Yesterday was another testing day for equity markets with the Dow closing down nearly 400 points with further unsettling losses in the tech sector. Apple was down another -4% yesterday and Facebook down a further -5.7%; this means there is at least somebody who has now lost 20% on Apple stocks in the past month, along with everyone else who has lost money buying the tech giant in the past 3 months (and still holds the stock).
In a bid to ease the pressure on New Mexico and West Texas’s infrastructure, education and healthcare systems, caused by the boom in shale gas and oil production in the Permian Basin, more than 15 energy companies have pledged USD100m to the local economies. Among the energy companies involved, Royal Dutch Shell, Exxon Mobil and Chevron will help back a consortium called the Permian Strategic Partnership. USD100m sounds like a big number, however, when you consider the Permian Basin covers approximately 75,000 square miles (the whole of the UK is 93,500 square miles) the number may/will need to grow.
Oil has had a torrid time of late with the Brent Crude price trading down ~22% from its October high. Suhail Al Mazrouei, the UAE Energy Minister and President of OPEC stated that OPEC+ needs to review its strategy and it will adjust projection to balance the market stating: ‘We have cut in the past to reach the market balance, and if we need to cut production to keep the market balanced, we will’. This follows Saudi Arabia advocating a 1million bpd cut to production earlier in the week.
Theresa May will have to fight for her political life in the coming days as a growing revolt from within her own party threatens to derail her plan for the UK to leave the EU. According to some news outlets, there may be as many as 48 letters of no confidence in the PM lodged with the Conservative 1922 Committee by lunchtime today. Already today we have seen the Northern Ireland Minister, Shailesh Vara, resigning saying he can in no way support the Brexit deal as it stands, believing it ‘leaves the UK in a halfway house with no time limit on when we will finally be a sovereign nation’. Naturally, the Labour party and the SNP has already said that it will vote against any Brexit deal.
After nearly 600 days of waiting, news of a draft Brexit treaty hit the wire; yet markets showed their disillusionment as sterling bounced less than a penny and then weakened again below yesterday’s close, and at time of writing hovers below 1.2950 against the dollar. The scant enthusiasm reflects the scant political endorsement of the deal – with antagonizing of the draft deal from both Brexiteers and Remainers even before they had a chance to evaluate the 400-500 page outline. Boris Johnson stated he would vote against this “vassal state stuff” that would leave Britain following unreasonable EU rules.
Italy’s revised draft budget is due to be submitted to the European Commission today. Deputy Prime Minister Luigi Di Maio of the Five Star Movement has insisted that the government will adhere to the spending commitments it pledged to the public during the elections to “be a credible country”, aggravating tensions with the European Commission (EC), which expects a budget cut to be presented.
In a stark warning last week, Ewald Nowotny, a European Central Bank Governing Council member said that Italy is as close as it gets to being ‘too big to fail’. Nowotny went on to say that although Italy ‘is a core country of the European Union, nothing in the world is ‘too big to fail,’ but if anything comes close, it’s Italy. However, when in doubt, nothing is ‘too big to save, either’.
Slower growth with increased risks and uncertainty was a common theme in the European Commission’s Autumn 2018 Economic Forecast and the IMF’s Regional Economic Outlook for Europe. Both look for a deceleration in the rate of growth in the Euro Area: the IMF forecasts growth of 2% in 2018 falling to 1.9% in 2019 and 1.7% in 2020. The EC is slightly more optimistic with Euro area growth of 2.1% in 2018 but also has growth falling to 1.9% and 1.7% in 2019 and 2020.
The big question from the outcome of the US midterm election is the stance of the Democrat held house in regard to the President. Trump yesterday held out an olive branch with one hand asking the House to come up with infrastructure spending plans and middle-class tax cut proposals, however, in the other hand he seemed to have a sledgehammer.
Threatening retaliatory investigations against minority senate democrats if the House increase investigations into the Trump administration or Russia meddling, he said the Democrats risk a ‘war like posture’ between the two parties.
Although the Republicans just lost the House, giving Trump’s adversaries real power to subpoena him in the near future, the President has remained his ever-congratulatory self. "Tremendous success tonight. Thank you to all!" was his tweet summing up his feelings on the results: clearly focusing more on the still disappointing results for the Democrats who failed to show any strength in Senate elections, especially across the South.
