Markets were given quite a lot to digest last week from several angles.  Record M&A activity, political headlines, firming sovereign yields, peak earnings season, and a busy economic calendar were all notable driving forces behind market movements.  Ultimately, U.S. stock and bond markets softened as firming sovereign yields and a notable pickup in volatility weighed heavily.

This Week’s Talking Points:

  • Third quarter U.S. GDP of 2.9% came in higher than consensus forecast of 2.5%  and was the strongest growth since Q3 of 2014. Increases in exports and inventory builds were the primary drivers and there were indications of increased investment activity from both business and consumer sectors.
  • The recent material increase in M&A activity continued last week and now has October on pace to be the busiest month ever with $248.9 billion worth of deals, surpassing the July 2015 record of $240 billion.  The prior week saw several deals of significant size and was the biggest single week of announced M&A since 1999.
  • U.S. elections weighed on sentiment as revelations of renewed FBI inquiries into Hillary Clinton’s email scandal cast doubt on the outcome.  Currently, markets have priced in a Clinton White House, a democratic senate, and a GOP house. This FBI investigation has the potential to change that calculus with less than two weeks to go before the election.  Politics aside, markets seem to favor the known vs the unknown or the predictable vs the unpredictable.
  • Japan and European PMI were strong at 51.7 and 53.3 respectively.  The pace of European growth rose to its highest level of the year and U.K. growth (0.5% vs 0.3% expected) came in better than post Brexit predictions.
  • U.S. 10yr yields rose to over 1.8%, the highest level in 5 months.  Dovish pivot by central banks, improving nominal growth, expectations for fiscal spends, and percolating inflation data are all contributing to the yield increase.  Firming sovereign yields globally will likely act as a ceiling for equity multiple expansion and are triggering an equity market rotation out of yield plays (REITs, utilities) into financials and consumer staples.
  • Last week was the peak week of third quarter earnings season and results are tracking better than expected.  With 293 of the S&P 500 companies reporting, the pace of sales and earnings growth are tracking at 2.7% and 1.6% respectively; these would mark the first quarterly growth in sales since Q4 2014 and in earnings since Q1 2015.
  • Inflation expectations are increasing.  The 10yr inflation breakeven rate priced into U.S. TIPS bonds has increased from 1.44% to 1.72% over the past two months and climbed 6bps just last week.  TIPS funds are on track for their biggest calendar of capital inflows since 2011.
  • Few market participants are expecting an ECB taper but timing and scarcity issues of the bond buying program combined with recent growth and inflation results may bring that back into the conversation.
  • Oil declined below $50 on news that Russia is not on board with OPEC on the issue of oil production cuts.