The U.S. stock markets trekked higher this week as the rest of the world struggles to make a turnaround in the face of trade wars and sluggish growth. The next six weeks are going to be interesting as we have a Fed meeting on Wednesday, ongoing trade negotiations and an upcoming mid-term election on November 6th. Historically, September is a tough month for stocks as the summer comes to a close and fund managers need to decide on how to position for Q4 and what to hold into the new year. The strongest index this past week was the DOW which made new all-time highs and broke free of the resistance of the old top that was created in January. The large cap names are leading stocks higher right now.
With so much going on, I think the market will rely on earnings and guidance from companies as a compass on how to navigate the next 6 months. From the few companies that have reported, the results have looked good but some companies are dialing back their earnings expectations over the next few quarters due to trade and tariff concerns. However, if the market remains steadfast in its uptrend then I doubt what happens in November will move the dial as no major change to policy seems imminent.
Things to watch next week:
- The Fed! Next announcement is Wednesday at 2PM. I doubt there are any surprises right before the election but there will be a press conference with Q&A.
- The 10YR Treasury yield. You have to watch this around Fed meetings as it could move based on guidance. I think it stays rangebound but a close above 3.1% may signal long-term yields are moving higher which would steepen the curve and reduce fears regarding an inversion of 2-10YR bond yields.
- Friday is end-of-month and end-of-quarter. There may be a lot of window dressing to close out the week.
Chart of the Week!
The Chinese banking system is $44 trillion in size. That’s almost three times the US banking system and the Chinese economy is showing weakness as evidenced by their weak stock market. How will their debt load affect their stock market if their economy contracts? (Bear Traps Report)
Economic & Central Banking Snippets
- Global PMI: The August PMI surveys brought signs of the global economy losing some momentum, largely as a result of trade tensions. Worldwide exports once again more or less stagnated, dampening growth in all major economies. Although the US, eurozone and UK remain on track for solid economic expansions in the third quarter, risks to the immediate future appear skewed to the downside. (Markit)
- Germany’s manufacturing sector extended its slowdown into September, early data showed on Friday, but its service sector bucked the trend with growth remaining robust. The flash manufacturing purchasing manager’s index for the eurozone’s largest economy fell to a 25-month low to 53.7 according to IHS Markit, which compiles the data. (FT)
- Optimism in French businesses slumped in September, with data indicating a “broad based slowdown” across both the manufacturing and service sectors, according to IHS Markit. The flash services PMI fell to a 4-month low of 54.3, below expectations of 55.2 and down from August’s figure of 55.4.
- The Bank of Japan kept interest rates unchanged at its September meeting as the threat of a global trade war looms over the country’s exports. It marks the 32nd month without a substantive change to the country’s programme of asset purchases, highlighting the divergence between monetary easing in Japan and tightening in the US. The policy decision suggests the BoJ will stay on hold until after a consumption tax rise scheduled for autumn 2019 as it observes the reaction to a policy modification it made in July.
- Tesla is under investigation by the US Department of Justice following chief executive Elon Musk’s claim last month that he had secured funding to take the company private, according to a person briefed on the matter. The criminal probe into Tesla is running alongside a previously reported civil investigation by the Securities and Exchange Commission. (FT/Bloomberg)
- Ireland has collected €14.3bn in disputed back taxes and interest from Apple, more than two years after Brussels decided that the tech giant’s sweetheart tax deal with the country violated EU law. Paschal Donohoe, Ireland’s finance minister, announced on Tuesday that his government had recovered €13.1bn in back taxes and €1.2bn in interest from the iPhone maker, which will be held in an escrow account pending its appeal against the ruling. (FT)
- Brussels has launched a formal investigation into alleged collusion between BMW, Daimler and the Volkswagen Group to limit the development and delay the rollout of clean emissions technology. The allegations go back to July 2017 when the carmakers were accused of holding secret meetings and colluding, for decades, on a range of areas from the cost of components to the choice of suppliers on petrol and diesel vehicles. The claims put the spotlight on the grey areas separating Germany’s uncommonly collegiate business culture and illegal cartel-like discussions. EU rules do allow rivals to co-operate to share risk and innovate faster, but the case focuses on discussions to hamper technological developments and delay their introduction. Brussels began investigating immediately amid political furore that Angela Merkel’s government had been too cozy with the big carmakers.
- Amazon’s business model is under the spotlight in Europe after the EU’s antitrust watchdog launched a preliminary investigation into how the platform uses data about merchants. The informal probe concerns the ecommerce group’s dual role as a competitor of but also host to third-party merchants, which sell goods on Amazon’s websites, said Margrethe Vestager, EU competition commissioner. (FT)
That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.
Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.
Paul J. McCarthy, III
President – Kisco Capital