Pictet North America Advisors

2019 Weekly Views — October 7

Pictet North America Advisors 2019 Weekly Views — October 7
Pictet North America Advisors

2019 Weekly Views — October 7

Pictet North America Advisors 2019 Weekly Views — October 7

Market update

Concerns about economy

The S&P 500 closed the week at 2,952.01, or -0.33% lower in the week. Dow Jones closed at 26,573.72 or -0.92% weekly return, and Nasdaq gained +0.54%. The intra-week move was large with the S&P 500 trading on a range between 2,855 and 2,992. The volatility index VIX closed the week at 17.04 from a 17.22 level a week before, however it spiked over 21 levels on Wednesday and Thursday. In Europe, Euro Stoxx 600 traded down -2.95% in the week, due to economic and trade concerns. The German DAX closed the week down -2.97% and the UK FTSE 100 underperformed with -3.71% weekly return.

The 10y UST closed at 1.53% from 1.68% a week before. After touching 1.75% on Tuesday, the yield moved down by -14% until Friday. The difference between the 10y UST and the 2y UST yield was +11.93 bps on Friday (vs. +4.83 bps a week ago) and remained positive during the entire week. The yield curve moved down and steepened: 1mo USD from 1.86% to 1.64% yield, 3mo UST from 1.78% to 1.68% yield, 2y UST from 1.63% to 1.40%, 5y UST from 1.56% to 1.35% and 30y UST from 2.13% to 2.01%. US Corporate Bond spreads: Investment Grade widened 7 bps to 157 bps; High Yield widened 47 bps to 514 bps. German 10-year Bunds yield closed at -0.58% vs. -0.57% a week ago.

The US Dollar Index (DXY) lost -0.27% in the week closing at 98.84. EUR closed the week at 1.0979 (+0.36% weekly); the Japanese Yen closed at 106.93 (-0.91% weekly) and the Swiss Franc at 0.9957 (+0.48% weekly). Gold gained +7.75% in the week and closed at 1,504.76, trading as low as 1,460 on Tuesday. Oil was lower with Brent closing at 58.43 (-5.62% weekly) and WTI also down at 53.01 (-5.19% weekly).


Economic data
The US ISM Manufacturing index came in at 47.8 vs. 50.0 expected. Components were also lower with new orders and production indexes both at 47.3 and the employment index at 46.3 - lowest level since June 2009. It contrasts with the Markit manufacturing PMI in expansionary territory, announced at 51.1 as expected. Also, the Non-Manufacturing ISM dropped from 56.4 in August to 52.6 in September. The Markit Services PMI was in line at 50.9, same as August. In Euro area, the September Composite PMI was revised down from 50.4 to 50.1, with the Manufacturing PMI at 45.7 and services at 51.6. PMI details were lower than expected in terms of new orders and employment. The German Manufacturing PMI was 41.7 and Services PMI was 51.4. China showed signs of manufacturing stabilization with the PMI at 49.8 and Caixin at 51.4.

September jobs
Nonfarm payrolls came in at 136k vs. 145k estimated, prior month was revised up to 168k vs. 130k. Unemployment rate ticked down to 3.5% vs. 3.7% estimated (lowest level since 1969) and participation rate was in line at 63.2%. Average hourly earnings grew +2.9% y-o-y vs. +3.2% in August.

Trade tensions
The WTO authorized US to impose tariffs on $7.5 Bn worth of European exports annually - citing the EU’s subsidies to Airbus. US said tariffs would start Oct. 18, with 10% levies on jetliners and 25% duties on other products including Irish and Scotch whiskies, cheeses and hand tools. US and China are set to restart trade negotiations on October 10th.

RBA cuts rates
The Reserve Bank of Australia (RBA) cut its cash rate by 25 bps to an all-time low of 0.75%, citing slowing global growth and household spending as the housing market loses steam.


Week of two halves
ISM data raised investors’ concerns with the S&P 500 dropping -3.07% on Tuesday and Wednesday. On Friday, the September jobs report triggered a +1.44% daily rally in the index. Bonds traded up and market expectations for an October 30th Fed rate cut raised from 40% on Monday to 73% on Friday.

Oil output
Saudi Arabia Energy Minister Prince Abdulaziz bin Salman announced that capacity was fully restored at 11.3 MM barrels per day after last month attack to the Saudi Aramco plant. He mentioned the listing of Saudi Aramco as the current kingdom's focus. Brent closed last week at 58.37, in line with pre-attack levels.

On China
President Xi Jinping marked 70 years of Communist Party rule on Tuesday, he stated that China must maintain lasting prosperity and stability in Hong Kong and Macau. Protests in Hong Kong escalated after passing a law to ban face masks.

On Brexit
PM Boris Johnson keeps pushing for an October 31st Brexit after submitting an updated proposal to the EU. It included a plan on the Irish backstop: Northern Ireland and the Republic of Ireland would form a single market for all goods for four years. The Pound moved in a range between 1.2207 and 1.2413 in the week to close at 1.2333 on Friday.

What to watch

Monday: German new orders (Aug.)

Tuesday: German Industrial Production (Aug.); US PPI (Sept.)

Wednesday: US FOMC minutes (Sept.)

Thursday: UK monthly GDP (Aug.); US CPI (Sept.)

Friday: U. of Michigan Consumer Sentiment (Oct. Prel.)

Investment team ― Pictet North America Advisors