Weekly Market Insight - October 23rd 2017

Oct 23, 2017 Written by LAT Staff

U.S. equities closed at record levels on Friday, October 20th with the broad benchmark S&P 500 recording a sixth week of gains. This should be seen as directly linked to the Senate passing a budget resolution that increased the expectation that President Trump’s tax-cut plan may make progress.

The Senate’s approval late on Thursday of the 2018 budget roadmap may well allow Republicans to pursue a tax-cut package without the need for Democratic support.

Stocks rallied following the November election of Trump, i.e. the “Trump Bump” on the expectation of his pro-business pledges to cut taxes and reduce regulations.

However, observers of the real economy have pointed out that shares of General Electric posted an initial decline of 6.3% after the new CEO, John Flannery announced that Q3 earnings fell almost 10% and that full year 2017 earnings would be a third below the previous target. The stock ended higher by 1.1%, matching the gain of the S&P industrials index. Still many are concerned as to why the world’s most powerful industrial operator is struggling.

One reason is that the former CEO, Jeff Immelt steered GE away from reliance on the volatile earnings at GE Capital and focused on industry plus oil and gas, just at the time commodity prices crashed. In addition, several acquisitions did not close e.g. $10 Billion was spent to buy Alstrom’s power unit, the deal did not reach conclusion.

European stocks also traded higher on Friday on upbeat earnings reports and the prospects for U.S. tax reforms helped investors shrug off renewed political uncertainty in Spain.

Asia followed a similar path last week although the overall tone remained muted somewhat as investors awaited the outcome of the early Japanese general election held yesterday.

Asian shares were mixed on Monday with Tokyo up sharply as Prime Minister Shinzo Abe’s coalition returned to power with a strong majority, setting the index on the path for its 15th straight daily gain.

As 07:35 BST the Nikkei 225 jumped 1.14%, while in Greater China, the Shanghai Composite inched up 0.11% and the Hang Seng was lower by 0.58%.

Japanese Prime Minister Shinzo Abe has promised to “deal firmly” with North Korea after exit polls suggested he won a clear victory in Sunday’s election. Local media report Mr. Abe’s ruling coalition has retained its two-thirds majority in parliament. This paves the way for Mr. Abe to amend Japan’s post-war pacifist constitution.

One should not overlook the comments of China’s central bank governor, Zhou Xiaochuan who warned that excessive optimism could lead to a “Minsky moment.”

Mr. Xiaochuan is the outgoing head of the PBoC and he said:

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction” 

Take that as a signal that the PBoC is looking for ways to unwind the excessive levels of debt within China.

In the coming week US focused investors will continue to track the news on potential candidates for the Federal Reserve Chair position.

Equities were lifted late Thursday when Politico reported Fed Governor Jerome Powell is the leading candidate to become President Trump’s nominee, which many would consider a continuation of the current stock market-friendly monetary policy. Another name in the mix is Stanford University economist John Taylor.

If the softer policies were to continue at the Fed it would see the reversal of the EURUSD brake down towards the 1.1775 handle. This move was prompted by the thought the US looks likely to have a reasonably hawkish Federal Reserve Chairman going into the future. That would help the Dollar; a softer stance would erode the recent gains. So be attuned to any “Head of Fed” rumour.

In the market watch earnings as the pace of Q3 reports should gather pace, with results from major names such as Advanced Micro Devices, Caterpillar, Eli Lilly, Halliburton, General Motors, Kimberly Clarke and 3M.

European eyes remained fixed on Spain as the Catalonian crisis escalates with Spain set to impose direct rule within days. The Spanish 5-Year CDS spread closed on Friday at +70.87 up from +62.98 one month ago.

On Saturday the Spanish Prime Minister, Mariano Rajoy, announced that he was stripping Catalonia of its autonomy and imposing direct rule from Madrid to crush the regional leadership’s move to secede. The decision prompted anger across Catalonia has escalated Spain’s deepest constitutional crisis since the restoration of democracy in 1977.

In Germany the horse-trading to form a government goes on with many inside the right flank of the CDU unhappy that Chancellor Merkel has wasted a political opportunity by staying too much on the centre ground. They are pointing to the success of Sebastian Kurz, the 31-year-old Austrian politician’s rise to the chancellorship offers a blueprint for revival.

There is a relatively light week of key economic data although what is on the slate is significant.

Not much of note until Wednesday when in the UK preliminary GDP for Q3 will be announced with the QoQ reading unchanged at 0.3% although the YoY figure fading to 1.4% from 1.5%.

On the same day, the US will release Core Durable Goods data and New Home Sales. These are September data points and look for Core Durables at 0.5% same is before and the New Home sales to hold steady at 555,000 from 560,000.

On Friday the Dollar and equities may well be on the back foot as US GDP growth QoQ for Q3 has its preliminary reading. This may be at 2.6% down from 3.1% in Q2.

Have a great week!