With yesterday’s, 8th consecutive decline for the S&P 500, the US equity market has now posted the longest losing streak since October 2008, although as the following WSJ chart shows, the severity of the selloff has been far more muted.
Still, with futures currently printing modestly in the red, should we close payrolls Friday with another negative print, it would be the longest negative streak since December 1980. Putting the recent slide in context, stocks are now down compared to a year ago, and are unchanged since December 2014.
To be sure, stocks around the world are not helping, as the global selloff extends into Friday trading as crude oil holds near a one-month low, having wiped out the entire post-Algiers OPEC meeting rally, and investors avoid riskier assets ahead of next week’s U.S. presidential election.
Tracking the decline in the US market, the MSCI World Index has sunk to the lowest level in four months. Turkey’s lira led losses among emerging-market currencies following the arrest of some opposition lawmakers, while Bloomberg’s dollar index rose for the first time in six days. The yen and developed nations’ sovereign bonds were poised for their biggest weekly gains since July, having risen with gold on haven demand. Oil was set for its steepest weekly drop in nine months amid a glut.
According to Bloomberg, global stocks are wrapping up their worst week since the run-up to Britain’s June Brexit vote, having slumped as opinion polls showed a dwindling lead for Democratic presidential candidate Hillary Clinton. Meanwhile, fears of a selloff continue to rise as expected volatility readings in equities and currencies have increased, and face the potential for a major breakout as two core quant strategies are poised for a volatile showdown.
“It seems like it’s too close to call,” said Ashley Perrott, head of Asian fixed-income at UBS Asset Management Ltd. in Singapore. “We’re relatively cautious. One thing markets are not particularly good at pricing is political risks.”
The selling has been strongest in Asia and Europe, as the MSCI Asia Pacific Index fell 0.9%, with decliners outnumbering advancers two to one. The Topix index sank 1.6% as trading resumed in Japan following a holiday on Thursday. Takata Corp. dropped to its lowest since May in Tokyo on renewed concern the Japanese air-bag supplier may file for bankruptcy protection for its U.S. unit. Mazda Motor Corp. tumbled by the most since July after the company cut its full-year profit forecast by 13 percent. The Stoxx Europe 600 Index dropped 0.9% in early trade, headed for the biggest weekly loss since February. BMW AG dropped to its lowest since September and Commerzbank AG fell 0.5 percent after their quarterly results.
To distract us briefly from election risk and coverage, today we get payrolls where the market consensus is currently sitting at 173k for October, versus the 156k print in September. As a reminder this is one of two payrolls reports we’ll get prior to the Fed meeting in December. As a reminder the ADP survey came in at 147k while the employment component of the manufacturing PMI jumped to 52.9 from 49.7 but fell to 53.1 from 57.2 in yesterday’s ISM non-manufacturing. As always it’s worth keeping an eye on the other important elements of the employment report. The consensus is for a slight drop in the unemployment rate to 4.9% from 5.0% while average hourly earnings are expected to have increased +0.3% mom and average weekly hours hold steady at 34.4hrs.
S&P 500 futures were little changed ahead of monthly American payrolls data due Friday that may influence the outlook for interest rates. U.S. shares fell in the last session as a New York Times/CBS poll found Clinton ahead 45 percent to Trump’s 42 percent among likely voters, down from a nine-point lead in the same poll in mid-October. A Washington Post/ABC News tracking poll also showed her to have lost ground to Trump since last week.
“We are still in a very cautious mood ahead of the U.S. election,” said Alex Wong, who helps oversee about $100 million at Ample Capital Ltd. in Hong Kong. “People are reducing their exposure because they are afraid of a Trump win. That is a possibility but not a huge possibility.”
Speaking of risk assets, sovereign bonds in developed countries handed investors a 1.5 percent gain over the last four days, set for the best weekly return since July. The yield on 10-year U.S. Treasuries fell six basis points this week to 1.79 percent, while the rate on similar-maturity debt in Japan declined 1 1/2 basis points to minus 0.065 percent.
Meanwhile, the odds of a Fed rate increase by year-end rose to 78 percent on Thursday, the highest level since March, from 69 percent at the end of last week, suggesting today’s non-farm payroll report is largely meaningless unless it is a massive outlier. The U.S. employment report is forecast to show employers added 173,000 workers in October, versus 156,000 in September, according to a Bloomberg survey of economists. “It will authorize the rate hike in December,” said Hiroki Shimazu, an economist and strategist at the Japanese unit of MCP Asset Management in Tokyo. “The U.S. economy continues to recover.”
