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Linear Talk – Macro Roundup – 14th November 2017

By Colin Lloyd 

October is often regarded as the most dangerous month for the stock market, probable a behavioural bias related to the collective market memory of the 1987 and 1929 crashes. Last month the Federal Reserve announced their intension to shrink their balance sheet and the ECB began to moderate the pace of their asset purchases. The stock market barely blinked, making new highs for the year: and, in the case of the US and Germany, new records.

Stocks

The Nasdaq 100 and the S&P 500 lent support to global equity markets. The Nasdaq made a new high at 6258, the S&P testing 2583.

The German DAX Index reached 13,249, although this leaves a monthly trading gap between the September high of 12,828 and the October low of 12,850 to, potentially, be retested on a retracement.

The EuroStoxx 50 followed the US and Germany, finishing the month on its high for the year at 3678. The next targets are 3836, the high of April 2015 and 4573, the level it reached in June 2007 – that is still almost 25% above the current level.

Another market, which has broken out of its trading range on the upside, is the Nikkei 225. It hit 22,087 on 30th. Since the start of November it has rallied even further taking out the 1996 high. The next technical target is 25,914, a level last witnessed in 1991. The broader based Topix Index has also rallied though its rise has been less dramatic. This is partly due to the constituents of the index and their weighting. The Nikkei 225 Index is calculated based on the average price of 225 stocks, these are also the largest stocks by market capitalisation. The Topix Index, by contrast, is market capitalisation weighted and contains a much wider set of constituents, including smaller companies. The BoJ, as part of it Quantitative and Qualitative Easing programme, has bought 75% of all Japan focused EFTs and, as a result, has acquired nearly 5% of the entire stock market. By the same process, however, it has purchased 30% more of the stocks in the Nikkei Index than those included in the Topix Index.

China’s Shanghai Composite has also seen strength although the rise has been orderly when compared with 2015. The chart below shows the percentage performance of the Shanghai Index (dark blue) and the Wisdomtree China ex-SOE ETF since 2015:-

Source: Yahoo Finance, Wisdomtree, SSE

The important thing to note is the substantial outperformance of the non-SOE (State Owned Enterprise) market. Analysts are terming this, ‘the divergence between Old China and New China.’ It is, perhaps, similar to the difference between the Nasdaq and the S&P but more extreme.

Currencies

In comparison with stocks, currency markets were quiet last month. The US$ Index continued to climb, testing 95.06 on 17th. It is up by nearly 4% since its low at the beginning of September.

The move is mirrored in the performance of the EURUSD which tested its low at 1.1575 on 27th. This may be a response to the political uncertainty surrounding Catalonian secession.

USDJYP was range-bound, despite the strength of Japanese stocks, opening at 112.56 and closing with the Yen slightly weaker at 113.64.

Bonds

Looking at a chart of the US 10yr bond, one might be forgiven for thinking that nothing of note had happened last month. This is either a testament to the effectiveness of the Federal Reserve’s ‘forward guidance’ policy, or a sign of complacency. Yields opened at 2.34%, closing 3bp higher. US 2yr bonds, however, continued to plumb new depths, with yields rising another 11bp over the course of the month, to close at 1.6% – the highest since November 2008.

German 10yr Bunds ended the month just off their yield lows, at 36bp, down from 47bp at the start of the month. The opposite price action was witnessed in Greek 10 yr bonds. Yields declined from 5.67% to close on their lows at 5.44% – the lowest yield since January 2010. The fall occurred ahead of the announcement of a Eur29.7bln debt swap from the Greek treasury – which saw yields fall even farther on November 1st.

Commodities

Global economic growth forecasts are being revised higher and the economic activity appears to be broadly based. This may be underpinning the price of Copper which traded to a new high for the year at 3.228c/lb on 16th. Technically it appears to be well supported. The next levels to watch are 3.27c/lb and 3.60c/lb, however, we are still a long way from the high of 4.625c/lb seen in February 2011.

The oil price has also been on an upward trajectory. Brent opened at $56.73/bbl but closed on its high at $61.41/bbl. The Baker Hughes rig count, which made a high of 768 on 11th August, was lower again at 729 on 3rd November. This is partly the result of the hurricanes which hit the south east of the US. Nonetheless, the spread between Brent and WTI widened to a high of $8.18 on 26th September. It has since moderated finishing October at $6.99 but the level is elevated compared with the recent, less supply constrained, environment seen earlier this year. The chart below shows the evolution of the price spread:-

Source: Y-Charts

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