If the US/China trade war was the cause of the October selling, then the start of November has more to go as this narrative turns to deal making. The relief rally back in risk assets is the first chapter of the last week but not the full story for the month ahead.

We have moved into a post-modern Goldilocks fairy-tale for policy and economics. We no longer believe in buying the bottom but in selling the top.  \The week ahead brings the US mid-term elections – expected to deliver gridlock; the RBA, RBNZ and FOMC rate decisions – all expected on hold – and a host of important data starting with Services PMIs and ending with Chinese inflation and trade reports – all expected to show slowing global growth and less price pressures.

Interest rates are the bogeyman for the straight shot higher in equities. Markets want to believe in the relief trade but need constant reassurances that inflation remains tame, that policy shifts gradual and growth continues at target, all of which requires a bounce for Europe, Japan and China into 4Q. US growth and its divergence is a complicated issue as well given that FOMC hikes need to be met with higher real growth and improving productivity to keep margins robust.

Markets closed Friday with insufficient momentum to hold the equity bounce and we had little positive news to support markets further over the weekend, leaving us vulnerable to more harsh language about politics and policy driving prices into Monday. The early snapshots for 4Q growth are not bullish enough to hold the present relief trade either, but perhaps this changes with the heavy news agenda ahead. Relief by its definition is temporary.

What Happened over the Weekend?  

The US weekend focus was on the upcoming mid-term elections – the most expensive in history at an estimated $5.2 billion in spending for the House and Senate races.

• North Korea warns on future talks - North Korea's foreign ministry said in a statement Friday that the "improvement of relations and sanctions is incompatible," Sky News reported. Against this the Friday Fox News interview with US Secretary of State highlighted the US position - A lot of work remains, but I'm confident that we will keep the economic pressure in place until such time as Chairman Kim fulfills the commitment he made to President Trump back in June in Singapore," Pompeo said.
• UK Sunday Times reports on new plan for Irish Border, but UK PM May’s office denies it. Her office has dismissed as “speculation” a newspaper report that suggests an all-UK customs deal will be written into the legally binding agreement governing Britain’s withdrawal from the EU.

Question for the Week Ahead: Is this the peak? 

The focus on turning points for markets remains essential with many wary of the price action as we have shifted from buying dips to selling rallies. The idea of a top to the cycle drives much of the fear trade.  Peak political and trade fears, peak earnings, peak growth, peak rate fears – these are the worries that dominated the last week even as equities globally bounced back with the US/China getting a majority of credit for turning markets as global trade has weakened since Trump talked tariffs and this has moved throughout emerging and developed markets.

So, the key worry in the next week will be to prove that US/China deal hopes are real. Many of the cynics argue that Trump will change his language after the Tuesday vote. The President told reporters Friday, “We’ll make a deal with China, and I think it will be a very fair deal for everybody.” The November 30 meeting of Xi/Trump at the Argentina G20 meetings has become an event risk for markets.

The second issue will be to see the November 6 election results and the market reactions. Current RealClear Politics polls show a House just slightly controlled by the Democrats and a Senate still barely in Republican control. The reaction of markets to this result is expected to be one of relief. Historically midterm elections have not had a major impact on the financial markets or provided reasons for investors to make major changes to their investment plans.

The third issue is US earnings for 3Q but more importantly the outlook for 4Q and beyond.The 3Q earnings are beating expectations at 24.9% but stocks have little to show for it.This is how Factset sees the outlooks:

• For Q4 2018, analysts are projecting earnings growth of 15.0% and revenue growth of 6.8%.
• For CY 2018, analysts are projecting earnings growth of 20.6% and revenue growth of 8.6%.
• For Q1 2019, analysts are projecting earnings growth of 6.0% and revenue growth of 6.6%.
• For Q2 2019, analysts are projecting earnings growth of 6.5% and revenue growth of 5.1%.
• For CY 2019, analysts are projecting earnings growth of 9.4% and revenue growth of 5.4%

The fourth issue is the Fed – as its meets next Thursday – and its decision for December is expected to be telegraphed in its statement. The risks of a December hike are about 75% - something that means the FOMC will need to change wording to not see it increase to 90% in the next few weeks.