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Bulletin Headline Summary from RanSquawk
- European equities enter the North American crossover lower ahead of upcoming risk events and lacklustre earnings
- Ahead of the North American payrolls releases, it has been a very quiet session in FX, with traders sizing up offers at the recent extremes seen.
- Looking ahead, highlights include Eurozone Service PMIs, US NFP, Canadian Jobs Report and a slew of central bank speakers
Market Snapshot
- S&P 500 futures down less than 0.1% to 2082
- Stoxx 600 down 0.9% to 329
- MSCI Asia Pacific down 0.9% to 137
- US 10-yr yield down 2bps to 1.8%
- Dollar Index up 0.03% to 97.19
- WTI Crude futures up 0.2% to $44.74
- Brent Futures up 0.2% to $46.45
- Gold spot down 0.1% to $1,301
- Silver spot down less than 0.1% to $18.35
Global Headline News
- Clinton Has Narrow Edge With Five Days Until Election: Poll Wrap: polls released Thursday showed the race narrowing
- Brexit Challenge Will Be Supreme Test of Britain’s Top Court: Supreme Court appeal on Article 50 challenge set for December
- Warburg Pincus Said to Consider Buyout of ARA With Founder Lim: ARA’s founder Lim previously said money manager undervalued
- Billionaire Wang Buys Dick Clark Productions for $1 Billion: Entire management of Dick Clark Productions to be retained
- Commerzbank Posts Loss on Overhaul, Sees Full-Year Profit: CFO says bank won’t pay dividend in 2017, 2018
- Liberty Global CEO on the Hunt for Deals in Latin America: pay-TV company “poised” for opportunities, CEO says
- Deutsche Telekom Seeks Dutch Turnaround With Vodafone Deal: No terms given for sale, which includes 150,000 customers
- Bayer-Monsanto Merger Proposal Said to Concern Brazil Regulator: Brazil watchdog shares similar concerns as those of the EU
- British Airways Owner IAG Cuts Long-Term Earnings Goal: Company says Ebitdar to average 300 million euros a year lower
Looking at regional markets, we start in Asia as always where stocks traded to the downside following from their US counterparts where crude lagged near month-lows and political uncertainty remained rife, while the NFP report looms. The energy complex undermined indices with the commodity heavy ASX 200 (-0.9%) pressured following a retreat in WTI crude futures below USD 45/bbl. The Nikkei 225 (-1.3%) was the underperformer on return from its market closure with weakness in tech following similar price action in the US, with healthcare also suffering amid a DoJ investigation into drug pricing. Elsewhere, Shanghai Comp (-0.1%) and Hang Seng (-0.2%) traded choppy after the PBoC injected CNY 437bln in to the financial system via its MLF, but then conducted a net weekly drain in its repo operations. Finally, 10y JGB’s traded higher following the risk play, while the BoJ entered the market to buy JPY 410bIn of government debt with maturities ranging from 5 to over 25-yr.
Top Asian News
- Takata Says It Wants to Avoid Bankruptcy to Minimize Disruptions: Air-bag maker hopes to go for out-of-court settlement, CFO says
- Denying Link to Cult, Park Fights to Hold Onto Power in Korea: Park’s public approval rating falls to historic low of 5%
- CICC Set to Make Very Substantial Acquisition; Shares Halted: CICC has been in talks with China Investment Securities
- BlackRock Said to Explore Sale of Second Singapore Tower: Asia Square Tower 2 sale could fetch about S$2b
- China to Clarify Hong Kong Law in Localist Fight, Lawmaker Says: Comes After 2 Elected Lawmakers Barred From Taking Seats
- Japan Shares Post Worst Week Since July as Yen Gains on Election: Topix index recently at 6-month high
- China Said To Start Direct Trading of CNY & CAD in the Near Term: Trading could start this month
European equities continue to be gripped by US election uncertainty as Trump gains ground in the latest batch of polls, while price action has also been guided by the latest uninspiring earning updates. Noticeable weakness has been observed in healthcare names amid reports that federal antitrust regulators are to investigate over possible US price fixing. Elsewhere, notable earnings from Europe include Commerzbank and BMW who trade lower by 0.6% and 1.8% respectively. Additionally, lacklustre PMI’s in Europe has also failed to lift sentiment with most readings revised lower. The risk off tone saw safe-haven flow into bonds with bunds trading higher by a modest 20 ticks, while the upside in German debt has been led by the gains in the long with the curve seeing some notable bull flattening.
