Whoosh! The gloomy start to the final quarter seems to have been swept away again by the beginnings of a half decent earnings season stateside – at least against the backdrop of dire expectations – and a steady drip feed of economic data surprises from the United States and elsewhere. Moody’s not downgrading Spain to junk has helped enormously and the betting is now that the latter will now seek and get a precautionary credit line, which would not require any bailout monies up front but still unleash the ECB on its bonds should they ever even need to – and, given Thursday’s successful sale of 4.6 billion euros of 3-, 5- and 10-year Spanish government bonds, they clearly don’t at the moment (almost 90% of Spain’s original 2012 borrowing target has now been raised). What’s more, Greek euro exit forecasts have been put back or reduced meantime by big euro zone debt bears such as Citi and others, again helping ease tensions and defuse perceived near-term euro tail risks. Obama’s bounceback in the presidential polls after the latest debate may be helping too by rolling back speculation that a clean sweep rather than a more likely gridlock was a possible outcome from Nov 6 polls. China Q3 GDP came in as expected with a marginal slowdown to 7.4% and signs of growth troughing — all adding to the picture of relative calm.
So, in the absence of the world ending in a puff of smoke – and the latest week of data, earnings and reports suggests not – we’re left with a view of a hobbled but stabilising world economy aided by hyper-easy monetary policy that is bolting core interest rates to zero. Tactical investors then, at least, are being drawn into the considerable pricing anomalies/temptations across bond and credit markets as well as the giant equity risk premia and regional price skews.
The upshot has been a sharp bounceback of some 2.5% in world equities since last Wednesday, falling sovereign bond spreads in euroland and in credit and emerging markets, a higher euro and financial volatility gauges still rock bottom. Dax vol, for example, is at its lowest in well over a year. Year to date, developed market equities are now scaling 15-20%! Germany stands out with gains of some 25%, but the US too is homing in on 20%. These are extremely punchy numbers in any year, but are doubly remarkable in year of so much handringing about the future. So much so, you have to wonder if the remainder of the year will be remain so clement. That doesn’t mean another shock or run for the hills, but shaving off the extremes of that perhaps?
Next week’s earnings slate in the US and Europe is heavy – with everything from Apple to VW And BASF to Santander. Global flash PMIs for October will be crucial as will Q3 GDP reports from the UK and US. The FOMC rounds off the top dirary items although, reasonably, how much more can or even should the Fed do at the this point?
Spanish local elections in Galicia Sun
US Q3 earnings Mon: Caterpillar, Texas Instruments, Yahoo etc
Europe Q3 earnings Mon: Electrolux, Svenska Handelsbanken etc
Japan Sept trade Mon
US 3rd presidential election debate Mon
European parliament session and vote on ECB appointments Mon/Tues
Eurostat 2011 debt and deficit revisions Mon
EZ Oct consumer confidence Tues
Canada rate decision Tues
US Q3 earnings Tues: DuPont, UPS, Whirlpool, Xerox etc
Europe Q3 earnings Tues: SEB, Swedbank, Heinekin, Whitbread etc
Global Oct flash PMIs Weds
German Oct Ifo, Italy Oct consumer confidence Weds
German 10-yr/US 5-yr govt debt auctions Weds
ECB’s Draghi visits Berlin Weds
US Q3 earnings Weds: Boeing, Corning, Motorola, AT&T, Bristol Myers Squibb, Lockheed Martin etc