Weekly Radar: Cliff dodging and Euro recessions
Most everything got swept up in the US election over the past week but, for all the last minute nail biting and psephology, it was pretty much the result most people had been expecting all year. So, is there anything really to read into the market noise around the event? The rule of thumb in the runup was a pretty crude — Obama good for bonds (Fed friendly, cliff brinkmanship, growth risk) and Romney good for stocks (tax cuts, friend to capital/wealth, a cliff dodger thanks to GOP House backing and hence pro growth). And so it played out Wednesday. But in truth, it’s been fairly marginal so far. Stocks were down about 2 pct yesteray, but they’d been up 1 pct on election day for no obvious reason at all. But can anyone truly be surprised by an outcome they’d supposedly been betting on all along. (Just look at Intrade favouring Obama all the way through the runup). Maybe it’s all just risk hedging at the margins. What’s more, like all crude rules of thumb, they’re not always 100 pct accurate anyway. Many overseas investors just could not fathom a coherent Romney economic plan anyway apart from radical political surgery on the government budget that many saw as ambiguous for growth and social stability anyhow. Domestic investors may more understandably wring their hands about hits on dividend and income taxes, but it wasn’t clear to everyone outside that that a Romney plan was automatically going to lift national growth over time anyhow.
That said, it was striking on Wednesday that even though global funds were mostly relieved the Fed won’t now be shackled after 2014, nearly everyone still expects the fiscal cliff to be resolved by compromise. Whether that’s wishful thinking or the smartest guess remains to be seen. But, just like in Europe, it means they are at the very least going to have endure a barrage of political noise in headlines and endless scaremongering before any deal is ultimately forthcoming. Some say the nature of the GOP defeat, even with an incumbent saddled with an 8 pct unemployment rate, will force enough moderate Republicans to seek distance from Tea Party and seek compromise. But others point out that post-Sandy relief spending may also bring the dreaded debt ceiling issue forward sooner than expected now too. All in all, the overwhelming consensus still betting on an eventual cliff dodge may be the most worrying aspect of market positioning and may be the best explanation the slightly outsize and sudden stock market reaction.
It also presupposes markets are trading solely on U.S. issues when the other world worries remain.
Elsewhere, we’re still waiting more details on China’s leadership handover and monthly economic data dump this week. But Europe hasn’t disappointed the gloomsters with another round of GDP downgrades and industrial unrest to darken the winter skies some more. EZ Q3 GDPs are out there next week and there’s still plenty to chew on surrounding knife-edge Greek austerity votes – not to mention rolling Spain saga, EU budget spat and Italy and French debt auctions next week.
Overall, global stocks are down just over one percent this week — slowly chipping away at the year’s double-digit gains with little over a month to go in 2012 and as Treasuries rally again. Vol is up a bit, oil is down, euro debt yields and gold are slightly higher. Given the news headline backdrop over the coming weeks, it wouldn’t be surprising to see the year’s favourite trades unwind further into yearend. Of course, any sign that the cliff’s been avoided would clear the decks for 2013 and the underlying investor is still broadly bullish. So, some murky times ahead perhaps.
NEXT WEEK’S EVENTS FROM SATURDAY, NOV 10:
China Oct trade Sat
Ecofin budget meeting Sun
Japan Q3 GDP Mon
Eurogroup meeting Mon
IEA World energy outlook Mon
Merkel in Lisbon Mon
UK Oct inflation Tues
German Nov ZEW Tues
Bank of Portugal Autumn bulletin Tues
IEA oil report Tues
Chile/Morocco rate decisions Tues
UK Oct jobless Weds
BoE inflation report Weds
Italy/German govt debt auctions Weds
Major strikes in Lisbon/Athens Weds
US Oct retail sales/PPI Weds
FOMC mins Weds
Iceland/Croatia rate decision Weds
EZ/Germany/France/Italy flash Q3 GDP Thurs
French govt debt auction Thurs
Moscovici/Noyer at Paris economy conference Thurs
UK Oct retail sales Thurs
US Oct CPI/Nov Philly Fed Thurs
Bernanke speech in Atlanta Thurs
US Oct Ind production Fri