Since the election of Donald Trump there has been a strong and volatile rise in the most cyclical sectors (primarily banks, with the exception of the mining and oil sectors) and an abrupt decline in the more defensive and more sensitive sectors of state yields. Wall Street yesterday’s session witnessed a recovery in the latter sectors, and that pattern is likely to be imitated in Europe. Among the sectors that were previously penalized the oil company should be the most dynamic, as after yesterday’s valuations, crude oil continued to appreciate during the Asian session.
Fed Chairman James Bullard said yesterday that it is quite likely that there will be a rise in interest rates in December, unless there is some surprise. At the present stage, the money markets give a 90% probability to an increase in key rates at that date.
US indexes closed higher. Janet Yellen’s words and their positive impact on US bond yields reinforced the pattern observed during the so-called Trump Rally. Banking and cyclical stocks led the rise, while utilities and the oil sector underperformed. Before the Congress’s Joint Economic Committee, Janet Yellen argued that the US economy continues to expand, having accelerated after a troubled start in the year. The Fed Chairman added that “a rise in interest rates is appropriate in the short term.” This statement was more incisive than the statement from the last Fed meeting two weeks ago.
Asian markets closed higher. The Dollar dip benefited some Southeast Asian markets. Although the strength of the American currency of recent weeks favor exports, it is important to remember that several banks and companies in the region subscribed bonds in dollars. When appreciated the Dollar, increases the the debt amount of these institutions, many of them with a high financial leverage. In Japan, exports declined for the 13th consecutive month, signaling the loss of competitiveness of their companies (due to the appreciation of the Yen during 2016). Imports also declined, partly because of the strength of the yen (which decreases its value) but also because of weak domestic demand.
As they hit new highs, US indexes force fund managers to follow the rise and buy stocks. Before the election, although discounting a victory by Hillary Clinton and having a misperception of the consequences of a remote election of Donald Trump, several fund managers had taken a defensive stance in their portfolios. Now, faced with the appreciation of the main indices, these investors have to take a more aggressive position, allocating a larger portion of their portfolios to the stock market.
The European indices continue to be traded in a wide range, which has lasted since June. In addition to the economic indicators, investors will monitor the publication of the minutes of the last meeting of the Fed (7:00 pm). The publication of this document may be less important than usual as investors expect, almost consensually, that the Fed raise interest rates at the December meeting. In fact, money markets put that probability at 100%.
In the pre-opening, European stocks traded without a definite trend. Today, the European session is expected to be less crowded due to the US holiday. In addition, after the recent movements observed in the various markets (foreign exchange, bond, etc.) investors are expected to make a pause to evaluate the adjustment to the new reality. In addition, investors will reflect on the potential scenarios that the constitutional referendum in Italy on December 4 may lead to. With US markets closed, European investors are expected to react to the publication of the IFO sentiment index and any sharp moves in the remaining markets. Today, a hypothetical more abrupt move should be explained more by the lack of liquidity than by a change in investor perspectives.
American markets were closed for Thanksgiving. Today, the session will be shorter, ending at 18:00 GMT. Today is called Black Friday, which marks the official start of the shopping season, which coincides with the most profitable period of retail chains. In recent years, with the expansion of online sales the importance of Black Friday has been losing some importance for Cyber Monday. Purchases during this period are monitored almost daily by analysts (with higher incidence at weekends, when consumers are more affluent to the stores) and are well publicized in the financial media, and thus condition the performance of stock markets . For the shopping season as a whole, sales are expected to grow 3.60% over the same period in 2015. At the statistical level, since 1928, the S & P has appreciated 68% of Black Friday sessions, presenting a little average rise Lower than 0.27%.
The referendum in Italy will be the main event this week. During this week, shares of Italian banks and bonds of this country are expected to be more volatile. Italian law prohibits the release of polls in the two weeks preceding the referendum.
US markets closed at modest losses but were enough to be considered the biggest since election day. The session was relatively quiet, with the volume well below average. The main themes of the session were the strong uncertainty over the OPEC meeting and the sales of the holiday season. After the optimism that prevailed for much of last week, the approach of tomorrow’s meeting is fraught with uncertainty and pessimism. The holiday season continues to show signs of dynamism. According to Adobe Digital Insights, Cyber Monday sales increased by 9.40% compared to the same day in 2015. Cyber Monday’s sales vary from estimate to estimate but most point to a significant increase over the previous year. The importance of the shopping season as the barometer of the economy might be a bit smaller this year. The reason for this view is that not only has the economy been showing steady signs of acceleration in the past two months as investors are placing great hope in the next administration’s economic policy.
US markets closed with modest losses, despite the sharp drop in oil (-3.90%). This year’s best performer on Wall Street is the Russell 2000 that prolonged the falls on Monday. However, this index had recorded an extraordinary series of 15 consecutive positive sessions. The second reading of GDP for the third quarter showed an expansion of 3.20%, above the previous reading of 2.90% and compared to the forecast of 3%. This is the strongest pace of economic growth in the US since the third quarter of 2014, when GDP rose by 5%.
