The broadly based Russell 2000 led equities higher in morning trade, with all major indices up over one percent. Earnings season picks up steam this week, with reports from Bank of America and Goldman Sachs tomorrow after upbeat results from other banks last week: tech majors Netflix and Tesla report on Wednesday. ‘Fedtalks’ by a phalanx of Fed officials will be scrutinized for hints of the next interest rate move, with traders expecting no change at the November 1 meeting. Oil prices slipped as the market moved on from the Middle East crisis.
Bottom line: risk-on.
TODAY’S MAJOR NEWS
China ponders economic and stock market support, potentially increasing global volatility
Reports suggest that China’s central government will issue $137 billion in bonds to fund critical infrastructures like railways, roads, and clean energy facilities – boosting its lackluster economy. Growth is expected to come close to 4% this year, pretty slow for China’s economy. If China makes a major domestic bond issue to support its economy, US Treasuries and the US Dollar would be significant losers, diverting capital back to China and continuing the divestment of US assets already evident.
Bloomberg also reported that Chinese policymakers are considering setting up a state-backed stabilization fund targeting the equity markets; the report said the fund would increase holding shares of up to hundreds of billions of yuan to help offset the stock market's downside pressures. China’s CSI 300 stock index is nearly 40% off its 2021 high as investors fret about that country’s economic problems. China’s property sector is of most concern, with few buyers and several major property firms facing massive debt payments that they will struggle to pay over the next few months. Consumer confidence is poor, leading to reduced spending on big-ticket items.
These efforts to artificially prop up the economy and market could have the opposite effect, reducing confidence in a free market and increasing government debt obligations. The IMF has warned China that relying on more significant budget deficits was unsustainable and would impact medium-term prospects. According to the IMF's estimate, China's total non-financial public and private debt-to-GDP rate is about 270% of GDP. Announcing China’s support for its economy and stock market could destabilize global debt and equity markets.
‘Fedtalks’ will be monitored for interest rate hints
Traders will monitor Fed officials' comments this week to glean any insight into the next move in rates, due November 1 (with the CME’s Fedwatch forward rate tool putting the odds of a quarter-point rate rise at one in ten.) Twelve speakers are up this week, and their comments will be closely watched to see if they agree with the message from other Fed officials that recent increases in US bond yields might tighten the country's financial conditions by increasing the costs of loans and financing for individuals and businesses.
- Jerome Powell, Fed Chairman
- Philip Jefferson, vice president of the Fed
- Patrick Harker, president of the Philadelphia Fed
- John Williams, president of the New York Fed
- Michelle Bowman, member of the Fed's Board of Governors,
- Christopher Waller, member of the Fed's Board of Governors
- Lisa Cook, member of the Fed's Board of Governors,
- Austan Goolsbee, president of the Chicago Fed
- Michael Barr, vice president of Fed Supervision
- Raphael Bostic, president of the Atlanta Fed
- Lorie Logan, president of the Dallas Fed
- Loretta Mester, president of the Cleveland Fed
Oil markets watch Saudi-Iran talks
Saudi Arabia and Iran are talking at the highest level for the first time in years after China brokered an improved relationship between the two historical enemies. Oil traders are watching these talks to see if the current ‘war’ between Israel and Hamas can be contained. Israel’s Prime Minister vowed yesterday to “demolish Hamas” following the previous weekend’s tragic terrorist attack on its soil. At the same time, ground troops prepare for an expected invasion of Gaza to seek out the Hamas terrorists responsible for the attack.
Wall Street isn’t significantly impacted as long as the conflict remains contained to Gaza, but traders continue to worry that it will spread into a more regional conflict. There are concerns that Hezbollah to the north of Israel could attack Israel while it is preoccupied with fighting Hamas in the Gaza Strip, which would bring Syria and possibly Lebanon into play. Iran has also threatened Israel to beware if it moves into the Gaza Strip. Hence, the critical role of Saudi-Iran talks is to prevent a wider conflict, which many fear could take oil to above $100 per barrel.
TODAY’S MAJOR MARKETS
Russell 2000 leads market rally
- The broadly-based Russell 2000 led equity markets in morning trade, up 1.7% at lunchtime, with the S&P 500 and Russell 2000 rose by 1.2%
- Foreign equity markets rallied overnight, with the DAX and FTSE 100 up 0.3% and 0.4%, respectively, while the Nikkei 225 fell 2.0% on profit-taking
- The VIX, Wall Street’s fear index, saw a significant one-day decline to 17.8
Bond yields continue to rise, dollar sees selling
- 2- and 10-year yields traded up to 5.08% and 4.71%, respectively, continuing their upward ascent
- The dollar index fell 0.3% to 106.3
- Versus the dollar, Sterling and Euro were up by 0.5% and 0.4%, respectively, while the Yen was unchanged
Oil, gold, and silver see profit-taking
- Crude oil prices saw profit-taking, down 0.7% to $87.0 per barrel
- Spot gold prices fell 0.4% to $1,934 per ounce, and silver prices fell 0.4% to $22.8 per ounce
- Grain and oilseed markets were mainly mixed
Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]
Market outlook by Paul Walton, Financial Writer: [email protected]
