“Betrayal is the only truth that sticks.” (Arthur Miller, 1915-2005)
Pre-event Speculation
With the election noise accelerating faster than
imagined, the market’s pre-event response has been rather resounding. Nine days
in a row of S&P 500 index decline combined with a spike in volatility has
re-confirmed the obvious – markets dislike uncertainty. Is it possible that Sunday’s
changing script of FBI investigation may have stopped the market bleeding? Lots to ponder until the election results.
Amazingly, a scheduled event, like an election, can be
quite tilted, scripted or massively influenced by other forces beyond than the
Federal Reserve. Unlike, market-related events for the last eight years where
the Fed is the dominate figure, the elections present a time where Central
Banks are a secondary market factor. However, like “Brexit” before, the shock
and surprise element of an event (voters’ response) may not last longer than
1-2 days. That’s possible. As pundits quarrel about polls and candidates’
shifting momentum, the markets have noticed that prior assumption of a
one-sided race is note quite clear. The question for investors is not all
about who is going to win. Instead, when the noise dies down regarding election
they ask: How is the Fed’s narrative going to be impactful? Surprise or
no surprise in the election, the Fed’s role and creditability will be under
severe scrutiny in the weeks ahead.
Pinpointing Concerns
Annual returns for S&P 500 are now closer to 2%
coming into weekend, showcasing that the upside is slowing. If there was any
doubt that QE has failed, Japan is a living daily example. Japanese stocks are
down 11%, Bank of Japan (BOJ) is running out of ideas after buying ETFs on
their balance sheet, and their anemic economy is at near dead mode. Central
Banks have painted a narrative that was too smooth for the
"intellectual" class in finance and risk participants, who follow the
messaging. The admission of missing inflation target by BOJ illustrated a
complete defeat and, frankly, failure of low interest rate policy. The
anti-Central Bank rhetoric is not a “revolt of the farmers” or a theoretical
discourse by nonconforming professors. Instead, Japan gave us the prelude of QE,
while England, Europe and US should take notice on the downfall (or
disappointment) of Central Bank reliance.
The failure of Central Banks and the deterioration of
the real economy are not overly discussed in influential circles. To claim that
QE worked (based on rising markets and suppressed volatility) is grossly
misleading, and that’s insulting to avid followers of financial markets with a
semi-decent IQ. Thus, the enraged
investors who have lost faith in Central Banks may make further noise to
re-create the current narrative. When will all of this come to a head? A highly prized mystery that keeps market
participants entertained and odds makers quite busy. Ultimately those
that are heavily bullish on the words of the Federal Reserve might find
themselves being betrayed and enraged at some point. Perhaps, that’s
why there is a cautionary feeling since mid-summer. The tiring game of rate-hike posturing and
guesses is also a bit numbing to observers. More than the election, the faith
of Central Banks remains just as suspenseful.
Conviction Tested
Shares of Tech leaders such as Facebook, Apple, Google,
Amazon and Netflix have enjoyed a stunning run. However, in quarters ahead, impressing
toward another level again is proving to be difficult. The Tech-led boom has
stood out in market where Energy has consolidated, Retail is going through
massive adjustments, and financial services are witnessing pressure from all
sides. Thus, Tech giants’ stocks, which have provided leadership, serve
as the grand leading indicator to sentiment and broad market narrative.
Regardless of the election obsession, grasping the current cycle and big
winners of the current cycle is rather critical. If Tech companies desire to sit on heavy cash
holdings instead of reinvesting, that may say something about their confidence.
More M&A, less supply of shares and risk-hungry investors still reaffirm a
bullish biased environment. Yet, the tech innovative company shares that
disappoint two or three quarters in a row may trigger a shift in sentiment. As
year-end approaches, tracking the big winners is critical when planning for the
next 3-6 months.
Article Quotes:
“Unlike the period from 2008 to 2010, when
interest-rate differentials vastly favored bringing money to China, and the
exchange rate was pegged, the difference between dollar rates and yuan rates
have narrowed substantially, plus the Chinese have to account for the
possibility the yuan will weaken further. That explains why Federal Reserve
rate increases have such a powerful effect on China’s capital flows. The
People’s Bank of China, facing such a large outflow, may feel pressure to stand
aside and let the currency slide further, rather than waste reserves. It
also has to consider that in spending reserves, China’s monetary base shrinks,
hampering efforts to boost the economy. And as the yuan slides, each dollar
spent out of reserves removes a greater quantity of yuan from the monetary
base.” (Wall
Street Journal, November 4, 2016)
“The rate of expansion of the eurozone manufacturing
sector gathered momentum at the start of the final quarter. Growth of
production, new orders, new export orders and employment all accelerated, while
price pressures showed further signs of increasing. The final Markit
Eurozone Manufacturing PMI rose to a 33-month high of 53.5 in October, up from
52.6 in September and the earlier flash estimate of 53.3. This signaled the
steepest rate of improvement in operating conditions since January 2014.The
Netherlands surged to the top of the Manufacturing PMI rankings in October,
with growth accelerating to a 15-month peak. Germany was also a top performer,
expanding at the quickest pace in almost three years.” (Markit, November 2, 2016)
Key Levels: (Prices as of Close: November 4, 2016)
S&P 500 Index [2,085.18] – The
struggles around 2,100 are re-visited again. For a while, the charts have
suggested waning momentum around 2,100 for most of 2015 and 2016. Clearly,
there is a collective mental hurdle as well as technical warning where buyers
seem to fade.
Crude (Spot) [$44.07] – Failed
to move above $50 once again. The sharp recent sell-off suggests that a
breakout is not quite feasible in the near-term. Yet, crude finds itself back
in the $42-50 range, which has mostly defined the trading ranges for 2016. Participants are still waiting for a notable
supply-demand shift to create a new catalyst.
Gold [$1,302.80] – Firmly holding above $1,260-$1,280. This
serves as a reminder that buyers are eager around those ranges. However, the
upside seems to stall around $1,340-1,360. Again, another sign of commodities
needing “game-changing” fundamentals to spark a meaningful break-out.
DXY – US Dollar Index [97.06] – Dollar strength is intact. Despite
a recent rise in volatility and looming global uncertainty, the currency
markets via Dollar has yet to erupt abruptly. The Dollar seems rather steady
for now.
US 10 Year Treasury Yields [1.77%] – Once again, 1.80% is proving to
be a key resistance level after the recent increase in yields. Interestingly,
since July 8, yields have shifted higher. However, 2% seems too illusive, which
may strongly indicate the bond markets are not convinced of real growth.
Dear Readers:
The positions and strategies discussed on MarketTakers
are offered for entertainment purposes only, and they are in no way intended to
serve as personal investing advice. Readers should not make any investment
decisions without first conducting their own, thorough due diligence. Readers
should assume that the editor holds a position in any securities discussed,
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