U.S. tightens exports to China’s chipmaker SMIC, citing risk of military use
1. Never ending story
Another week, another record high for stocks and another record low for volatility. This week, Germany’s DAX hit a record high, the S&P 500 hit its 42nd record high of the year and the MSCI World index its 47th record peak of the year. Market volatility, meanwhile, simply refuses to rise – the VIX ‘fear index’ has opened what is historically the most perilous month for stocks within a whisker of its lowest level on record. What gives? Market expectations of another Fed rate hike by the end of the year soared to 90% this week, Spain is in political crisis, US-North Korea tensions are ratcheting up, and yet … markets don’t care one jot. If history is any guide though, research by Renaissance Capital shows that nine of the top 20 daily percentage declines in the Dow Jones since 1896 have come in October. That’s by some distance more than any other month (the next is September, with three).
2. Pound may be tested
British Prime Minister Theresa May’s vow to stay on in the face of plots to unseat her gave a brief lift to sterling, which nonetheless remained on track for its worst week against the dollar in a year and on a trade-weighted basis. Political uncertainty has also cast a shadow over a much-telegraphed interest rate increase by the Bank of England. Speculation rates would go up pushed six-month interest rate swaps to their highest since last June’s Brexit vote on the view that a stronger pound would combat rising inflation. Political jitters couldn’t have come at a worse time for hedge funds who had finally turned positive on sterling in the last quarter of 2017. If the uncertainty grows, sterling may test the 2017 lows below $1.20 in the coming days.
3. Strain in Spain
Is Spain’s worst political crisis easing? After Spain apologised on Friday for a violent crackdown on Catalonia’s independence referendum, a Catalan parliament spokesman said the region’s pro-independence leader would address lawmakers on Tuesday on the “political situation”. This appeared to be at odds with an earlier plan to move an independence motion on Monday. The change of tone led to a narrowing of Spain’s bond yield premium over German benchmarks and Spanish stocks pared losses. The stakes here remain high. Even some sort of compromise with Madrid, possibly a devolution of tax powers, would blow a hole in the central government’s budget.
Other concerns are the impact the uncertainty could have on Catalonia’s finances and inward investment. Spain’s government is planning to make it easier for firms to transfer their legal base out of Catalonia, as some Catalan banks have already intimated they will do. The violence that marred the vote could also come back to bite Prime Minister Mariano Rajoy, who leads a minority government. Some analysts are already predicting opposition parties may try to use the turmoil to push for new elections in the euro zone’s fourth biggest economy.
4. Risky vote?
Japan’s Prime Minister Shinzo Abe had possibly thought his call on Sept. 25 for a snap parliamentary election would be a slam dunk vindication of his rising approval ratings. Instead, the emergence of the Party of Hope led by Tokyo Governor Yuriko Koike has fragmented the opposition, upset the ruling Liberal Democratic Party’s calculations, and raised the possibility that the Japanese election could shock investors just as much as other major political events in the past year or so, such as the UK’s Brexit vote, the US presidential election, the French and recent elections in Germany.
The rising uncertainty has not so far affected Japanese markets. They are still hoping Abe’s ruling coalition will retain its majority. Also, Abe and Koike also have a lot in common, including a populist streak. Only some economic policies are different, such as Koike’s proposal to delay the sales-tax hike, tax companies’ cash piles and her call to hunt for the exit to the Bank of Japan’s stimulus, while still maintaining it. Although Koike has said she isn’t running for a seat in this election, investors will know that for sure only in the coming and that might make this election far more risky and volatile for investors.
5. Harsh climate
What Mother Nature took away, Mother Nature might give back. The impact of Hurricanes Harvey and Irma pushed US employment down in September for the first time in seven years. Harvey also pulled US retail sales lower in August. The storm caused industrial production to suffer its biggest drop since 2009. However, in a prelude to September’s data, due Oct. 13, major automakers reported on Oct. 3 the seasonally adjusted annualised rate of new US car and light truck sales in September rose to 18.57 units, according to Autodata Corp. Consumers in hurricane-hit parts of the country replaced flood-damaged cars, with replacements seen lifting new and used auto sales at least through November.