European PMI Data
- Eurozone Oct. Services PMI 52.8 vs Flash Reading 53.5
- Eurozone Oct. Composite PMI 53.3 vs Flash Reading 53.7
- Germany Oct. Composite PMI 55.1 vs Flash Reading 55.1
- Germany Oct. Services PMI 54.2 vs Flash Reading 54.1
- Italy Oct. Composite PMI Unchanged at 51.1; Est. 51.5
- Italy Oct. Services PMI 51 vs 50.7 in Sept.; Est. 51.5
- France Oct. Composite PMI 51.6 vs Flash Reading 52.2
- France Oct. Services PMI 51.4 vs Flash Reading 52.1
- Spain Oct. Composite PMI 54.4 vs 54.1 in Sept.; Est. 54.3
- Spain Oct. Services PMI 54.6 vs 54.7 in Sept.; Est. 55
Top European News
- Euro-Area Economic Growth Marred by Slowdown in French Services: Economic momentum in the euro area accelerated less than forecast in October
- Volvo to Sell Military-Vehicle Business in Streamlining Effort: co. announced divestment plans in statement
- Ubisoft Shares Soar as Raised Profit Target Reassures Investors: Full-year operating profit may reach EU250m
- Richemont Overhauls Top Management as Luxury Sales Plunge: Cartier owner to lose CEO, CFO, 8 board members next year
- BMW Automaking Profit Weighed Down by Rising Spending: Earnings before interest and taxes fell 3.9% to EU1.8b
- Belgravia Mansion Owners Cut Asking Prices as Brexit Bites: Majority of sellers accepted lower price to sell homes
In FX, the Bloomberg Dollar Spot Index pared this week’s loss to 0.8%. It fell over the last five trading sessions as election concerns outweighed a pickup in speculation that the Federal Reserve will raise interest rates next month. The central bank left policy unchanged at a review this week and signaled that a December rate hike was likely. The yen, euro and Swiss franc all strengthened more than 1 percent this week. “The dollar is showing clear signs that investors are worried about a Trump win,” said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney. “The slide in the dollar against ultra-low-yielding currencies such as euro, yen and Swiss franc is evidence of a flight to safety, reversing a period of optimism where the dollar enjoyed the combination of stronger polling results for Clinton and not entirely coincidental positioning for a Fed hike in December.” The lira slid as much as 0.9 percent to a fresh record after Turkish police rounded up Kurdish lawmakers in post-midnight raids, extending a crackdown on the opposition as President Recep Tayyip Erdogan consolidates power following a July 15 coup attempt. The pound was on track for a 2.3 percent weekly bounce, its best performance in eight months, following a hawkish shift by the Bank of England and a court ruling requiring the government to get lawmakers’ approval for Brexit to begin.
In commodities, crude oil fell 0.3 percent to $44.51 a barrel in New York. It has plunged more than 8 percent this week as the U.S. reported a record jump in its stockpiles. In addition, members of the Organization of Petroleum Exporting Countries who are claiming exemption from an agreement to limit supplies helped boost the group’s output to an all-time high last month. Gold declined 0.2 percent, trimming this week’s advance to 1.9 percent. It touched $1,308.02 an ounce on Wednesday, the highest level in about a month. “If Donald Trump is elected next week, we think gold can go anywhere shy of $1,400,” Wayne Gordon, executive director for commodities and foreign exchange at UBS Group AG’s wealth-management unit, said in a Bloomberg Television interview. “If Hillary Clinton is elected, we think gold can probably fall by $20, $30. So the clear skew in this trade is to the upside.” Zinc retreated from a five-year high in London, while copper fell from its highest level since July. The LMEX Metals Index, which tracks six major base metals, rose to the most in more than 15 months on Thursday as investors bet that a rebound in demand from China, surging coal prices and logistics issues will underpin prices.
Looking at today’s calendar, the overriding focus is on the aforementioned October employment report at 8.30am ET. Along with that, the September trade balance reading will also be released. Away from the data Fedspeak resumes with Lockhart, Kaplan and Fischer all on the cards. Earnings wise there are just 11 S&P 500 companies reporting today.
