Equity markets and interest rates ended up relatively sideways for the week ending 10/14 despite no shortage of market moving events including the beginning of 3rd quarter earnings season, U.S. election ugliness, Fed insights, currency volatility, OPEC deals, money market regulations, and a standard dose of economic reports.
Alcoa kicked off what is forecasted to be a sixth consecutive quarter of losses. Higher U.S. dollar, increasing wages, and depressed oil prices comprise the party line for why the numbers are what they are. 1986 was the only other time the market had sustained this number of consecutive quarterly earnings declines and did not fall into recession. The common denominator between 2016 and 1986 is the dramatic fall in oil prices which depresses overall earnings for the market. Earnings for the third quarter ex-energy are expected to post less than 2% growth so either way you look at it, earnings are benign.
Fed minutes were released on Wednesday revealing three dissenting voters who voted for a hike at the September meeting. This is the first occurrence of dissent under the Yellen led Fed. A December hike is looking likely at this point with futures markets pricing in a 67% likelihood, the highest level since November 2015, just prior to the December 2015 hike. However, markets are only pricing in 1.5 hikes through 2017, meaning only ½ of a hike is expected next year, not a string of consecutive quarters. Implicit tightening metrics including recent strength in the dollar (Oct +2.4%), rising bond yields, and a spike in LIBOR all pose challenges for the Fed to follow through with a hike.
The Pound experienced another crash this week, hitting record lows on Theresa May’s indication that the U.K. will proceed with a ‘hard exit’ of the EU beginning in March. Markets fear a significant fall in inbound investment and negative ramifications to productivity and departure from the European supply chain. The currency fell an unheard of 2% in one day, stands -30% vs the USD, and is -15% on a trade weighted basis. Meanwhile, the Chinese renminbi marked a 6 year low as capital flight from mainland China became evident. A Goldman Sachs report indicated $27.7b left China in August, significantly over the $4.4b average over the 5 years ending 2014.
LIBOR continued to climb as the October 14th deadline for the new money market regulations came into effect where prime money market funds can no longer offer a fixed NAV. $1t worth of prime money funds has been withdrawn and moved into government money funds. As a result, there has been a significant fall off in demand for short term paper which has driven the cost of short term paper higher. LIBOR has climbed from a low of 0.22% to the current level of 0.87%, the highest level it has seen since May 2009.
Politics were front and center this week, and no matter how bad it smells, we have to look at it. Revelations on Trump have us wondering what happened to our souls and revelations on Clinton have us wondering how long she can stay out of legal crosshairs. Meanwhile, Putin suggested Russia would join an OPEC production quota deal which the market quickly discounted after it became evident that the OPEC figures were more fiction than fact and meant very little actual change in production levels.
