Weekly Recap – Traders react to US Election and Non-Farm Payrolls

We had another exciting week,
filled with profitable trading opportunities and lots of ‘entertainment’ from
the US Election, the soap opera in the ECB, and of course Friday’s BIG Non-Farm
Payroll report!

If you missed the action in the
first week of November, here’s your chance to catch up!

Global equity markets moderated
their charge higher this week, flattening out a bit even as the DJIA and
S&P500 marked fresh all-time highs.

US equities have more than filled
the gap left after October’s slide, while Europe is just over halfway back.

The Shanghai index marked 20-month
highs despite some concerning Chinese data. The Chinese manufacturing and
services PMIs for October suggested the economic pullback is not over in the
middle kingdom, with the services index at a nine-month low and the manufacturing
series at a five-month low, although both remain in expansion territory.

In the US, elections and the
October jobs report were the big themes, while crude prices may have found a
short-term floor.

In Europe, conflict at the ECB
provided entertaining headlines, but Draghi’s post-policy meeting press
conference offered nothing new.

For the week, the DJIA gained
1.1%, the S&P500 rose 0.7% and the Nasdaq added less than 0.1%.

Note that weekly earnings and hours worked were
pretty much unchanged even as unemployment gets closer to full employment
around 5.0-5.2%, boosting pressure for Fed rate hikes. Goldman Sachs Chief
Economist Hatzius commented that the defects in the report were a signal of how
much slack remains in the labor market.

Crude prices may have found a
short-term bottom this week, after WTI futures dipped briefly below the key
psychological level of $75 on Monday. There was some commotion after Saudi
Arabia adjusted its prices (cut US prices, raised Europe and Asia prices), with
January WTI delivery futures moving above December futures, putting the market
briefly in contango, although the Kingdom said it was just a regular seasonal
adjustment. Later in the week, OPEC reduced its price and demand expectations
in the long-term World Oil Outlook. OPEC Chief El-Badri said oil prices had
fallen too far in the absence of major changes in fundamentals, claiming that
speculation has driven the decline in prices.

Various Fed officials commented on the road ahead for US monetary policy now
that QE had ended and the rate hike guessing game has begun. On the dovish end
of the spectrum, new dissenter Kocherlakota reiterated that raising rates in
2015 would be a mistake. Fisher, a hawk, said the FOMC has neutered the
“considerable time” concept, and the key indicator for policy remains
unemployment. Mester, Plosser’s hawkish replacement in Cleveland, said she
would have liked the “considerable time” language removed and said
the Fed funds rate would be 3.75% eventually. Moderate Bullard said the FOMC
has agreed to keep the balance sheet at its current size for now. According to
Bullard, the rate lift off will come first and only then will the Fed consider
selling off assets in a passive and gradual process.

The Republican Party had a very good night at the polls on Tuesday, easily
winning the six seats they needed to take control of the Senate and greatly
expanding their majority in the House. This marks the first time the GOP has
controlled both houses since 2006. GOP candidates avoided setbacks in all of
the key battleground states. President Obama made conciliatory comments about
finding areas to cooperate with the GOP, but few expect great things. Various
asset classes have reacted to the elections, but none so much as the coal
complex. Coal stocks moved up on the news on hopes of favorable treatment from
presumed Senate Majority Leader McConnell: Alpha Natural Resources gained 30%
through week’s end, while CNX was up 5%.

The Russian ruble broke above 45 to the dollar for the first time ever amid
plunging oil prices and the Bank of Russia announcing it might use some of its
foreign currency reserves or even its gold bullion reserves to pay for imports
if Western sanctions over Ukraine continue. The central bank tried to jawbone
panicky markets by promising to limit interventions to $350M a day (they have
been around $1-2B per day in late Oct/early Nov), and also shifted the
free-float corridor. The moves did little to staunch the bleeding and USD/RUB
peaked around 48.75. Friday morning saw some firming in the ruble as the
central bank declared that it could implement currency interventions at any time
without warning.

October US auto sales came in at the expected pace. Ford’s sales were negative
for a second month in a row, led lower by declines in truck sales. GM’s October
US sales were more or less flat, after a big y/y gain in September. Chrysler
continues to see booming sales, with the October y/y gain up at a strong,
double-digit rate. Toyota, Honda and especially Nissan saw very good US sales
growth in the month.

On the M&A front, US digital marketing firm Sapient has agreed to be
acquired by Publicis Groupe for $3.7 billion in cash. With the acquisition of
Sapient, Publicis says “digital revenues will account for more than
50%,” some three years ahead of its 2018 plan. The pharma consolidation
dance continues: LabCorp agreed on Monday to buy Covance for about $6.1 billion
in cash and stock, taking control of one of the biggest providers of contract
medical research.

The dollar strengthened firmly against most major pairs in the week following
the end of Fed QE as FX traders talked about yield divergence between the US
and the rest of the developed world. The most dramatic moves were against the
ruble, although this is admittedly a special case. Some drama at the ECB helped
EUR/USD move out to 27-month lows under 1.2400 midweek. Ahead of the ECB rate
meeting, a press report citing sources claimed that committee members were
planning to challenge President Draghi and critique his leadership style at the
governors’ dinner on Wednesday. Thursday’s press conference was uneventful and
Draghi merely reiterated his dovish stance. Draghi indirectly addressed the
discord story by highlighting that the council remains unanimous in its
commitment to using more unconventional measures (though not necessarily
agreeing on which unconventional measure might be used).

The EUR/CHF cross edged closer to the SNB’s 1.2000 line in the sand. The
weakening euro could very well prompt the SNB to officially intervene for the
first time since 2012 to defend its floor. SNB Governor Jordan commented that
the upcoming Swiss referendum on gold could make defending the floor defense
more difficult. On November 30th, the Swiss will vote in a referendum on a
measure to require the bank to build its bullion position up to at least 20% of
total assets from 8% today. Given the bank’s current $544 billion of assets, it
would have to buy at least 1,500 tons of gold to get to the required threshold
by 2019.

Trading in USD/JPY pair remained volatile in the wake of surprise BOJ stimulus
announcement last week, reaching a fresh 7-year high above 115.50 before coming
in toward the low 114 range going into the weekend. South Korea, whose export
economy is particularly impacted by the competitive yen weakness, stepped up
its jawboning aimed at the Japanese stimulus with intention to “manage KRW
moves in line with JPY”. Volatility also returned to trading in the Aussie
currency, as AUD/USD hit fresh 4-year lows below $0.8650. The Reserve Bank of
Australia Quarterly Policy Statement maintained its outlook on growth through
2016, but renewed its attack on the exchange rate and also lowered its forecast
for headline inflation for 2014-end and 1H15 by 0.25pts.

The Shanghai Composite traded sideways for much of the week, bumping along
20-month highs around 2,420. The balance of China October PMI data was mixed –
HSBC Final manufacturing PMI of 50.4 confirmed a 3-month high, while the
official non-manufacturing survey struck a 9-month low. HSBC noted that the
“manufacturing sector continued to stabilize in October, however the
sequential momentum likely weakened”, with property downturn-related
uncertainty and slow pace of global recovery justifying further easing
measures. The PBoC’s Q3 Monetary Policy Implementation Report confirmed a new
liquidity tool that siphoned another CNY770B in funds to China’s top lenders
over the past two months with a 3.5% interest rate. Over the weekend, China
Customs Office will post its October trade figures, estimated to show a $42B
surplus.