, will leave geopolitics to continue to influence in the day.

Ahead of the European open, trade data due out of China through the Asian session will set the tone. Any weak numbers and expect market jitters over the global economy to return.

In the futures market, at the time of writing, the DAX30 was down by 35 points, while the Dow was up by 38 points.

Phase One: Too Much Uncertainty to Call It a ‘Good Deal’

It’s tough to say whether investors liked the first phase of the trade deal between the United States and China announced on Friday because of what was contained in the details, or because something was finally accomplished after months of waiting.

I have to admit, I didn’t think anything would be accomplished at the two-day meeting because I became caught up in the headlines throughout the week that seemed to be leaning toward the negative side. However, I quickly came to my senses on Thursday night when I saw the five indicator markets – Treasurys, Gold, U.S. Dollar, Japanese Yen, S&P 500 Index – starting to make noticeable moves.

When Treasurys, Gold, U.S. Dollar and Japanese Yen all started moving in the same direction, I knew something was up because this was unusual. It was especially odd seeing gold and the dollar both breaking sharply. These are the markets that investors were using to hedge risk. So when they all started to break, I sensed investors were trimming positions against the worst outcome of the trade talks.

Trump’s Flip-Flop Source of Tension

President Trump was actually the source of most of the recent tension in the markets.

On September 20, he signaled that he would consider an interim trade deal with China, even though he would not prefer it.

The president told reporters he would like to ink a full agreement with the world’s second largest economy. However, he left the door open to striking a limited deal with Beijing.

“If we’re not going to do the deal, let’s get it done,” he told reporters. “A lot of people are talking about it, I see a lot of analysts are saying an interim deal – meaning we’ll do pieces of it, the easy ones first. But there’s no easy or hard. There’s a deal or there’s not a deal. But it’s something we would consider, I guess.”

Later that day, a White House official then said the U.S. is “absolutely not” considering such a deal.

A few days later on September 24, Trump said he will not accept a “bad deal” in trade talks with China. “Hopefully we can reach an agreement that will be beneficial for both countries. But as I have made very clear I will not accept a bad deal for the American people.”

But Did Trump Make a Bad Interim Trade Deal?

No interim deal, check. Bad deal, check. Morgan Stanley says President Trump’s partial deal with China is an “uncertain” arrangement at best and there does not appear to be a viable path to reduce existing tariffs at the moment.

Without a durable dispute settlement mechanism in place, another round of tariff increases cannot be ruled out, according to Morgan Stanley.

“There is not yet a viable path to existing tariffs declining, and tariff escalation remains a meaningful risk,” the bank said in a note. “Thus, we do not yet expect a meaningful rebound in corporate behavior that would drive global growth expectations higher.”

Evercore wrote in a note, “Trump’s statement that ‘We are near the end of the trade war’ is not plausible to us. We do not expect tariff cuts in 2020 – but are ready to be favorably surprised. And as long as such punitive tariffs remain, we would describe US-China economic relations as bad, not good.”

JP Morgan said the first phase of the deal is a positive development after months of trade escalation, but that the outcome is not a surprise for the market. It expects that US-China tension could escalate again, especially during the 2020 presidential election.

“Investors had high hopes for some form of mini-deal in the weeks before the meeting, and Friday’s announcement has at least been partially, if not fully, priced in” the firm wrote.

Near-Term Expectations

Trader focus over the near-term should be on one or all of the following markets – Treasurys, Gold, U.S. Dollar, Japanese Yen and S&P 500 Index. If it proves to be too much then watch Treasury yields.

There is still risk to the economy because the initial series of tariffs still exist. Once traders trim their hedges placed in anticipation of the October 15 tariffs that have now been suspended, yields should flatten and traders will start pricing in the possibility of a Fed rate cut.

Traders aren’t changing sentiment, per se. They are just making adjustments to the suspension of the October 15 tariffs so don’t expect too much more downside action in gold, the U.S. Dollar and Japanese Yen. All should find support at or near their September 11 levels, the day Trump announced the October 15 tariffs.