On the last day of November, the US market was trading higher, favored by higher oil prices. However, attention was also focused on the economic indicators released. According to the ADP employment report, 216,000 jobs were created in November, up from 165,000 expected. On the other hand, household consumption grew by 0.30% in October (vs. 0.40% estimated), while Household income increased 0.60%, the best reading since April and in line with the estimates. Inflation associated with consumption stood at 1.40%, slightly below the expected 1.50% but higher than the 1.20% registered in the previous month. On the other hand, the Chicago PMI index reached 57.6 in November, well above the 50.6 observed in October and the expected 52.5. Regarding the real estate market, real estate purchase and sale contracts increased by 0.10% in October compared to the previous month, and against 1.50% in September. Investors are now waiting for the disclosure of the Fed’s Beige Book.
In the pre-opening, the European equities traded with some losses. At the end of the session one should not exclude an increase in the trade volume in the various markets (equity, bond and currency), with investors positioning themselves for the referendum in Italy on Sunday. The latest polls (published on Nov 18 because of Italian law banning their disclosure in the two weeks leading up to the elections) gave an advantage of between 4% and 6% for No, although the undecided rate was high (around 25%). Since then, there has been a steep increase in Italian yields, an increase in the spread against German yields and a significant drop in the country’s banking shares. Therefore, it is possible that investors have already partially discounted a No victory. On Sunday, the presidential elections in Austria will take place. The elections in Austria and the referendum in Italy precede a year full of political events in Europe, with the elections in France, the Netherlands and Germany, in addition to Brexit. Mario Draghi said recently that “political uncertainty is a dominant factor” in the current situation and that the great unkonown is to know how this uncertainty will affect the economy of the Eurozone, however reassured investors by stating that European banks are better prepared to face Adverse events than before the crisis.
The best way to measure investors’ risk perception regarding Italy is through the evolution of the country’s banking shares, Italian credit default swaps and the differential between Italian and Spanish yields. While the spread between German and Italian yields not only measures the risk of Italy as well as Southern Europe as a whole, the differential between Italian and Spanish interest rates isolates the “southern Europe” or “periphery” effect and Focuses on country risk.
Yesterday, the negative reaction to the outcome of the referendum turned out to be quite limited in time. In fact, the Italian market opened with losses close to 2%, with banking shares accumulating devaluations of almost 5%. The fragility of the FTSEMIB index and its banking sector rapidly spread to other markets. In the debt market, the Euro has reached the lows of the last months and the peripheral yields have risen sharply. This trend, however, lasted less than 30 minutes, when a notable recovery boosted the Milan stock exchange (affecting their European counterparts) and the Euro, while yields in southern Europe eased the losses. On one hand, No’s victory (unlike Brexit and Donald Trump’s election) was the most anticipated scenario for investors. Thus institutional investors had time to prepare for the event. Many of them reduced exposure to Italian equities and debt, and some hedge funds constituted selling positions. After a strong negative response at an early stage, risk assets underwent notable recoveries, frustrating the intentions of many sellers who sold out at that early stage.
The main theme of Thursday’s meeting will be whether the ECB will extend its debt-buying plan and how it will done. This program, which focuses on the acquisition of debt instruments at 80,000 M. € / month, ends in March 2017. According to several declarations from members of the Central Bank, it is very likely that the debt acquisition program will extend Beyond that date. Since the publication of the latest economic forecasts in September, the Eurozone economy has reported a number of improvements, surpassing in some headings not only the economists’ projections but also those of the ECB.
Yesterday European stocks were boosted by the banking sector, notably Italian bonds. The Italian press has published a number of news reports concerning Monte dei Paschi di Siena. According to Reuters, citing an Italian source, the Italian State may acquire a stake of 2000 M. € in the capital of the oldest bank in the world. This news has not yet had an official confirmation. If confirmed, this transaction lowered the bank’s capital requirements to about 2000 M. €. The La Stampa newspaper said that the Italian State could use the European Stability Fund, calling for a plan to support its banking sector in a manner very similar to that required by Spain during the sovereign debt crisis. According to the same source, this program of aid to the transalpine banking would amount to 16000 M. €. The shares of Monte dei Paschi di Siena were valued at 11%.
The American indexes closed higher once again, prolonging the denominated Trump Rally. Last week, this upward movement seems to have entered a new phase. In the weeks following the US presidential election, stock indexes were favored by the positive expectations which investors drew from the measures that the Trump administration is willing to introduce. But more recently, equity markets seem to have entered into more of a dynamic, driven by more intrinsic factors. In an initial phase the Trump Rally was received with surprise and later with skepticism. However, as US indexes hit new highs in succession, many fund managers are forced to increase exposure to the stock market, otherwise they will underperform against their benchmark.
Political developments in Italy will dominate the attention of investors. Yesterday, the President of the Republic Sergio Mattarella appointed Paolo Gentiloni as the future Prime Minister. To justify this choice are, among other arguments, the fact that he had a prominent position in the previous executive and of being a person with good relations with the different institutions of the European Union. This latter quality is particularly important considering that the first dossier that the new government will have to solve is the Monte dei Paschi di Siena issue. The solution through public intervention is the most likely from the investors’ point of view.
Although investors are currently focused on the Italian political situation and on the economic prospects that the future Trump administration has created, China remains a relevant variable for the activity of several European companies. In the third quarter of this year, European companies saw a 6.10% drop in profits. However, most analysts estimate earnings growth in 2017 (between 6% and 14%). To this end, emerging markets are an important variable, accounting for 31% of their revenues (compared to 17% of their US counterparts).