By Ben Robson
What a pulsating week we had last week in the financial markets, with the Dow Jones reaching record highs earlier in the week, only for US stock markets to be rattled by a massive ADP employment number, exceeding even the most optimistic expectations, sending US 10-year bond yields to 7-year highs and markets pricing in yet more US interest rate hikes. Friday’s Non-Farm payrolls, as if to confirm the ADP figure saw the US unemployment rate fall to 3.7%, wage growth holding steady and an upward revision in August’s payroll to 254,000 vs 201,000 (although the September number fell shy of expectations at 134k vs 185k). As I have mentioned in previous commentaries, October can be a very volatile month and we saw evidence of this as the Nasdaq took the brunt of “risk” coming off the table and closed nearly 4 percent lower for the week. Gold held above $1200 an ounce and the S & P Volatility Index (VIX) ratcheted higher to close at nearly 15.
If US interest rates are poised for faster than expected increases, then there are ramifications for companies with heavy borrowings or those who simply buy back their own shares to maintain an elevated price. There may also be rotation out of riskier “growth-stocks” into more stable stocks of companies with strong balance sheets and less debt. October is a good time to reflect upon the merits of our portfolios and assess the real competencies of the companies in which we invest. Diversification into other asset classes may also be a wise move!
Other noteworthy news from last week is that a new US Mexico Canada Agreement (USMCA) will replace NAFTA after The US and Canada agreed to concessions on both sides with respect to dairy and auto components of the new deal. The Canadian dollar rallied strongly during the first part of the week only to give up much of its gains from Wednesday onwards. Canadian employment increased with a headline print of +63.3k although by drilling into the number, 16.9k full time jobs were actually lost and 80.2k part time jobs created. Towards the end of last week there was also renewed optimism that a UK-Europe Brexit deal will be finalized before year-end. GBPUSD rallied on this news.
In terms of economic announcements, this week is relatively shy on big announcements. On Wednesday we have US Producer Price Index (exp 2.8% Y.o.Y. for September) followed up on Thursday with US Consumer Price Index. CPI is the more important announcement and is expected to fall to 2.4% (Y.O.Y) for September. On Friday we have the University of Michigan Consumer Sentiment Index expected at 100.5 vs previous reading of 100.1. In Europe, The UK releases its monthly GDP assessment (expected at 0.1%) on Wednesday and the European Central Bank releases minutes of its Monetary policy meeting on Thursday.
My focus this week will certainly be on EUR and GBP versus the US$. I also have the sensation that the US dollar, which has had so many positive stimuli in recent weeks is due to give back a few of its gains. Outside of G7 currencies I feel that US$ valuations versus some Emerging market currencies are very overstretched and several EM currencies may be worth consideration. The paradox of “making America great again” is that there are so many other great nations that need to be part of this equation and in order to achieve greatness it requires humility and diplomacy. That means Worldwide trade and multilateral cooperation. The pendulum having swung far in favour of the US might just be starting to run out of momentum and may need to revert to the center. Good luck and good trading.
This Article was prepared and accomplished by Mr. Ben Robson in his personal capacity. The opinions expressed in this article are Ben’s own and do not reflect the view of EGM Securities.