Stocks Rise as Partial Trade Deal Lays Groundwork for Truce on Additional Tariffs

The major U.S. equity indexes rose last week with the rally primarily driven by optimism that U.S. and Chinese trade officials made sufficient progress in negotiations to bring the two economic powerhouses closer to a permanent end to their more than 15-month trade dispute.

At the end of the week, President Trump announced that both sides had agreed to a partial trade deal or phase one of a series of partial trade deals. It wasn’t the ground-breaking news that many investors had hoped for, however, it day lay the groundwork for a truce on additional tariffs.

In the cash market last week, the benchmark S&P 500 Index settled at 2970.27, up 0.6%. It’s up 18.5% for the year. The blue chip Dow Jones Industrial Average finished at 26816.59, up 0.9%. It’s posted a 15.0% gain so far this year. The technology-based NASDAQ Composite closed at 8057.04, up 0.9%. In 2019, it’s up 21.4%.

What’s the Deal with the Partial Deal?

U.S. equities were unpinned at the end of the week after President Trump said China and the U.S. reached the first phase of a substantial trade deal that delays tariff hikes that were to kick in this week.

Late in the session on Friday, Trump told reporters at the Oval Office that phase one of the trade deal will be written over the next three weeks.

As part of this phase, China will purchase between $40 billion and $50 billion in U.S. agricultural products. Trump also said the deal includes agreements on foreign-exchange issues with China. In exchange, the U.S. agreed to hold off on tariff hikes that were set to take effect Tuesday.

Additionally, Treasury Secretary Steven Mnuchin said both sides struck an “almost complete agreement” on currency and financial services issues. Phase two of the deal will “start almost immediately” after the first one is signed, Trump said.

Big Tech, Banks and Chipmakers Liked the News

Despite quite a few calls for caution, at the end of the trading session, the data revealed that Big Tech, Banks and chipmaker investors liked the news. Since stock investors tend to discount future events, they were probably happy because the tariffs that were set to begin on October 15 had been suspended.

The previous tariffs are still in place, but they have been priced into the market. On September 11, President Trump announced that he was delaying plans to impose an additional 5 percent duty on $250 billion worth of Chinese goods on October 15. These tariffs will be suspended with the partial deal in place.

Stocks rose on the news because many investors had sold on September 11 so it’s catch up time for them.

At the end of the session, Facebook, Amazon and Google parent Alphabet were all up at least 0.5%.

Last week’s rapid rise in Treasury yields caused by investors exiting their bond market hedges, made bank stocks more attractive with Bank of America and J.P. Morgan Chase surging more than 1.6% each.

Finally, chipmakers, which had been the center of attention due to tariffs and sanctions against Chinese communication giant Huawei, rose broadly. Among the winners, Micron Technology gained more than 4%, while Xilinx climbed 3.7%.

The Week Ahead – Brexit, Earnings, Stats and the IMF and EU Summit in Focus

On the Macro

For the Dollar:

It’s a busier week ahead on the economic calendar.

NY Empire State Manufacturing figures for October get the week going on Tuesday. The focus will then shift to September retail sales figures due out on Wednesday.

With a heavy reliance on consumer spending, the numbers will need to be in line with forecasts to provide Dollar support.

On a busy Thursday, September building permit and housing start figures are due out along with October’s Philly FED Manufacturing numbers.

September industrial production and the weekly jobless claims figures are also due out.

With no material stats due out on Friday, Wednesday’s retail sales and Thursday’s Philly FED numbers will have the greatest impact.

Outside of the stats, trade war chatter will continue to be a factor, as will any further talk of impeachment.

The Dollar Spot Index ended the week down by 0.55% to $98.301.

For the EUR:

It’s also a relatively quiet week ahead on the economic data front.

