Weekly Market Update

Author : Laura Hochstetler
Date : October 6, 2018

Market Action

Global equities declined on the week amid rising treasury yields and the Fed’s pursuit of rates that will exceed a neutral stance. The US 10-year Treasury note rose to its highest level in more than 7 years. The price of WTI Crude oil increased slightly this week while volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), increased to its highest level since April. Click here for this week’s update on market returns.

Canada agreed to join the US and Mexico in a deal to revise the North American Free Trade Agreement. Under its new name, the United States-Mexico-Canada Agreement, Canada will give American farmers a bit more access to its dairy market but the much larger car trade will become less free. The US agreed to keep NAFTA’s dispute-settlement mechanism.

Italy set budget-deficit targets for 2020 and 2021 at 2.1% and 1.8% of GDP, respectively, lower than the previously anticipated 2.4% deficit targets for both years. However, the government still plans to move ahead with the 2.4% deficit for 2019, pending the approval of European authorities. The lower target levels for 2020 and 2021 suggest that Italy is taking a more practical position after investors began to sell off Italian assets upon news of the government’s initial budget plan. Currently, Italy’s debt stands at around 130% of GDP, the second-highest level in the eurozone, following Greece.

Russia and Saudi Arabia struck a private deal in September to raise oil output, and informed the US just before the latest OPEC meeting in Algiers. The idea was “to add barrels to the market quietly with a view not to look like they are acting on Trump’s order to pump more,” sources told Reuters. It also underlines how the two nations are increasingly deciding oil output policies bilaterally.

On Friday, EU Brexit negotiators told ambassadors of the 27 states remaining in the bloc that there was no breakthrough on the Irish issue and much would depend on what their British counterparts bring to Brussels next week.

US job growth slowed in September, likely as Hurricane Florence depressed restaurant and retail payrolls, but the unemployment rate fell to near a 49-year low of 3.7%, pointing to a further tightening in labor market conditions. Following Friday’s report, Treasury yields rose to seven-year highs amid speculation the figures will clear the path for higher interest rates.

What could affect markets in the week ahead?

Brazilians will head to the polls Sunday for the first round of presidential elections. The current frontrunner is Jair Bolsonaro, still recovering from being stabbed while on the campaign trail, with the Workers’ Party’s Fernando Haddad likely the runner-up. The economy, unemployment, crime and corruption have become contentious issues for the candidates.

Japanese stocks recently scaled 27-year highs, helped by improving growth, tentative wage inflation and “Abenomics”. But the rally’s main driver has been yen weakness. Aside from rising US yields, temperatures in the US-China trade war are climbing further and when Chinese markets open on Monday after a week long-holiday, the yuan could play catch-up with other emerging currencies which are nursing heavy losses against the dollar. If all that conspires to send the yen higher, the Nikkei could end up struggling.

The divergence between depressed European stocks and their buoyant American counterparts may be here to stay for some time. Third-quarter earnings for the pan-European STOXX 600 are expected to increase 13.9% from the third quarter of 2017, according to data from Refinitiv I/B/E/S. In contrast, third-quarter earnings for the S&P500 are expected to show an increase of 21.5%.

Next week’s data by the Mortgage Bankers Association on US home loan applications will be closely scrutinized, as borrowing costs have leapt to their highest since May 2011. US bond yields have jumped in the wake of strong economic data and hints from Federal Reserve officials that interest rates could rise for a fourth time this year in December – and that rate-hike cycle may be about to take another bite into the already softening US housing market, as rising mortgage interest rates weaken home affordability. Mortgage application volumes are lower on a year-over-year basis and refinancing activity continues to decline – fewer borrowers can benefit, given today’s higher interest rates.

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