Global Investing

Easy come, easy go. A choppy October prepares to exit on a downer – just like it arrived. World equities lost about 3 percent over the past seven, mostly on Tuesday, and reversed the previous week’s surge to slither back to early September levels. Just for the record, Tuesday was a poor imitation of the lunge this week 25 years ago – it only the worst single-day percentage loss since July and only the 10^th biggest drop of the past year alone. But it was a reminder how fragile sentiment remains despite an unusually bullish, if policy-driven year.

Why the wobble? t’s hard to square the still fairly rum, or at best equivocal, incoming macro data and earnings numbers alongside year-to-date western stock market gains of 10-25%. There’s more than enough room to pare back some more of that and still leave a fairly decent year given the macro activity backdrop and we now only have about 6 full trading weeks left of 2012. So it will likely remain bumpy – not least with U.S. and Chinese leadership changes into the mix as mood music. The sheer weight of a gloomy Q3 earnings season seems to have hit home this week, with revenue declines or downgraded outlooks  – particularly in “real economy” firms such as Caterpillar, Dupont,  Intel and IBM etc – worrying many despite more decent bottom line earnings. As some investors pointed out, earnings can’t continue to beat expectations if revenues continue to wither and there are still precious few signs of an convincing economic turnaround worldwide to draw a line under the latter.

The policy-driven equity boom of the past couple of months has also been suspect to many strategists given the lack of rotation from defensive stocks to cyclicals, showing little conviction in central bank reflation policies succeeding soon even though ever more ZIRP/QE has seen something of an indiscriminate dash to any fixed income yields you care to mention – from junk to ailing sovs and now even CLOs! The bond rush has swept up an awful lot of odd stuff –  not least 10-year dollar debt from countries such as Bolivia and Zambia, whatever about Spain, and corporate junk with CCC ratings and current default rates of almost 30%! As some other funds have pointed out, another weird aspect of this has been the appetite for long duration – which doesn’t fit with any belief that reflationary policies will work on a reasonable timeframe. So, is that it? Central banks will continue to wrap everything in cotton wool for the next decade without ever succeeding in boosting growth or even inflation? Hmmm. The various U.S. growth signals are not ultra-convincing, not yet at least, but they’re not to be ignored either. Thursday’s news of a bounceback in the UK economy in Q3 also shows the prevailing stagnation narrative is not without question. And everyone seems convinced Chinese growth has troughed in Q3 –and  just look at the 66% rise in Baltic Freight prices in little over a month. The rebound in super-low equity volatility in the U.S. and Europe this week is also worth watching – though it has to be said, these gauges remain historically low about 20%.

All of which brings us to US election and another potential reason to be wary of the next couple of weeks or so at least. It’s neck and neck for the White House with the debates now all done and dusted and fiscal cliff jitters firmly in the frame. Reports that Bernanke plans to step down when his 2^nd term expires early in 2014 may have taken some of the sting from the Fed policy question, but Barclays strategists still think there could be a jump of 50bp or more in the implied rate on 2015 Fed funds futures in direct reaction to a victory for the Fed-sceptical Romney team. Given that they also think a Romney win, by more easily sidestepping the fiscal cliff and related growth fears, could pump 10-year Treasuries above 2 percent, that’s a considerable near-term risk to euphoric fixed income markets at least. Of course, they assume the opposite knee-jerk direction in rates on an Obama win.

On the other side of the coin, don’t forget about global monetary policy in the meantime.  The Bank of Japan meeting next week could well announce more QE from there.

Elsewhere the week will be all about U.S. payrolls, the election campaign and a G20 finance chiefs meeting in Mexico – with side orders of euro zone inflation, big-hitter European earnings and a stream of confidence reports either side of the pond.

Here’s the list of top events for the week to Nov 2:

Ukraine parliamentary elections Sun

Sicily regional elections Sun

Lithuania parliamentary elections Sun

G20 sherpas meet in Mexico Mon/Tues

Nordic PMs meet in Helsinki Mon-Thurs

German Oct inflation Mon

Belgian bond auction Mon

Israel rate decision Mon

Europe Q3 earnings Mon: Telecom Italia Media, Audi, Deutsche Boerse

BOJ meets Tues

Japan Sept jobless and industrial production Tues

German Oct jobless Tues

EZ Oct biz/consumer sentiment Tues

BoE Sept mortgage lending Tues

Italy bond auction Tues

Hungary rate decision Tues

US Q3  earnings Tues: Ford, ADP,  Pfizer

Europe Q3 earnings Tues: Deutsche, UBS, BP, Standard Chartered, Fiat, Metro etc

US Oct consumer confidence/Aug house prices Tues

EZ Oct  flash inflation, Sept jobless Weds

French/German/Swedish bond auctions Weds

Norway rate decision Weds

Portugal budget vote Weds

Portugal bank lending survey Weds

US Q3 earnings Weds:  Mastercard, MetLife, TimeWarner, Visa

Europe Q3 earnings Weds: Barclays, GlaxoSB, Total, BBVA, Novo Nordisk, ArcelorMittal, Continental

US Oct ADP jobs, Chicago PMI Weds

China NBS Oct PMI Thurs

Czech rate decision Thurs

US Q3 earnings Thurs: Exxon, Chesapeake, Newmont, Starbucks

Europe Q3 earnings Thurs: Shell, BG, BSkyB, BT

US Oct manufacturing ISM, Q3 unit labour costs Thurs

European Oct manuf PMIs Fri

US Oct payrolls Fri

Romania rate decision Fri

US Q3 earnings Fri: Chevron, Washington Post

Europe Q3 GDP Fri: AlcatelLucent

G20 finance ministers and central bank chiefs meet in Mex Sat-Sun