Industrial production figures on Monday and German and Eurozone economic sentiment figures on Tuesday will influence early in the week.

The Eurozone’s September inflation and industrial production figures due out on Wednesday will also provide direction.

We would expect finalized inflation figures out of France and Italy to have a muted impact on the EUR, however.

With no material stats due out in the latter part of the week, geopolitical risk will remain in focus.

Any talk of U.S tariffs on EU goods and chatter on Brexit ahead of the 19th October EU Summit will also need considering.

The EUR/USD ended the week up by 0.58% to $1.1042.

For the Pound:

It’s another busy week ahead on the economic calendar.

Key stats include employment figures due out on Tuesday, inflation figures on Wednesday and retail sales numbers on Thursday.

On the data front, claimant counts, inflation and retail sales figures will be the key drivers in the week.

On the Brexit front, there would be more upside for the Pound should Johnson finalize a deal ahead of next weekend’s EU Summit.

The GBP/USD ended the week up by 2.73% to $1.2668.

For the Loonie:

It’s a relatively busy week ahead on the data front.

Key stats include September inflation figures due out on Wednesday and August manufacturing sales numbers due out on Thursday.

On the data front, we would expect the inflation figures to be the key driver in the week.

From elsewhere, trade data, industrial production and 3rd quarter GDP numbers out of China will also influence.

The Loonie ended the week up by 0.83% to C$1.3203 against the U.S Dollar.

Out of Asia

For the Aussie Dollar:

It’s another relatively quiet week ahead.

Key stats are limited to September’s employment numbers due out on Thursday.

On the monetary policy front, the RBA minutes are due out on Tuesday and could pressure the Aussie Dollar should there be suggestions of more rate cuts to come.

From elsewhere, economic data out of China on Monday and Friday will also influence.

The Aussie Dollar ended the week up by 0.34% to $0.6794.

For the Japanese Yen:

It’s a relatively quiet week ahead on the economic calendar.

Key stats are finalized industrial production figures due out on Tuesday and inflation and trade data on Friday.

We would expect the stats to have a relatively muted impact on the Yen, however.

Geopolitics and economic data out of the U.S and China will likely have the greatest impact in the week.

The Japanese Yen ended the week down by 1.26% to ¥108.29 against the U.S Dollar.

For the Kiwi Dollar:

Stats are on the quieter side in the week ahead.

Economic data is limited to 3rd quarter inflation figures that are due out on Wednesday. We can expect the Kiwi to be particularly sensitive to the numbers.

From elsewhere, stats from China will also influence in the week.

The Kiwi Dollar ended the week up by 0.27% to $0.6337.

Out of China:

It’s a busy week on the economic data front. Economic data includes trade data due out on Monday and inflation figures on Tuesday.

The focus will then shift to a busy Friday. Stats on Friday include fixed asset investment, industrial production and 3rd quarter GDP numbers.

We expect trade data, industrial production, and the GDP numbers to have the greatest impact on market risk sentiment.

The impact of any weak numbers could be buffered, however, by any further positive chatter on trade.

The Yuan ended the week up by 0.83% to CNY7.0892 against the Greenback.

Geo-Politics

Impeachment: With the U.S and China making progress on trade, impeachment chatter could return in the week ahead.

Trade Wars: 15th October U.S tariffs on Chinese goods have been postponed as progress was made last week. For real progress to be made, however, the U.S would need to remove existing tariffs that continue to hurt the Chinese economy. Expect more chatter in the week, which will influence risk sentiment.

UK Politics: Brexit talks continue, with a deal now needed to support further the Pound ahead of the EU Summit. Any suggestions that the latest proposal is inadequate and expect the Pound to slide.

The Rest

Earnings:  It’s a big week ahead, with U.S banks Citi, Goldman, JPMorgan, and Wells Fargo announcing.

EU Summit: It is make or break for Boris Johnson and the Brexiteers. Will there finally be an agreement for the British PM to take back to parliament?