Market Recap

Trade fears and economic data dominated the last week with Monday lows reversed into Friday on hopes for US/China trade deal inspired by a Xi/Trump phone call and reports for a G20 follow up framework. The weaker PMI reports from China and Europe were offset by a stronger US jobs report. Rates rose globally with risk-on sentiment. The US added 250,000 NFP jobs with 3.1% y/y earnings and a 50-year low 3.7% unemployment rate.

US earnings continued to beat at 24.9% blended rate for 3Q. The central bank meetings were non-events with BOE on hold, but the Autumn budget showing plans for bigger spending and May continuing to win on the Brexit deal story. The BOJ also kept its policy unchanged but tweaked its bond buying and the 7-2 vote continues to show push back on the 0% 10Y rate. In EM, Mexico was hit on the airport referendum rejection with AMLO seeing his honeymoon with the market end.Brazil saw a further rally as Bolsonaro’s victory was as powerful as many expected.

Equities

The MSCI all-country World Index rose 3.13% on the week with lows Monday, Oct 29 at 469.56.The MSCI EM index jumped 6.08% to 996.72 on the week with lows Monday at 930.33 against 1,002.27 Friday highs. The biggest gains were in Asia while the US lagged.The S&P 500 3Q earnings are still strong with 74% of the companies reporting, blended earnings are 24.9%, the second highest since 3Q2010 according to Factset. Next week brings another 77 companies reporting.  

• US S&P500 rose 2.42% to 2,723.06 on the week. Within the S&P 500 Index, the materials sector posted the strongest returns, while utilities shares lagged. The large information technology sector also underperformed, held back by a sharp drop in Apple shares, hit after the firm would no longer break out sales reports and warned on holiday sales.The DJIA rose 2.36% to 25,270.83 on the week and the NASDAQ rose 2.65% to 7,356.99 on the week. The Cboe VIX fell 4.65pp to 19.51% on the week after hitting 8-month highs Monday. Also notable that the Russell 2000 (small caps) ended a 6-week losing streak up 4.2% to 1548.73
• The Stoxx Europe 600 rose 3.33% to 364.08 on the week. This was the biggest gain for a week since December 2016. The German DAX rose 2.84% o 11,518.99 on the week, the French CAC40 rose 2.71% to 5,102.13 on the week and the UK FTSE rose 2.23% to 7,094.12 on the week. The Italian FTSE MIB rose 3.78% to 19,390.34. The biggest winner was the Swedish OMX up 4.45% to 1,551.39 as the tech sector rallied the most and the Riksbank minutes were balanced for a Dec or Feb hike.
• The MSCI Asia Pacific rose 4.80% to 153.63 on the week. The biggest winner – Hong Kong Hang Seng up 7.16% to 26,486.35 on the week. Second is India and the Nifty 50 up 5.21% to 10,553.00. The Japan Topix rose 3.93% to 1,658.76 while the Nikkei rose 5% to 22,243.66 on the week.The Chinese Shanghai Composite rose 2.99% to 2,676.48 while the Korea Kospi rose 3.40% to 2,096.00 on the week. The Australian ASX rose 3.25% to 5,849.21.

Fixed Income 

Given the usual month-end and new month economic data, the focus on stocks was different but not surprising given the extent of the October selling. Risk-on returned to markets so global bonds sold off. The US funding plans for 4Q was also released and surprised with less front end issuance but that was lost after a stronger US jobs report.US rates remain on target for 2-3 more hikes according to the market and the data supported this view.

The FOMC meeting next week will be the event to add to this and so, rates are back as the counterbalance to equities given the geopolitical tensions are lower and global growth concerns recede.Next week also brings the Iran Sanctions and that maybe put the focus back on oil, which had a rough week, but remains a key part of inflation in 2018. The US supply and EU supply will be the other key for fixed income as demand needs to meet supply in a potentially risk-on environment. The US sells $45 billion in 13-week, $39 billion in 26-week, $26 billion in 52-week bills along with $37billion in 3Y, $27 billion in 10Y and $19 billion in 30Y bonds.

