November has ended unchanged in price levels from the start of the month, in many markets. Despite the USA Mid-Term elections and a dovish about turn by the US Fed we really have had no net change. The Christmas rally, which occurs 70% of the time, failed to materialise this year – so far.
The S&P500 opened the month at 2732 and is currently trading at 2741, +0.3%. NASDAQ is down 0.7%, the Dow Jones +1.1%. The UK Footsie -0.8%, German Dax -0.8% too, whilst the Japanese Nikkei +2% and the Aussie 200 -1.7%. Most markets would be considered into a well established down trend of lower highs and lower lows.
In FX, the Eurodollar opened the month at 1.1311 and is now trading at 1.1388, +0.6% – 7 7pips higher. The Cable opened at 1.2764, and whilst it did spike to over 1.31 on UK/EU agreement, it was short lived to have a change of 0.1% trading at 1.2781 – 17 pips higher. The Dollar-Yen is up 50 pips for the month, whilst the Loonie has lost 125 pips (-0.9%) to the US on the back of the large sell off in oil. The Aussie and Kiwi currencies were the best performers on the month, the former +243 pips (+3.4%) and the latter +341 pips (+5%).
Gold has traded sideways mostly, currently up $10 at $1,224. The largest move has by far been in the energy sector with West Texas oil down 21%.
Had oil not fallen the Canadian currency too would have had a more positive result like the antipodean currencies. There has been a distinct shift out of stocks into sovereign bonds this year, and the higher yielding currencies, mostly outside of Europe, have benefited from that flow.
The US economy is showing increased signs of having already peaked and the Fed is now backing away from rate hikes in 2019. We most likely will get one more hike on December 20th but expect that to be the last. There is a hostile US political arena that will not likely introduce any significant growth policies as they play tit-for-tat in rejecting proposed bills. Global growth in 2019 seems very unlikely.
For all Trump’s bluster about growth and make America great again, the tax cuts have had very little impact on the GDP. Most corporations used the extra cash to buy back their own stock. With buy backs contributing to over $1 Trillion dollars of market capitalization, yet the stock market is little changed for the year even. The S&P500 opened the year at 2669 and is only 68 points higher (+2%).
The tariffs are having a negative effect that it seems no one in the White House foresaw or are willing to admit. The US Treasury market has priced in one more rate rise between today and December 2019, and then pricing in falls. A clear signal from the smart money that things will not improve. The smart money has also exited the stock market as we discussed last month. Why own an overpriced asset with a yield of 1.8% when you can get better yield from a Treasury note of 2.8% or more.
Looking into December the key events will be the ECB meeting (December 13th) and FOMC (December 20th). Will the ECB blink first? They have been exiting their QE program and stated that it will be fully out by December 2018. Will they complete that promise? There have been many ECB members talking the last few weeks how surprised they are at the poor growth in their region and that global growth is forecast to decrease. The ECB has little wriggle room to spur growth now. Interest rates are already at zero. Will they have to roll back into QE?
Whilst over at the Fed’s FOMC it is highly expected that the will raise rates to 2.75%. This is the neutral level they have mentioned. At 2.75% they see that level of rates as neither being a loose or tight policy setting. From there the focus will be on the Powell conference and the dot plot. Where does the Fed expect rates to be in 2019, or in other words, how strong does the Fed see the US economy to be?