IMF Annual Meeting: Chatter on the global economy and what can be done to drive growth will influence. Will there be any agreements to ramp up fiscal spending to offset the effects of the ongoing U.S – China trade war?

U.S Mortgage Rates Ease Back to Support Refinancing

Mortgage rates hit reverse in the week ending 10th October. 30-year fixed rates fell by 8 basis point to 3.57%, following a 1 basis point rise in the week prior.

The pullback left 30-year rates close to levels last seen in early November of 2016, according to figures released by Freddie Mac.

Compared to this time last year, 30-year fixed rates were down 133 basis points.

More significantly, 30-year fixed rates are down by 137 basis points since last November’s most recent peak of 4.94%.

Economic Data from the Week

Economic data was on the quieter side throughout the week. Key stats included September inflation figures released on Tuesday and Thursday.

On the monetary policy front, the FOMC minutes on Wednesday also influenced. The minutes revealed that some members are willing to deliver further rate cuts down the road.

With stats on the lighter side, however, geopolitics remained the key driver.

Progress on Brexit and on the U.S – China trade talks supported yields mid-week.

Freddie Mac Rates

The weekly average rates for new mortgages as of 10th October were quoted by Freddie Mac to be:

  • 30-year fixed rates decreased by 8 basis points to 3.57% in the week. Rates were down from 4.90% from a year ago. The average fee remained steady at 0.6 points.
  • 15-year fixed rates fell by 9 basis points to 3.05% in the week. Rates were down from 4.29% from a year ago. The average fee held steady at 0.5 points.
  • 5-year fixed rates slipped by 3 basis points to 3.35% in the week. Rates were down by 72 basis points from last year’s 4.07%. The average fee decreased from 0.4 points to 0.3 points.

According to Freddie Mac, a 50-year low unemployment rate together with low mortgage rates led to an increase in homebuyer demand in the year.

Freddie Mac also noted that much of the strength comes from entry-level buyers. First-time homebuyer share of the loans Freddie Mac purchased in 2019 stood at 46%, a 2-decade high.

Mortgage Bankers’ Association Rates

For the week ending 4th October, rates were quoted to be:

  • Average interest rates for 30-year fixed, backed by the FHA, decreased from 3.79% to 3.75%. Points increased from 0.23 to 0.29 (incl. origination fee) for 80% LTV loans.
  • Average interest rates for 30-year fixed with conforming loan balances fell from 3.99% to 3.90%. Points fell from 0.38 to 0.37 (incl. origination fee) for 80% LTV loans.
  • Average 30-year rates for jumbo loan balances decreased from 3.98% to 3.90%. Points remained unchanged at 0.28 (incl. origination fee) for 80% LTV loans.

Weekly figures released by the Mortgage Bankers Association showed that the Market Composite Index, which is a measure of mortgage loan application volume, increased by 5.2% in the week ending 4th October. In the week ending 27th September, the Market Composite Index had risen by 8.1%.

The Refinance Index increased by 10% in the week ending 4th October, leaving the index up by 163% from the previous year. The Index had jumped by 14% in the week ending 27th September.

The share of refinance mortgage activity increased from 58.0% to 60.4%, following on from a rise from 54.9% to 58.0% in the week prior.

According to the MBA, yields fell sharply in the week as a result of weaker service sector data that raised yet more red flags. In September, weakness in private sector growth was no longer confined to the manufacturing sector. The surveys revealed that service sector growth was also beginning to wane.

A resulting flight to safety led to a drop in mortgage rates across the board, leaving 30-year fixed rates at their lowest level in a month.

For the week ahead

It’s a busier week on the economic data front.

Economic data includes NY and Philly manufacturing figures on Tuesday and Thursday and retail sales figures on Wednesday.

From the housing sector, building approvals and housing starts are also due out.

While we can expect the stats to influence, geopolitics will continue to be in focus. Progress on trade talks between the U.S and China and Brexit would support yields, which could lead to a pickup in rates.