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US Event Calendar
- 8:30am: Trade Balance, Sept., est. -$38.0b (prior – $40.7b)
- 8:30am: Change in Non-farm Payrolls, Oct., est. 173k (prior 156k)
- Change in Private Payrolls, Oct., est. 170k (prior 167k)
- Unemployment Rate, Oct., est. 4.9% (prior 5.0%)
- 8:45am: Fed’s Lockhart speaks in Orlando, Florida
- 1:00pm: ECB’s Constancio in Chicago
- 4:00pm: Fed’s Fischer speaks in Washington
- 1pm: Baker Hughes rig count
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DB’s Jim Reid concludes the overnight event wrap
Just as yesterday took us 1,161 words to get to the FOMC, today it will take us 734 words to get to previewing payroll Friday. Considering we’re only weeks away from possibly only the second Fed hike in over 10 years and a global hike/cut ratio since the financial crisis of around single figures to 600 plus this shows you how many interesting stories there are at the moment.
Indeed after yesterday you might be able to add the UK to the following list. Germany, France, Austria (December 2016), Holland and Italy (possibly). Yes all these countries have general elections before the end of next year and our strategists now see the base case scenario being a UK general election in 2017 as a result of the High Court ruling going against the government yesterday. Assuming the appeal is thrown out in just over a month’s time it will likely mean parliament will force a negotiating stance that prioritises a softer Brexit with as much access to the common market as possible. This goes against recent government rhetoric which has emphasised controlling migration as the priority. Overall our guys believe PM May’s very small parliamentary majority (15), will make it very hard to balance competing interests on Brexit in her own party and in the wider House of Commons, without a larger mandate to conduct renegotiations. They continue to see upside risks for the pound in the short-term based on this and positioning.
That news, along with a change in easing bias at the BoE to a much more neutral position (more on that shortly) following the outcome of their policy meeting yesterday helped Sterling to rally +1.28% and at one stage come close to testing the $1.25 level, a mark we’ve not seen since October 6th. It’s a touch firmer again this morning at around $1.2475. Yesterday Gilts (+3bps) were weaker in line with the wider European bond market while the FTSE 100 fell -0.80% but the more domestic focused FTSE 250 jumped +0.68%.
So although the prospect of a softer Brexit gave sentiment a boost, by the close of play in the US we saw another broadly risk off session. The S&P 500 (-0.44%) seeing the first 8 day losing streak since October 2008. Just to recap from yesterday’s EMR there have only now been 10 longer daily losing streaks since 1957 and 9 of equal length to this one. If today is a down day it will be the first 9 day fall since 1980. Of the 20 losing streaks equal or worse, this is the 2nd mildest so far with the index only down -2.91%. So it’s more notable by its consistency than its depth at the moment.
In Europe the majority of the core equity markets finished in the red yesterday too although the Stoxx 600 did actually manage to finish flat by the closing bell. Interestingly that means that the now snapped 8-day losing streak for that index is actually bookended by two sessions where the index closed completely flat. In terms of the price action elsewhere volatility continues to surge. The VIX was up over 14% yesterday to close above 22 which is the highest level since June 27th. The post-Brexit high for the VIX is 25.76. Meanwhile sovereign bond markets continue to be a bit directionless. Yields in Europe were generally 2-3bps higher while 10y Treasuries were 1bp higher at 1.812%. It’s a lot more obvious where the momentum is in currency markets though. The USD index (-0.25%) was down for the third day in succession with the Yen (+0.31%) once again benefiting. The Mexican Peso (+1.00%) did rally back after the latest ABC News/Washington Post tracking poll had Clinton now swinging back to a 2% lead at 47% to 45%, albeit still within the sample margin of error.
To distract us from the election risk reassessment, today we’ve got payrolls where the market consensus is currently sitting at 173k for October, versus the 156k print in September. As a reminder this is one of two payrolls reports we’ll get prior to the Fed meeting in December. Our US economists are slightly below market and have pegged a 150k forecast which would imply some moderate slowing from the three month trailing average of 192k. As a reminder the ADP survey came in at 147k while the employment component of the manufacturing PMI jumped to 52.9 from 49.7 but fell to 53.1 from 57.2 in yesterday’s ISM non-manufacturing. As always it’s worth keeping an eye on the other important elements of the employment report. The consensus is for a slight drop in the unemployment rate to 4.9% from 5.0% while average hourly earnings are expected to have increased +0.3% mom and average weekly hours hold steady at 34.4hrs.
To the latest in Asia now where the broadly weaker and nervy tone is continuing for most markets this morning. After being shut yesterday, the Nikkei has reopened to a sharp -1.44% decline, while the Kospi (-0.45%) and ASX (-0.74%) are also in the red. The Hang Seng and Shanghai Comp are currently little changed along with US equity index futures. Commodity markets are more mixed with Gold (-0.25%) paring some of yesterday’s gains while WTI Oil (+0.25%) is up, albeit modestly, for the first time since last Thursday.