• US bonds see bear curve steepening after US jobs and US/China trade hopes: 2Y up 10bps to 2.903%, 3Y up 115bps to 2.97%, 5Y up 13bps to 3.033%, 10Y up 13.5bps to 3.212%, 30Y up 14.5bps to 3.454%.
• Canadian 10-year bond yields rose 14bps to 2.53% on the week with the BOC comments dovish, the data mixed but the US driving.
• Japan JGB yields rose 1.5bps to 0.114% on the week with the BOJ unchanged but tweaking buying plans and cutting CPI/growth story agiain
• Australian 10-year bond yields rose 10bps to 2.69% on the week with weaker China PMI offset by US/China trade hopes and equities bouncing. Data mixed.
• UK Gilt yields rose 11bps to 1.49% on the week with the BOE hawkish and Brexit deal hopes higher.
• German Bund yields up 7.5bps to 0.425% on the week with the data weaker but the risk-mood stronger – Merkel story ignored.
• French OAT yields rose 4.5bps to 0.78% on the week with French PMI better but Macron polls weaker
• Italy BTP yields fell 12.5bps to 3.315% on the week with relief on ratings story continuing but budget/EU impasse still looms
• Spain Bono yields unchanged at 1.567% on the week with the PMI in Spain better but Italy still main spread driver
• Portuguese 10-year bond yields off 1bps to 1.875% on the week with focus on supply next
• Greek 10-year bond yields off 1bps to 4.24% on the week – like others watching Italy, growth and waiting for ECB reaction to markets.

Foreign Exchange

US dollar index rose 0.2% to 96.54 on the week on the week but failed to convincingly break out over 97 again.Rate moves Friday after jobs lifted the USD up 0.5%. Focus is on 94.80-97 still.  In Emerging Markets, USD was mostly weaker – EMEA: ZAR up 2.1% to 14.299, TRY up 3% to 5.429, RUB off 0.85% to 66.175 – hit by oil; ASIA: TWD up 1% to 30.66 – helped by tech bounce, KRW up 1.7% to 1122, INR up 1.4% to 72.437 and CNY up 0.75% to 6.8910; LATAM: MXN off 3.25% to 20.014 – hit on AMLO/Airport, BRL up 0.1% to 3.702, ARS up 3.7% to 35.493. 

In Crypto Currencies – still calm – BTC off 0.85% to $6350, ETH off 0.65% to $200.50.

• EUR: 1.1390 off 0.15% on the week with Merkel, Italy and growth hitting but risk-mood reversal and earnings helping 1.1300-1.1500 still key.
• JPY: 113.20 up 1.15% on the week with EUR/JPY 128.90 up 1%. 112 still key against 114 with equities the driver and BOJ on hold helping. EUR/JPY watching 130 again.
• GBP: 1.2970 up 1.1% on the week with EUR/GBP .8780 up 1.2% with GBP helped by Brexit hopes and BOE hawk talk with data mixed.
• CHF: 1.0035 up 0.65% on the week and EUR/CHF 1.1425 up 0.45% - less Italy pain, better stocks, tracks JPY with 1.00 pivot for 0.98 or 1.02.
• CAD: 1.3110 flat on the week. Focus is on 1.30 or 1.32 with BOC dovish enough, data mixed enough for doubts.
• AUD: .7195 up 1.4% on the week with China/US trade hopes key, metals mixed and data suggesting RBA still holding. NZD .6660 up 2.15% - beats out the A$ with focus on China, rates and crosses.

Commodities

The S&P/GSCI total return index fell 3.85% to 2658.60 on the week.

• Oil: $63.14 off 6.58% on the week. Brent $72.83 off 6.17% on the week – with technical breaks finding fundamental excuses – Saudi pumping, less fear about Iran sanctions, US inventories.WTI watching $62-$65 for next breakout while Brent $72.50 pivotal for $70-$75 trading.
• Gold: $1232.90 off 0.1% on the week. USD driving most of the price action with $1220-$1236 still important. Silver up 0.1% to $14.71 on the week with $14.50 base against $14.80 breakout hopes. Platinum up 4.25% to $868.20 while Palladium up 1.2% to $1118.80.
• Corn: $371.25 up 0.95% on the week. Wheat up 0.7% to $508.75 and Soybeans up 3.58% to $887.75 – all about USD and US/China trade talk with Soybeans leading the hope trade.
• Copper: $2.8320 up 1.1% on the week with Dec Futures up 2.4% to $2.8070. Tracking stocks and China hopes but hurt by PMI there.Iron Ore fell sharply this week – with November off 2.9% to $72.99 and Dec $71.24.

