All the cards are on the table and now we will see which players can pull an ace from the hole. The vibes in the financial markets over the last few months have been bad as global growth slows and international trade relations deteriorate. Who is playing with a strong hand?
- The Fed: Got lucky with all the problems in the overnight lending markets last month. Used it as an excuse to buy $60B in T-Bills monthly without an end date. This hand has not been called as it may be the strongest at the table. Don’t fight the Fed.
- China: Has the weakest hand. Their banking system is fraught with high risk loans; they are dealing with a deadly pig virus (pork is big there); their exports are subject to tariffs and they are dealing with political unrest in Hong Kong. They have to find a deal of some kind with the United States so they can attend to their other problems.
- United Kingdom: Getting closer to a break-up deal with the European Union (EU) means they will regain certainty for their economy and have an opportunity to re-negotiate their trade relationships across the globe. This could be their winning hand as they can outmaneuver the EU in global trade as they break free from the regulatory burdens of the nanny state.
- European Union: Does not know how to play cards. Raising taxes and increasing regulations will need to stop as their strongest economy (Germany) is in recession. Not to mention that negative interest rates are destroying their banking system.
- The White House: China needs a deal and the Fed has backtracked on raising interest rates and they will continue to liquify the U.S. capital markets. The elections are next year so this player is “All-In” when it comes to the stock market.
A complex set of circumstances that boil down to the price of the S&P 500. Removing uncertainty and providing liquidity can change sentiment and behavior of large and small companies that have been cautious these past six months. It will be an interesting game to watch but the everyday reality is in the market where there is no bluffing.
In the chart of the S&P 500 Index below, we are a bit higher from last week but there is a potential wedge pattern developing. Typically, prices move abruptly higher out of this pattern, however, one more leg lower is needed before it is completed – a break of 2,860 would eliminate this possibility. The S&P 500 may be showing its winning hand here but a bit more time is needed to see all the cards.
Chart of the Week!
The name on the top is Saudi Armco which is trying to get an IPO done at a $2T valuation. It is the state owned oil company of Saudi Arabia and is the source of their wealth.
Economic & Central Banking Snippets
- Global growth is expected to slow to 3% this year, according to new estimates from the International Monetary Fund (IMF), down from an estimate of 3.2% in July and a 3.8% pace in 2017. The IMF attributed this slowdown to rising trade barriers that have stunted manufacturing and investment around the world. (WSJ)
- U.S. manufacturing production fell in September, adding to evidence that slowing global growth and trade frictions are weighing on the economy. Manufacturing output, the biggest component of industrial production, fell 0.5% in September from a month earlier, the Federal Reserve said Thursday. Production at factories was in part dragged down by a strike at General Motors Co., but showed broad-based fragility. (WSJ)
- China’s gross domestic product rose 6% in Q3, the slowest pace since the early 1990s, and below consensus forecast. A slowdown in investment was the main driver for the lower-than-expected number. Investors are looking to a meeting of the Communist Party’s top leadership, due in the coming days, for a possible review of stimulus measures. There is a feeling, however, that officials are allowing growth to run a little slower as they seek to clean up the financial system and deal with excess leverage. (Bloomberg)
- The German government has revised down its forecast for economic growth next year from 1.5% to 1%, in a further sign of the slowdown that is clouding the prospects for the eurozone’s largest economy. Germany’s economy has been roiled by global trade tensions, Brexit-related uncertainty and upheaval in the auto industry. But other parts of the economy, such as craft trades and the construction industry, were booming, thanks to strong domestic demand. (FT)
- Many businesses have lowered their outlooks for the next year, with companies in the Midwest and Great Plains particularly downbeat, according to the Fed Beige Book’s report of conversations with local business leaders around the US. The US economy has grown at a “slight to modest pace” since the previous report last month, with deterioration in two familiar areas: manufacturing and agriculture. (FT)
- Unexpectedly weak Commerce Department data released on Wednesday showed overall US retail sales dipped 0.3%in September. The figures will give monetary doves more ammunition to press for another Federal Reserve interest rate cut. Jack Kleinhenz, chief economist at the National Retail Federation, said it was “possibly a reaction to increased fears over US-China tensions” as the world’s two largest economies spar over trade, even though US consumers “still have a lot going for them”. (FT)
- SoftBank is in talks to take control of WeWork, according to multiple people briefed on the matter. The Japanese telecoms-to-technology group’s chief executive Masayoshi Son has been trying to gain full control of the lossmaking property company in an effort to salvage an investment that has already cost the Japanese group billions. (FT)
- BREXIT Update: Britain and the European Union agreed to new terms for the U.K.’s exit from the bloc Thursday, paving the way for a high-stakes vote in the British Parliament. European businesses welcomed a potential deal to avoid a messy break between the U.K. and European Union, but investment plans that many companies have put on hold aren’t likely to get started anytime soon. (WSJ)
- Saudi Aramco has postponed the launch of what is expected to be the world’s largest initial public offering, according to people familiar with the matter. The delay comes as some foreign investors remain concerned about market transparency on Saudi Arabia’s stock exchange and how heavily the government intervenes in Saudi shares. (WSJ)
That is all for now until next week’s Market Update and thank you for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital