Bittersweet symphony.

October 2018 will go down as the month that was. But it’s not all bad news. The stockmarket recovered and the S&P 500 is only down 6.9% for the month, the worst since 2011. Once again Trump came to the rescue and suggested that he could reach an agreement with Xi Peng over trade when he and the Chinese President meet next week. The stock market has seen a massive turnaround since his appearance on Fox two days ago.

For the S&P 500 Index, the last two days have capped the biggest surge since February. The Nasdaq 100 Index jumped 2.3% but still fell the most in any month during the bull market. Today, payrolls calmed the equity market but disturbed the bond market sending yields higher.  Throughout the turmoil some $8 trillion was wiped off stock markets globally. Corporate results will be the key to sustaining any gains in the share market.

Europe continued its merry mood from the previous day. Europe followed Asia’s lead and continued to rally. The rally was broad with miners and energy companies leading the way. Italy of course continues to buck the trend. The economic data in Europe is not all good. Inflation picked up in October whilst the growth data is weak. No doubt the data will be causing a few headaches in the ECB.  However, the ECB remains committed to ending quantitative easing in December.

For the bond market today, it was very much a risk on day. A somewhat bitter day. The long end was spooked by Treasury saying they would issue more long term debt this quarter in what could be seen as an attempt to steepen the yield curve.

The slowing Chinese data had no impact on treasuries today. China’s growth has slowed appreciably to 6% and this is largely due to talk and implementation of tariffs by the U.S. The ADP National Employment Report showed private employers added 227,000 jobs in October the most since February.

Bonds elsewhere and in particular Europe look set to rise further as the ECB unwinds its QE. Even if it wished to continue its purchasing, it is limited to buying only 1/3 of a country’s debt.  And it is hitting that ceiling for Germany, Europe’s biggest economy and a country that really does not need to issue a lot of debt. There is also a commitment to send Italy a strong signal that it should not look to the ECB for assistance.

The month of October was not so good for the hedge and quant funds. Morgan Stanley estimates that the hedge fund industry globally lost some 4.9% for October. Macro strategies provided the one bright spot.  With the U.S. market down 6.9%, MS’s prime brokerage unit estimated losses for year for hedge funds is about 5.9%. Momentum trading was not a safe bet in October.

The MS report concludes:

  • globally all funds lost an average of 4.9% for the month and 3.9% for the year;
  • American equity funds lost 7.2% for the month and are down 4% for the year;
  • European funds slid 5.8% for the month and lost 5.9% for the year; and,
  • Asian equity funds lost 6.3% for the month and are down 13% for the year.

All rather bitter.

If you are not long oil then the slump in oil prices is sweet. Oil is down 11% for October and data is indicating that U.S. inventories have grown each week for the past six weeks. Some believe this is heralding a slowdown but it could also be that the Iran Oil sanction come into play next week and the U.S. is simply stockpiling oil ahead of the sanctions. Some oil traders are seeing the stockpile as a slowdown and are in risk off mode.

Finally someone in the Trump Administration, John Bolton is concerned about the deficit. Since Trump took office the budget deficit has ballooned to $779 bio, the highest level since 2012. The Congressional Budget Office has forecast that the budget gap will hit $973 bio in 2019 and exceed $1 tr shortly thereafter.  Bolton sees the deficit as a threat to society. He is calling for a cut in discretionary spending.

And in a sweetener for China, Egypt is set to sell its first yuan bond in early 2019. Egypt will also look to issue a yen bond in what is an attempt to diversify Egypt’s funding base and remove its dependence on the U.S. dollar.

Market Recap.

Equities: The S&P rose 1.09%  and the Dow rose 0.97% The Stoxx raced ahead and gained 1.7%. The Vix closed at 21.23 and the MSCI Asia Pacific Index surged 2%.

Currencies: The Bloomberg Dollar Index rose 0.2% while the yen fell 0.1% and the euro fell 0.2%.

Bonds: The ten-year closed around at 3.149%. The 2-year closed at 2.875% and the 30-year closed at 3.395%. The ten-year bund closed at 0.384% and the OAT closed at 0.753%. The U.S. curve closed on the day with the following closes 2/10 at 27.2 bp, 2/30 at 51.9 bp and the 10/30 closed at 24.5 bp. The U.S. 5-year closed at 2.98%.

Commodities: WTI rose 0.3%. However, oil is down 9% for the month,  the fall representing the largest fall since July 2016. Gold fell 0.1%

Bitcoin is trading around $6,307.

Aussie Market Today.

Equities to rally as we start the month. Risk on till Trump meets Xi Peng or there is news relating to tariffs.

Risk off so bonds will weaken. The direction out of Europe and the U.S. is weaker for bonds, however watch for news as this narrative can rapidly change.

The strength of king dollar will determine the Aussie battlers direction and with rates rising in the U.S. and elsewhere the Aussie may well weaken. As a proxy for the yuan which is the current play the Aussie looks slightly weak.