Here we are at the midterm elections with all 435 seats in the House of Representatives and 35 seats, about a third, in the Senate up for grabs. Currently the Republicans have a 235-to-193 majority in the House and a 51-to-49 hold in the Senate.
It would appear that the polls are suggesting; yes the polls remember Brexit and the last UK election, that the Democrats will flip the house with a probability up around 86% but that the Senate will be held by the Republicans with an 83% probability.
At the opening of the China International Import Expo (CIIE), China’s President Xi Jinping pledged to cut import tariffs and continue to broaden market access for foreign companies. Xi says he now expects China to import USD10tn worth of services and US30tn worth of goods over the next 15 years, a step up from the USD24tn worth of goods that Xi estimated China would import last year. The trade fair attracts about 3,000 companies and interested parties from around the world, all looking for a slice of China’s huge consumer market.
Today’s October non-farm payroll release showed 250,000 jobs added which was above expectations of 200,000 jobs created, although the previous month’s figure was revised down by 16,000 to 118,000 from 134,000. The unemployment rate held at 3.7% and the participation rate rose marginally to 62.9% from 62.7%. But the standout news is the 3.1% yoy surge in average hourly earnings, which is the largest annual jump in pay since 2009 (when it was as high as 3.6% just before slumping to under 2% for most of the next three years). The large rise in wages was in line with forecasts, which had expected October’s figure to beat the previous month’s year-on-year rise of 2.8%.
Latest data from the US Energy Information Administration (EIA) records the US as the world’s top oil producer during August with output rising to 11.346 million barrels a day (mbd) beating Russia at 11.2 mbd and Saudi Arabia at a mere 10.5 mbd.
This is the largest recorded increase in US production since data began in 1920 and some are suggesting that by 2030 US production will be at around 16.5 mbd.
October looks set to become the worst performing month for global equities in over 6 years, and down -8% at present this could be the worst month for the S&P 500 in 8.5 years. Even the market adage, “Nobody ever got fired for buying IBM" looks questionable after the company lost a quarter of its value in October, having only just held its value over the first 3 quarters: vastly underperforming the tech sector.
President Trump has already warned that further tariffs would follow if he does not get the concessions he feels are required from China. The timing of his latest threats are a little surprising given the intended meeting of the two leaders at the G20 meeting in Buenos Aires in November and the further $200 billion of import tariffs due to move from 10% to 25% on January 1st.
It is reported that the US is preparing a further $257 billion of trade tariffs should the talks fail to reach an agreement and that these further penalties could coincide with the Chinese Lunar New Year holidays in early February.
Far-right candidate Jair Bolsonaro has been voted in as the next Brazilian President securing 55.1% of the vote, convincingly ahead of the Workers’ Party candidate Fernando Haddad who secured 44.9% of the vote.
Bolsonaro’s anti-corruption and anti-crime rhetoric has obvious voter appeal: according to the BFPS there were a record 63,880 homicides in Brazil in 2017 and the Workers’ Party has been unable to distance itself from the Lava Jeto or Car Wash scandal.
Bahrain has been one of the GCC member states most negatively impacted by the fall in the oil price since mid-2014: not only does it have one of the highest fiscal breakeven prices but it has weaker financial buffers to cushion the impact. Fiscal adjustments were insufficient to offset lower oil prices so Bahrain ran double digit fiscal deficits eating into its asset buffers and pushing up government debt levels to 89.2% for 2017 (Moody’s estimate including debt held by the central bank) from 44.4% in 2014.
Yesterday, for the second time this month the S&P 500 fell more than -3%. What had been 11% year-to-date return in the first three quarters is down to just 0.88% this month; though most of those who moved into equities during 2018 will now be holding losses (unless the timed their entry on one of the only 21 of 206 trading days that the index has been lower than where it is now). With 14 down-days and only 4 up-days so far in October, markets are looking around guessing how many are ready enough to call the bottom, and confident enough to risk catching a falling knife.
Again the euro took a hit touching 1.14 versus the dollar earlier today following: first yesterday’s unprecedented demands by the European Commission on the Italian government to revise their budget for 2019, followed by today’s weak PMI data across European majors – including 1 and 2 point shortfalls from forecasts for German manufacturing and services respectively.