On the week ended November 4th, election uncertainty overshadowed improving fundamentals and sent US stocks to their ninth consecutive decline. Over the week, the Dow Jones Industrial Average declined -1.0% to 17978, the S&P500 Index declined -1.4% to 2097.40, and NASDAQ declined -2.1% to 5080. The last heavy batch of third-quarter earnings also affected US stocks. Notably, Facebook (NASDAQ: FB) shares retreated -8.6% to 120.75 after announcing greater investment plans, albeit better-than-expected earnings. The S&P500 Volatility Index (VIX) rose to 22.83, a +37.6% increase from 16.59. The Federal Open Market Committee announced it would leave rates steady, but hinted at a December rate hike, already strongly priced by the market. The fed funds futures market implies a likelihood of a December hike at 66.8%. US bonds, represented by the iShares US Aggregate Bond ETF, rose 0.3%, while the 10Y Treasury Yield declined -0.07% to a 1.78% close.
The US Bureau of Labor Statistics released its monthly payroll numbers. The US economy added 161,000 jobs in October, while the job growth figures of the previous two months were revised higher by 44,000 jobs. Wages rose 0.4% in October for a 2.8% gain over the past year – the fastest pace since 2009. Wage increases could boost consumption and fuel economic growth.
Next week, the result of the US election is expected to be known by 04:00am (GMT) on Wednesday. Market volatility is to be expected in either case, but a Trump victory would cause significantly stronger market swings.
The uncertainty about the US elections had impact on the European equity markets. In fact, STOXX 50 closed on Friday at 2956.56, 4% down with respect to the previous week. DAX Index closed at 10259.13 which is also around 4% lower than the level of last Friday.
Regarding the fixed income market, the yield on 10Y Bund dropped from 0.168% to 0.14% over the week. On the other hand, the yield on 10Y Italian bond climbed from 1.57% to 1.68% which was mostly driven by the negative news on Monte Paschi rescue plan. The Euro appreciated around 1.4% against the Dollar, reaching $1.1141.
This week’s economic data suggest that the growth of the Eurozone is starting to get momentum. Firstly, the composite PMI rose to 53.7 (10-month high), both service and manufacturing PMI recovered. Secondly, The IFO Index shows that the German business confidence in October is on the highest level since April 2014. Finally, the European Commission survey was also strong. Economic sentiment rose to 106.3, and manufacturing sector’s confidence is over a five-year high. Importantly, the latest improvement continues to suggest that there has not been strong negative impact from the UK’s Brexit vote. Next week’s focus will be on the flash GDP report for the third quarter and on the flash inflation report for October.
The FTSE 100 had five straight daily losses and dropped 4.3% for the week which represents its biggest weekly drop since early January. On Thursday, the drop was around 0.8% after a high court ruled that a parliamentary vote must be held before the government can invoke Article 50, the trigger for negotiations on the U.K.’s withdrawal from the European Union.
The yield on 10Y UK Gilt ended the week 13bp below compering to the beginning of the week when the level was 1.13%. GBPUSD spiked after the high court’s decision, trading as high as $1.2495 which represents its highest level since early October.
The Bank of England said inflation, currently 1%, would peak at 2.8% in early 2018 and return to the 2% target level only in 2020. It said a further interest cut was now unlikely. Also, it left interest rates unchanged at 0.25%.
UK Composite PMI for October reached 54.5 (fastest pace of growth since January), above expectations of 52.5. Next week the data for the Industrial Production (YoY) (Sep) will be published, the previous reading was 0.7%.
Rest of the World
Emerging markets suffered the biggest drop since Brexit. As a matter of fact, The iShares MSCI Emerging Market ETF, the most widely used benchmark for the region, dropped 3.4% on Friday. The move can be explained by the concerns that the Federal Reserve would raise interest rates in December, which can boost the US dollar and make debt denominated in the currency more expensive to emerging markets.
The Bank of Japan pushed back its forecast date for hitting 2% inflation to around fiscal 2018. Previously the bank said it would reach its target in fiscal 2017.
Japan’s Nikkei Stock Average closed at its lowest level in two weeks, at 16905.36 as traders digested recent yen strengthening with the currency gaining 2% against the dollar so far this month as investors fled to safe havens.
Oil futures settled lower on Friday, as uncertainty surrounded a weekend meeting of major oil producers who are expected to discuss a proposal to curb crude production. During the week December West Texas Intermediate crude-oil futures finished down 2.1% at $48.70 a barrel.
The Hong Kong Purchasing Managers Index dropped to 48.2 in October from 49.3 in September, staying in contractionary territory for the 20th consecutive month. The October PMI reading was lower mainly because output and new orders continued to weaken along with an accelerated decline in new business from mainland China, IHS Markit said.