Pictet North America Advisors

2019 Weekly Views — November 4

Pictet North America Advisors 2019 Weekly Views — November 4
Pictet North America Advisors

2019 Weekly Views — November 4

Pictet North America Advisors 2019 Weekly Views — November 4

Market update

Tailwinds

The S&P 500 closed the week at 3,066.91, or +1.47% higher. Dow Jones closed at 27,347.36 or +1.44% on the week, and Nasdaq climbed +1.74%. The volatility index VIX closed the week at 12.30 from a 12.65 level a week before. In Europe, Euro Stoxx 600 rose +0.36% in the week. In general, Healthcare and cyclical sectors continued to outperform globally, namely Tech, Industrials and Financials.

The 10y UST closed at 1.71% from 1.79% a week before, or a +0.7% performance for the week. The difference between the 10y UST and the 2y UST yield was +15.42 bps on Friday. The yield curve moved down and steepened. US Corporate Bond spreads: Investment Grade widened 2 bps to 145 bps; High Yield also widened 15 bps to 488 bps. German 10-year Bunds yield closed at -0.38% vs. -0.36% a week ago. European Corporate Investment Grade spreads contracted 2 bps to 113 bps, while High Yield spreads widened 5 bps to 415 bps.

The US Dollar Index (DXY) slipped -0.66% in the week closing at 97.18. EUR closed at 1.1165 (+0.77% weekly); the Japanese Yen at 108.18 (-0.45% weekly) and the Swiss Franc at 0.9857 (-0.91% weekly). Gold gained +0.65% in the week and closed at 1,514.41. Oil was lower with Brent closing at 61.55 (-0.76% weekly) and WTI down at 56.23 (-0.76% weekly).

Macroeconomy

Trade & China
Over the weekend, US Commerce Secretary Ross was positive about a trade deal with China. He also suggested that taxing US consumers of autos partially made in Europe may not be needed. News came after the Chilean President’s cancelation of the APEC and climate summits scheduled for November and December. In China, 5G networks were turned on ahead of the 2020 scheduled date. The services are offered by 3 different state-owned carriers.

FOMC meeting
As expected, the FOMC cut the funds rate target range by 25 bps. Jerome Powell confirmed a pause in the easing cycle and tied further actions to economic data - in contrasts with the more dovish tone during the September meeting. In terms of economic momentum, Powell mentioned that “risks to the outlook as perhaps having moved in a positive direction” and trade developments should have a positive impact on business confidence and activity.

US Economic data
October nonfarm payrolls rose by +128K (vs. estimated +85k) with a strong upward revision to prior month (+95k) to a solid +180K. It is estimated that GM strike may have subtracted at least 40k from the October headline number. Unemployment rate was 3.6%, in line with expectations and up from 3.5% in September. The participation rate increased to 63.3% (vs. estimated 63.1%). Q3 GDP moderated to 1.9% q-o-q, from 2.0% in Q2. There was a wider gap between consumption (resilient at 2.9% q-o-q), and business investment (-3.0%, second negative print). October US ISM manufacturing rose slightly but disappointed again to 48.3 vs. estimated 48.9 (prior 47.8).

Global economic data
In Europe, Euro area Q3 GDP came in at +0.2% q-o-q, the same as in Q2. Country-wise, France grew +0.26%, Italy +0.1% and Spain +0.43% - broadly the same pace in Q3 as in Q2. Germany Q3 figures will be released mid-November. Headline inflation fell to 0.7% y-o-y in October from 0.8% y-o-y in September. In China, two manufacturing PMIs show significant differences in recent months. The official PMI declined to 49.3 from 49.8 in September, while the Markit PMI rose further to 51.7 from 51.4 in the previous month - the Caixin survey includes more SMEs/private sector companies compared to the official survey which is broader and includes more of the sovereign/quasi sovereign actors.

Highlights

Q3 earnings season
Last peak week of Q3 earnings season. With 72% of the S&P 500 having now reported, the earnings growth rate improved to -1%. 80% of reporters have beaten consensus EPS expectations, with earnings +4.9% above expectations. In Europe, with 60% of the Euro Stoxx 600 having reported, earnings growth has been -2.94% so far. Still, 55% of companies have exceeded analyst’s estimates by a +2.26% average margin. The Q3 earning season will slow down this week with another 90 US large cap companies expected to report. In Europe, around 25% of the Euro Stoxx 600 will report.

Curve steepening
The US Treasury yield curve moved down across maturities and steepened. The largest move was seen in maturities up until 6 months, large enough to offset lower longer rates and reverse the curve inversion. 

Corporate activity
We are seeing signs of consolidation in several sectors. Last week, auto-makers Peugeot and Fiat Chrysler officially agreed to merge, creating the world’s fourth-largest automaker with estimated 8.7 million in annual vehicle sales, behind Volkswagen, Toyota and Renault-Nissan. Also, LVMH announced its interest to acquire Tiffany’s to strengthen the Jewelry segment. Lastly, Google confirmed its USD 2.1 bn acquisition of Fitbit.

What to watch

Monday: Euro zone Manufacturing PMIs (Oct.); US Durable goods orders (Oct.)

Tuesday: UK PMIs (Oct.); US Trade balance (Sept.); US Markit PMIs (Oct.)

Wednesday: Japan PMIs (Oct.); Germany Factory Orders (Oct.); Euro zone Services & Composite PMIs (Oct.)

Thursday: Germany Industrial Production (Oct.); BOE Meeting; US Initial Jobless Claims

Friday: Japan Labor Cash Earnings (Sept.); US Wholesale Inventories (Sept.)

Investment team ― Pictet North America Advisors