The stats would need to support, however, with retails sales and the Philly FED Manufacturing Index the key drivers.

From elsewhere, trade data out of China will also impact yields at the start of the week.

European Equities: A Week in Review – 11/10/19

The Majors

It was a bullish week for the European majors, with the DAX30 rallying by 4.15% to lead the way. The CAC30 and EuroStoxx600 weren’t far behind, with gains of 3.23% and 3.00% respectively.

After a bearish start to the week, 3 consecutive days in the green delivered, with the lion’s share of the gains coming on Friday.

Economic data through the week failed to weigh on the majors, with geopolitics delivering the upside in the week.

Progress on Brexit negotiations and positive updates from the U.S – China trade talks drove demand for the European majors.

U.S President Trump said on Friday that discussions were very good and that there were warmer feelings at the latest talks,

On Brexit, positive updates from Johnson, Irish Prime Minister Varadkar and from the EU in the 2nd half of the week also supported.

Monetary Policy

The ECB’s monetary policy meeting minutes on Thursday had little influence on the majors. While having little influence, the minutes did reveal division amongst members on what lies ahead. Recent ECB member commentary had already alerted the markets of a rift amongst members, with a number of key members against the reintroduction of bond purchases.

The Stats

It was a relatively quiet week on the Eurozone economic calendar. Through the week, Germany’s August factory orders and trade data were negative for the DAX, while an unexpected pickup in industrial production was positive.

On Monday, factory orders fell by 0.6% in August, following on from a 2.7% slide in July. A 0.3% rise in industrial production, reversing a 0.4% fall in July, had little impact on Tuesday, as market jitters ahead of trade talks pinned back the majors.

A narrowing in Germany’s trade surplus from €20.5bn to €18.1 did little to dampen demand for riskier assets on Thursday.

The positive updates from both Brexit and trade talks in Washington drove demand for the European majors on Thursday and Friday.

At the end of the week, finalized inflation figures out of Germany and Spain also had a muted impact, with further updates on Brexit and trade talks driving the majors on the day.

The Market Movers

From the DAX, it was a bullish week for the auto sector. Volkswagen led the way, rallying by 8.55%. Daimler and BMW also saw solid gains, rising by 6.25% and 3.08% respectively. Continental trailed the pack, however, rising by just 0.02%.

It was also bullish for the banking sector. Deutsche Bank gained 3.98%, with Commerzbank rallying by 4.92%, to partially reverse last week’s 8.42% tumble.

While the stats were on the weaker side, a trade agreement would ease concerns over the economic outlook.

From the CAC, the banks also found strong support. BNP Paribas and Soc Gen led the way, rallying by 8.19% and by 7.95% respectively. Credit Agricole trailed with a 6.10% gain. French autos saw green following 3 consecutive weeks in the red. Peugeot rallied by 6.52%, with Renault up by 6.10%.

On the VIX Index

The VIX Index fell by 8.57% in the week ending 11th October. Following on from a 0.7% fall from the previous week, the VIX ended the week at 15.6.

After a Tuesday 13.6% jump in the VIX, it was red through the rest of the week. Sentiment towards Brexit and U.S – China trade talks offset a negative bias on the economic data front.

VIX Weekly Chart 12/10/19

The Week Ahead

It’s a relatively busy week on the Eurozone economic calendar. Key drivers include German and, Eurozone economic sentiment figures on Tuesday. The Eurozone’s industrial production and trade data due out on Monday and Wednesday will also influence.

From elsewhere, China’s trade data and industrial production and 3rd quarter GDP numbers on Friday will also influence risk appetite.

While economic data is on the heavier side, continued progress on Brexit and the U.S – China trade talks will buffer the effect of any disappointing figures.

A delay to tariffs that were due to be introduced on 15th October, was key in the week.

Looking at the forecasts, Eurozone and China economic stats are skewed to the negative.