Moving on. For those that missed it yesterday, there were no surprises on the policy front at the BoE where as widely expected all prior policy settings were retained. What was interesting however was the slightly more forward assessment of ‘balanced’ risks to policy that was a more definitively neutral conclusion than certainly what our economists were expecting. The key takeaway was the mention of the fact that ‘monetary policy can respond in either direction to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the target’. The statement also noted that the near-term outlook for the economy appears stronger than the Bank had expected when it last eased policy back in August but that the outlook is judged to be weaker than previously anticipated in the latter part of the forecast period. CPI is now expected to rise to 2.7% in 2017 and 2018 before falling back gradually over 2019 to reach 2.5%. The MPC noted that it is willing to accommodate a period of above-target inflation given the risks around the economy, but that it will be monitoring closely the evolution of inflation expectations. Our economists are of the view that the BoE’s policy dilemma – caught between weak growth and higher inflation – will continue. For now then, they note that this means no further monetary easing, in other words, if the current configuration continues, there will be no extension of QE in February. However, they would also not totally discount further monetary easing. They are still inclined to see the risks as modestly skewed in the direction of further easing rather than being outright balanced. However, the recent perceived threats to independence may make it more difficult for the BOE to stretch their tolerance for an inflation overshoot too far. If sterling is less likely to recover much to dampen the inflation overshoot, it would probably need a marked downside surprise to growth to make the trade off.
Staying with BoE for one last time this morning. Following the BoE abandoning its dovish bias, we have updated our views on its corporate bond purchases. Barring a change in economic conditions, we expect no QE extension in February and that applies to the size of the Corporate Bond Purchase Scheme (CBPS) as well. Yesterday’s MPC announcement was later followed by data showing continued slowdown in CBPS purchases. Had they continued at their very strong initial pace, the BoE would have hit the £10bn CBPS target in about half a year as opposed to the announced 18-month duration of the programme. Our baseline is thus that the CBPS will not be expanded and its pace will slow down in order for the purchases to be spread over a longer period of time (“taper”). The BoE also published for the first time the sectoral allocation of its CBPS portfolio. It is currently meaningfully overweight the electricity, industrial & transport sectors while it is meaningfully underweight water, gas, energy and property & finance. This provides some indication of where buying will concentrate next. With yesterday’s addition of 66 new bonds, the BoE expanded the eligible universe by 21.5% from £106.1bn to £128.9bn. Despite the relatively limited size of the programme, the mere optionality of the BoE to expand it if economic and funding conditions require that should benefit spreads. The Carney put is still there for GBP credit investors even if it seems deeper out of the money now. See the note in your emails this morning from Michal Jezek entitled “Will the Bank of England Taper its Corporate Bond Purchases?”.
Before we move onto today’s diary, a quick wrap up of the data yesterday which somewhat flew under the radar with all the Brexit, BoE and Election headlines flying around. The ISM non-manufacturing reading for October pulled back a bit last month, declining to 54.8 from 57.1 after expectations were for a more modest decline to 56.0. The reading is still a touch higher than the YTD average however of 54.6 while the broader details were fairly solid despite that pullback in employment we mentioned earlier. Both new orders and business activity fell but still remain at a robust 57.7 level. Meanwhile, there was no final revision made to the services PMI at 54.8 which puts the composite at 54.9 and the highest since November last year. Factory orders rose a little bit more than expected in September (+0.3% mom vs. +0.2% expected) with data for August also revised up. Initial jobless claims were up a modest 7k to 265k last week while there was good news on the productivity front where Q3 nonfarm productivity rose more than expected during the quarter (+3.1% qoq vs. +2.1% expected). Unit labour costs rose a little less than expected however during the quarter (+0.3% qoq vs. +1.2% expected).
Looking at today’s calendar, this morning in Europe the focus will be on the remaining October PMI’s in Europe (services and composite) where along with the final revisions for the Euro area, Germany and France, we’ll also get the data from the periphery. The only other data due out this morning is the Euro area PPI print for September. This afternoon in the US the overriding focus is unsurprisingly on the aforementioned October employment report at 12.30pm GMT. Along with that, the September trade balance reading will also be released. Away from the data Fedspeak resumes with Lockhart (12.45pm GMT), Kaplan (5pm GMT) and Fischer (8pm GMT) all on the cards. The BoE’s Forbes is also due to speak in Washington this afternoon at 2.45pm GMT while the ECB’s Constancio speaks this evening at 5pm GMT. Earnings wise there are just 11 S&P 500 companies reporting today.
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