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Stock markets fared quite well in November. The S&P 500 index was flying high in autopilot mode, reaching new highs at 3154 points and ignoring all the alarming signals along the way. German DAX and Japanese Nikkei were on a similar footing, ready to repeat their 2018 records.
It seems that President Trump has no doubts in the power of his Twitter account, having concluded a while ago that it is possible to simultaneously raise import tariffs, slow down the growth of Chinese economy and stimulate the advance of the stock market barely with promises of a bright future. Ironically, such an approach keeps working. It has been a year since country heads, central bankers and corporate executives began to consider trade wars to be the greatest risk to the global economy. However, this year the economic situation has only worsened, and the trade war between China and the United States is not over yet. Quarterly reports and macroeconomic data no longer have such an impact on the stock market as politicians’ comments about the proximity of signing or not signing various trade agreements. In November, there were more statements about the vicinity of the deal between United States and China, so the conquest of new historical highs in equities came as no surprise to anyone.
November was the 10th straight month of contraction of the Eurozone manufacturing activity. Purchasing Managers’ Index, though rising a bit in November, is still below the 50 mark, which separates growth from contraction. New orders, employment, raw materials purchases and backlogs of work all declined at a shallower rate, which was enough to raise the overall level of optimism. On the other hand, British manufacturers cut jobs last month at the fastest rate since 2012.
The earliest-available indicators of China’s economic performance point to a continued slowdown in November. Economic growth was already the slowest in almost three decades in the third quarter and the earliest data from financial markets and businesses showed that continuing with a worsening picture for trade, sales manager sentiment and factory prices. Profits of the Chinese industrial firms dropped by 9.9% from a year ago. It was the biggest fall since 2011 and the third consecutive month when profits contracted. Fall in profits was mainly attributable to an expanding decrease in producers’ prices for manufactured goods, slower production and slower sales growth.
The U.S. economy expanded modestly from October to mid-November and the outlook for growth was generally positive while labor market remained tight across the country.
Overall, employment continued to rise even as the situation across the country made it difficult for employers to find workers they needed. U.S. consumer spending rose steadily in October, suggesting the economy will probably maintain its moderate pace of growth in the fourth quarter. Consumer spending, which accounts for more than two-thirds of the U.S. economic activity, increased by 0.3% in October as households spent more on electricity and gas, offsetting a drop in new motor vehicle purchases. The gain in consumer spending together with signs of stabilization in business investment supports economists’ expectations that the economy will continue to grow around its potential, which is estimated to be between 1.7% and 2.0%.
Those of you who read us regularly have already been accustomed to our usual paragraphs about inactive and directionless EUR / USD currency pair. This time we want to introduce the picture – two charts, in fact – worth more than thousand words. First chart (see next page) shows 3-month volatility of the Forex market. One can see that today’s readings are only a fraction away from record lows of this volatility index. Next chart demonstrates same marked areas on EUR / USD graph so it is visually easier to understand what normally happens after these low points of volatility. As we see, after periods of low volatility market can experience a very fast directional move. For example, back in 2007 and 2014 market saw more than 23% move. Today we are in a very similar situation in terms of volatility readings. Of course, numbers do not say the exact day of the spike in volatility and do not guarantee a sharp rise in the dollar. For this reason, we keep watching the pair closely for any directional clues.
That FX volatility index affects the pound, too. For the last 6 weeks GBP / USD was locked in a very narrow range (again). Predicting outcomes of this consolidation is hard, especially with everlasting Brexit problem. One thing is clear – the pound is holding 1.3000 level on top, as there is an important trend line off 2014 highs just above 1.3000. Weekly close above 1.3000 will add to probability that the pair is ready to see 1.3350 levels. Shall we again see it below 1.2800 and one must ready himself for a deeper setback to the 1.2550 -1.2600 region.
Silver and gold are still in narrow sideways trading and there is not much to add to last month’s comments. Recent weeks demonstrated a visible correlation between stock market and metals. Weak stock market might be good for metals, so we keep watching it to get clues for where the metals might go.
In the fixed income space, everybody is in a “wait-and-see” mode. Government bonds and to a lesser extent investment-grade bond markets were “consolidating” this year’s gains for, give or take, 3 months now. Junk bond markets, to remind, have shown a tremendous performance this year. The Bloomberg Barclays US Corporate High Yield Total Return index rose 0.33% in November and this makes it 10 out of 11 months with positive returns for 2019, bringing the year-to-date returns to almost 12%. Europe’s HY index looks the same with year-to-date returns being almost 11% (+1.05% in November). Although the current uptrend looks quite tired, the spreads in both markets are not outrageously low and there is some room for further gays if the environment stays accommodative for risky assets.