Market Recap 08-10-17

Market Recap 08-10-17

United States

The labour report released on Friday showed, along with encouraging data on US wage growth, some inconsistencies which are likely to be the outcome of distortionary effects caused by the Hurricane Irma. More specifically, the latest non-farm payroll figure is negative (-33,000). This is the first time that payroll data goes below zero since 2010, in contrast with market consensus of +100,000 and previously released anticipatory indicators that suggested a payroll print higher than 200,000. The market, however, dismissed this figure as strongly influenced by adverse weather conditions and, instead, was positively surprised by wage growth that recorded a 2.9% increase over one year ago. The reaction was an increase in US Treasury Yields and a USD appreciation against Euro and other major currencies.

The S&P 500 closed on Friday at 2,549.33, down 3 points from the new all-time high recorded on the 5th October, recording weekly gains of 1.19%. Small-cap stocks tracked by the Russell 2000 gained 1.3%, outperforming US large-caps.

The dollar gained against major peers with the Dollar Index reaching 93.91 on Thursday before closing the week at 93.80. The Euro/USD closed the week at 1.173.

Next week, only a couple of important economic data will be released. On Friday, the Producer Price Index is going to be published along with the initial jobless claim data (expectations: 255,000, down 5,000 from the previous release of September). As stated above, we would like to suggest taking next releases on the US economy with a grain of salt since the impact of the hurricane is likely to persist and produce distorted data for a while.

Eurozone

On Sunday 1st October, Catalonia held a referendum in which citizens were called to choose whether the richest Spanish region would become independent or not. Despite the central government dissent, which led to violent clashes between Spanish police and Catalonian civilians, 92% decided that Catalonia should be independent (although only 43% of the people voted).

Euro Stoxx 600 index closed 0.34% higher with respect to last Friday. While most European markets have not been affected by the referendum, Spain suffered a 1.89% loss during this week, although it managed to reduce losses by suspending a Catalonian parliamentary session and stalling the process of declaration of independence. Similarly, Italy’s FTSE Mib fell 1.34%, due to uncertainties about the approaching political elections, which will possibly bring further instability to the country. The German DAX 30 and the French CAC 40 closed respectively 1.00% and 0.56% higher, as these markets were considered safer by investors.

German 10-year bonds currently yield 0.459%, 5bps lower than last week, while Spanish 10-year bonds offer 1.709%, up from 1.604% seven days ago. This reflects the political events that occurred in the Iberian country and its possible instability.

1€ is worth 1.173$, down 0.76% since last Friday. The decrease in value of the euro is mostly due to further strengthening of the dollar, after recent news about a tax cut by President Trump and perhaps more hawkish measures by the Fed. On the other side, 1€ is worth 0.898£, 1.81% more than last week. Again, the change is mainly due to the gloomy political scenario in the UK, where Theresa May is struggling to impose its leadership in choosing the strategy to handle with Brexit.

UK

Over the course of the last week, the most important driver of the UK markets was the speech of the UK Prime Minister Theresa May at the Tory party conference on Wednesday. UK Prime Minister failed to deliver a positive signal, since her speech was overshadowed by a prankster handing her a P45, an incessant cough, and problems with the backdrop. The Conservative Party had already been weakened by the loss of parliamentary majority on the June’s snap election. After the disastrous speech, some speculation of her possible resignation as leader of the party caused the sterling’s tumble.

The UK manufacturing PMI data was weaker than forecasted. It showed activity fell to 55.9 against an expected value of 56.4, mainly caused by the weaker pound, that increased the cost of imported materials used in production process. UK construction PMI was also weaker than expected, the index fell to 48.1, when forecast was 51.0. It showed that September was a difficult month for the construction sector, underlining concerns over the UK economy. On the other hand, UK services PMI, showed a surprise rise from 53.2 to 53.6 in September, that outpaced expectation that activity would remain unchanged from the previous month.

Following Theresa May’s speech, the pound closed at lower levels on Friday, 1.3064 USD and 1.1145 EUR. On other hand, the FTSE 100 had the best weekly advance of 2017, closing up 2.0% at 7523.0 from 7373.0 previous week close. The weaker pound explains the rally in UK equities. Regarding fixed incomes, the yield on the 10-year government bond closed on Friday at 1.36 % at a slightly lower level from the previous Friday rate. The yield of two-year UK Gilt closed at 0.43%.

Next Tuesday, there will be the MoM Manufacturing production for the month of August, that is expected to be 0.3%. Moreover, there will be the release of UK Trade Balance and UK Trade Balance Non-EU for August, that are expected to be -11.20B and -3.60B respectively.

Rest of the World

Most Asian markets were closed at least part of the week, but joined the global stock rally when they were open. Japanese stocks, like those elsewhere, rose on stronger economic data and posted good gains in quiet trading. The Nikkei 225 Stock Average advanced 334 points (1.6%) and closed at 20,690.71, which is a 20-year high. The Nikkei is up 8.3% ytd, the large cap TOPIX Index has advanced 11.1%, and the TOPIX Small Index gained 19.2%. The yen weakened and closed near ¥113 per U.S. dollar. CPI data was 0.7% in the 12-month period until August, in line with expectations and fastest pace since March 2015. However, core-core CPI was unchanged, which then suggests that the higher energy prices were the drivers.

China’s manufacturing activity increased in September, official manufacturing PMI rose to a five-year high at 52.4, beating forecasts. Looking forward, China’s data will start to show the impact of pollution curbs as Beijing attempts to crack industrial polluters.

Reserve Bank of Australia kept rates unchanged at a record low 1.5 percent due to heavy indebtedness among households and sluggish wage gains. Bond yields at the short end of the curve have surged since the start of June as hawkish comments rippled out of developed-market central banks. Thus, many positioned their portfolios for better times ahead. However, in Australia it has been a bit harder to join the bulls, poor retail sales data that came out on Thursday provided a reality check. Customers who were using their saving to fund their spending are now lessening their shopping. This is piece if data is significant because household speeding contributes to 50 percent of Australia’s economic growth. Thus, RBA reminded us that growth and inflation may be slower than expected if the Aussie keeps rising. And there may be some value for bears if rates stay low for longer than the markets expect.

Puerto Rico bonds due in 2025 dropped to 32 cents on the dollar on Thursday after President Donald Trump said that the island’s debt may need to be “wiped clean” to help the post-hurricane recovery. However, White House officials were quick to revert those comments which, then, ruled out any U.S. bailout of bondholders. The concern for the government of the U.S. commonwealth is that it is out of cash and won’t be able to collect some taxes for at least one month due to the destruction caused by hurricane and the delays in sending aid to the island may be due its complicated fiscal position,

Saudi King Salman bin Abdulaziz has met Russian President Vladimir Putin in Moscow on Thursday and a possible extension of the deal to cut oil output was likely to dominate talks. The kingdom’s energy minister Khalid Al-Falih said that the cooperation between world’s two largest oil exporters has “breathed life back into OPEC”. Crude has fallen from recent highs this week. In addition, there was a tropical storm in Central America, Nate, which has left at least 22 people dead. Due to the storm, oil and gas platforms at the sea have been closed and it is also a threat to cotton and orange crops. WTI for November delivery was at $50.59 a barrel.