Calendar for the Week Ahead

Another busy week for data, politics and central banks with the US mid-terms, US FOMC, US Service ISM all important. The global Service PMI reports will also set the tone for 4Q global growth along with the start of the China monthly data with trade and CPI/PPI. The RBA/RBNZ decisions will be watched for their reactions to China slowing along with their own data. The UK gets a heavy load with GDP, retail sales, IP, trade while Europe also gets more earnings and heavy bond selling schedule.US 30Y sale maybe an event given the move up in rates last week and the FOMC decision Thursday.

Monday, November 5: Global Service PMIs, Xi speech, US Service ISM, BOJ minutes

• 0430 pm Australia Oct AIG Services PMI 52.5p 53.5e
• 0650 pm Japan BOJ Policy Minutes
• 0730 pm Japan Oct Services PMI 50.2p 50.5e
• 0800 pm BOJ Kuroda speech
• 0845 pm China Oct Caixin Services PMI 53.1 52.9e / Composite 52.1p 51.9e
• 0200 am China President Xi speech
• 0300 am Spanish Oct unemployment change 20.4k p 49.1k e / cons confidence 90.6p 92e
• 0430 am UK Oct Services PMI 53.9p 53.3e
• 0430 am EU Nov Sentix Investor Confidence 10.1 11.4
• 0810 am BOC Poloz speech
• 0945 am US Oct final Services PMI 53.5p 54.7e
• 1000 am US Oct Services ISM 61.6p 59.3e
• 1130 am US 3M and 6M bill auction
• 0100 am US $37bn 3Y note auction
• 0200 am Fed 3Q Senior Loan Officer Survey

Tuesday, November 6: RBA decision, EU Services PMI, US JOLTS, US Mid-Term elections

• 0700 pm RBNZ 4Q inflation expectations 2%p 2%e
• 0830 pm RBA rate decision – no change from 1.5% expected
• 0200 am German Sep factory orders (m/m) 2%p -0.6%e
• 0315 am Spanish Oct Services PMI 525p 51.8e
• 0330 am Sweden Sep Industrial Production (m/m) 0.6%p 1%e (y/y) 3%p 5.2%e
• 0345 am Italy Oct Services PMI 53.3p 52e
• 0350 am French Oct final Services PMI 54.8p 55.6e / Composite 54p 54.3e
• 0355 am German Oct final Services PMI 55.9p 53.6e / Composite 55p 52.7e
• 0400 am Eurozone Oct final Services PMI 54.7p 53.3e / Composite 54.1p 52.7e
• 0500 am UK 10Y Gilt sale
• 0500 am Eurozone Sep PPI (m/m) 0.3%p 0.3%e (y/y) 4.2%p 4.2%e
• 0700 am ECB Lautenschlager speech
• 0830 am Canada Sep building permits (m/m) 0.4%p 0.3%e
• 1000 am US Sep JOLTS job openings 7.136m p 7.1m e
• 1000 am US Nov IBD/TIPP economic optimism 57.8p 59.2e
• 1130 am US sells 4-week and 52-week bills
• 0100 pm US sells $27bn 10Y notes
• 0430 pm US weekly API oil stocks 5.7mb p 4.1mb e

Wednesday, November 7: NZ jobs, German IP, US 30Y bond sale

• 0430 pm Australia Oct Construction PMI 49.3p 50.1e
• 0445 pm New Zealand 3Q unemployment 4.5%p 4.5%e / Labor Cost (y/y) 2.1%p 1.9%e
• 0830 pm BOJ Funo speech
• 1200 am Japan Sep LEI 104.5p
• 0200 am German Sep industrial production (m/m) -0.3%p +0.1%e
• 0400 am Italy Sep retail sales (m/m) 0.7%p -0.1%e
• 0500 am China Oct FX reserves $3.087trn p $3.068trn e
• 0500 am Eurozone Sep retail sales (m/m) -0.2%p +0.1%e
• 0540 am German 10Y Bund sale
• 0700 am Polish Central Bank rate decision – no change from 1.5% expected
• 1000 am Canada Oct Ivey PMI 50.4p 50.9e
• 1030 am US weekly EIA crude oil stocks 3.22mb p 2mb e
• 0100 pm US $19bn 30Y bond sale
• 0300 pm US Sep consumer credit $20.08bn p $17.25bn e

Thursday November 8: RBNZ rate decision, Japan Trade, China Trade, German trade, EU 4Q economic forecasts, FOMC rate decision.

