In a note to clients yesterday, Brian Reynolds, chief market strategist at Rosenblatt Securities in New York, laid out a question recently wracking the minds of global investors: are central bank easing measures creating a new credit bubble? Reynolds identifies two key factors that indicate this is the case. First, by his firm’s analysis, 440 pension funds have voted to increase credit investment allocations in the past 26 months, with 38 in October 2014 alone. Second, the pace of corporate share buybacks among U.S. equities is reflective of the easy credit flow that is leaving companies unconcerned about maintaining capital. According to Reynolds, “If stocks go down because of the elections or because of this Friday’s crapshoot of a payroll number, the drop should be brief and shallow,” adding, “There is nothing on the legislative or regulatory fronts that can stop this credit boom.”
Rates hold steady Down Under. The Reserve Bank of Australia opted to keep the benchmark overnight cash rate at a record-low 2.5 percent for the 15th consecutive month. In the accompanying statement, Reserve Bank of Australia governor Glenn Stevens noted that by most estimates, the Australian dollar remains higher than its fundamental value. Separately, the Australian Bureau of Statistics today restated September employment data to include an additional 24,000 job seekers, providing further support for sustained accommodative monetary policy.
Silk Road project leads to more funds for infrastructure. Media reports today indicate that the New Silk Road initiative outlined by President Xi Jinping in speeches last year will be accompanied by a fund totaling more than $16 billion dedicated to new transportation infrastructure in Central Asia and Eastern Europe. Xi has identified external investment in land and maritime trade as a focus for China going forward.
Europe shows prospects for growth. As had been widely anticipated, the European Commission today cut euro zone growth forecasts, with expectations now for a 0.8 percent final GDP for the 18-nation bloc in 2014 and 1.1 percent in the following year. This significant cut was matched by lowered inflation forecasts that are below the European Central Bank’s already low expectations.
Oil prices continue to decline. During overnight trading, front-month WTI crude oil futures contracts fell below $76 per barrel as markets continue to react to increased production in North America and in Saudi Arabia, as well as to signals of slack demand from China and Europe. Saudi Aramco, Saudi Arabia’s state-controlled oil company, this week reduced export prices to the U.S., but hiked them to Asia and Europe.
U.S. factory and trade data on deck. On a day full of quarterly corporate earnings announcements, also on the schedule in the U.S. is the release of September trade and factory order data. Expectations among economists are for a marginal expansion in the trade deficit, despite lower fuel imports and a marginal improvement in new industrial orders.
Portfolio Perspective: U.S. Elections in Focus — Karl Haeling, Landesbank Baden-Württemberg
Of the major market events scheduled for the week, the first one, U.S. midterm Congressional elections, is today. The outcome, of course, will not affect the markets until tomorrow. Polls suggest that Republicans will easily keep control of the House of Representatives, while narrowly gaining control of the Senate.
In general, regardless of what happens at the polls, the broad policy stalemate in Washington is not likely to change. But similarly, most experts believe there will be more willingness to make some positive changes regardless of who wins or loses. The point here is that ahead of the 2016 elections, neither the Democrats nor the Republicans want to be seen as the party that can only say “no” and not accomplish anything. There is thus a better chance for new initiatives, including those involving corporate tax reform. Such an outcome would thus be bullish for equities and the U.S. dollar but should only be slightly bearish for Treasuries as global disinflation and deflation pressures persist.
Karl Haeling is head of strategic debt distribution at Landesbank Baden-Württemberg’s New York office.
