Any hope of figuring out a new market trend before next week’s U.S. election were well and truly parked by the onset of Hurricane Sandy. Friday’s payrolls may add some impetus, but Tuesday’s Presidential poll is now front and centre of everyone’s minds. With the protracted process of Chinese leadership change starting next Thursday as well, then there are some significant long-term political issues at stake in the world’s two biggest economies. Not only is the political horizon as clear as mud then, but Sandy will only add to the macro data fog for next few months as U.S. east coast demand will take an inevitable if temporary hit — something oil prices are already building in.
Across the Atlantic, the EU Commission’s autumn forecasts next week for 2012-14 GDP and deficits will likely make for uncomfortable reading, as will a fractious EU debate on fixing the blocs overall budget next year. But the euro zone crisis at least seems to have been smothered for now. Spain seems in no rush seek a formal bailout, will only likely seek a precautionary credit line rather than new monies anyway and needs neither right now in any case given a still robust level of market access at historically reasonable rates and with 95% of its 2012 funding done. According to our latest poll, more than 60% of global fund managers think Spanish yields have peaked for the crisis. Greece’s deep and painful debt problems, shaky political consensus and EU negotiations are all as nervy as usual. But tyhe assumption is all will avoid another major make-and-break standoff for now. More than three quarters of funds now expect Greece to remain in the euro right through next year at least.
The extent to which the relative calm is related to today’s introduction of a wave of EU regulation on short-selling of bonds and equities and, in particular, rules against ‘naked’ credit default swap positions on sovereign debt is a moot point. This may well have reined in the most extreme speculative activity for now and it has certainly hit liquidity and volumes.
So, where have global markets settled after Halloween? It’s been a pretty mixed bag over the past seven days and lacking in overall direction even if with notable deviations – an interesting factor perhaps in a world obsessed with highly-correlated waves of risk on/risk off . Even though October will now be confirmed as the first month in the red for world stocks since May, our poll shows investors have actually been building more equity and euro zone debt during the month as they pare back cash levels to their lowest since February. Not least because of some surprisingly decent European earnings, eurostocks outperformed and gained almost 1% over the past week. Spanish govt yields are flat over the week, although Italian debt yields are up about 10bp on domestic election jitters there. Broad volatility gauges continue idling around at relatively low, sub-20% levels – Wall St’s VIX is up a bit for all the obvious reasons, while the VDAX is down again and 6-month eur/$ vol continues to fall like a stone to five-year lows as the underlying exchange rate snoozes about 1.30. Emerging market hard currency debt indices, captured by the EMBI+, are down over the past week and spreads with Treasuries have backed up about 25bp — but that’s largely due to Argentina’s sharp retreat on an adverse NY court ruling on its botched debt restructurings.
Perhaps because of Sandy and the elections, Treasury yields have nudged back lower to about 1.70% but it will be fascinating to see how the 10- and 30-year Treasury auctions go next week after the election results.