• 0300 pm RBNZ rate decision – no change from 1.75% expected.
• 0600 pm Japan Nov Reuters Tankan 28p
• 0650 pm Japan Sep Trade and C/A surplus Y1.838trn p Y1.772trn e
• 0650 pm Japan BOJ Summary of opinions
• 0650 pm Japan Sep machinery orders (m/m) 6.8%p -10%e (y/y) 12.6%p 7.7%e
• 0900 pm China Oct Trade Surplus $31.69bn p $36.27bn e / exports 14.5%p 12%e / imports 14.3%p 14%e
• 1200 am Japan Oct Ecowatchers survey current 48.6p 48.9e / outlook 51.3p
• 0145 am Swiss Oct unemployment 2.5%p 2.5%e
• 0200 am German Sep trade surplus E18.3bn p E21.2bn e / exports -0.1%p +0.3%e
• 0245 am French Sep trade deficit E5.6bn p E6.2bn e / C/A E1.6bn p E2bn e
• 0400 am Eurozone 4Q economic bulletin / commission forecasts
• 0405 am French 10Y bond sale
• 0440 am Spanish 3-5-10Y bond sale
• 0830 am Canada Oct housing starts 189k p 195k e / prices 0.4%p 0.3%e
• 0830 am US weekly jobless claims 214k p 215k e
• 0915 am ECB Coure speech
• 1200 pm US WASDE report
• 0200 pm FOMC rate decision – no change from 2.25% expected

Friday, November 9: RBA SOMP, China CPI/PPI, UK 3Q GDP, IP, trade; US PPI, US Consumer Sentiment.

• 0730 pm Australia Sep home loans -2.1%p
• 0730 pm RBA statement on monetary policy
• 0830 pm China Oct CPI 2.5%p 2.5%e
• 0830 pm China Oct PPI 3.6%p 3.4%e
• 0430 am UK 3Q GDP (q/q) 0.4%p 0.6%e (y/y) 1.2%p 1.5%e / Sep (m/m)  0%p 0.1%e
• 0430 am UK Sep industrial production (m/m) 0.2%p 0.1%e / manuf. -0.2%p 0.1%e
• 0439 am UK Sep goods trade deficit G11.195bn p G11.250bn e / total G1.27bn G1.1bn e
• 0815 am Fed Quarles speech
• 0830 am US Oct PPI (m/m) 0.2%p 0.2%e / core 0.2%p 0.2%e
• 1000 am US Nov preliminary Michigan Consumer Sentiment 98.6p 98.0e
• 1000 am US Sep wholesale inventories 0.3%p 0.3%e

Conclusions: Is the US growing fast enough?  

The fear of a peak in US growth in late 2019 or early 2020 continues to hang over markets. The US unemployment report puts some of those fears away – but there are other things at play with the US risks of peak earnings and with demographics and deficits dogging the outlook as well. The labor force participation in the US is an aging issue. It’s never recovered from the new millennium highs. The drop in the US jobless rate is partially the story of a shrinking labor market, putting the US on par with Japan for slow growth, low unemployment, lower demand, lower inflation expectations.

The US growth is also necessary to support the profit margins for corporations as they face higher inflation whether from materials or people. 3.1% wages in the US mean companies need some gains in productivity and growth closer to 2.5% to just stay stable. Measuring the growth of the economy against the value assigned by the market is the stuff of the Buffett indicator and the Q ratio – both suggest we remain overvalued despite October 7% drop and the 3Q growth at 3.5%.

Markets need to see some progress on the US debt to GDP to take comfort in the present fiscal plans not just being a late business cycle mistake. There is a view that you can grow your way out of debt. Others see the size of that debt as a key limit to this theory. The USD and the FOMC play a role in reflecting this dynamic tension. The next week will highlight both with the USD watching 97 breakouts or the curse of a double top, while the US bonds are in the same position with 10-year yields at 3.25%.Growth and policy support both.