Bedrock’s Newsletter for Friday 9th of November, 2018
9 November 2018


 Friday, 9th of November 2018

November started on a much rosier note than the month of October. Already the 2 last days of October reversed the negative direction in worldwide equity markets. Then last Friday, markets were reassured with a strong job report out of the US, which showed unemployment remaining at close to a 50-year low at 3.7%. Yesterday, in its first meeting since October’s market turmoil and this week’s midterm elections, the Federal Reserve voted to maintain the current level of its benchmark interest rate. The policy-making Federal Open Market Committee, as expected, unanimously approved keeping the federal funds rate in a range of 2 percent to 2.25 percent. Markets figured the central bank would hold the line at this meeting and probably approve a quarter-point hike in December, which would be the fourth of the year. However, there were a few tweaks to the way policymakers are viewing economic conditions. On the upside, the committee noted that the unemployment rate “has declined” since the September meeting. There was no detail or data given for why officials see investment declining, though companies reported during the third-quarter earnings season that some of their investment plans have been curtailed due to the ongoing trade war between the U.S. and China. The economy otherwise has been humming along strongly, and the FOMC reiterated its belief that “economic activity has been rising at a strong rate.” GDP growth this year has averaged 3.3 percent for the first three quarters and is expected to come in around 3 percent for the final three-month period of 2018. “We shouldn’t be surprised by either comment as they are simply a summary of the recent data,” Michelle Meyer, U.S. economist at Bank of America Merrill Lynch, said in a note. “Interestingly, there was no mention of the softer housing data. Moreover, there was no mention of the sell-off in the stock market in October which implies that Fed officials were largely willing to shrug it off.” It certainly looks like the Fed will keep a steady hand and will continue to raise rates moderately in the coming quarters.


But this week, the big piece of news was of course the mid-term elections in the US and the result of these elections on the market and on the outlook for the next 2 years. First, the fact that the perceived risk of the mid-term elections is over, uncertainty is removed, hence the sharp move up in equities the following day. U.S. stocks closed sharply higher on Wednesday. The major averages hit their session highs after President Donald Trump kept his republican majority in the Senate, thereby blocking any push by democrats to try and remove him from Office. The Dow Jones Industrial Average closed up 545 points. The S&P 500 gained 2.1 percent as the health care, tech and consumer discretionary sectors each rallied more than 2.8 percent. The Nasdaq Composite rose 2.6 percent. Wednesday marked the biggest post-midterms gain for both the Dow and S&P 500 since the day after the 1982 contests, when the indexes surged 4.3 percent and 3.9 percent, respectively. “Hopefully we can all work together next year to continue delivering for the American people, including on economic growth, infrastructure, trade, lowering the cost of prescription drugs,” Trump said in a news conference. “The Democrats will come to us with a plan for infrastructure, a plan for healthcare, a plan for whatever they’re looking at and we’ll negotiate.” “We believe that a split Congress is the best outcome for US and global equity markets,” said Marko Kolanovic, a widely followed quantitative analyst at J.P. Morgan, in a note. “As the President cannot count on Congress or the Fed for more easing, he will need to do what is in his power to keep the economy rolling – drop the damaging trade war and turn it into a winning deal.”


In Brazil, equity markets and the Brazilian Real have been rallying for a while on a perceived and now confirmed win by Bolsonaro in the Presidential Election. But for the moment at least, only local investors’ enthusiasm is helping, as foreigners are still seeing how the new President -elect will move on long awaited measures on pension system overhaul, as well as redressing government accounts.


In Turkey, annual inflation surged to a staggering 25 percent in October, official data showed on Monday, hitting its highest in 15 years and underscoring the sustained impact of a currency crisis on the wider economy. Month-on-month, consumer prices jumped 2.67 percent, higher than the 2.0 percent forecast in a Reuters poll. October inflation was driven by a 12.74 percent month-on-month surge in clothing and shoe prices and a 4.15 percent rise in housing prices, the data showed. There was however little reaction from the lira, which weakened to 5.44 against the dollar from 5.43 beforehand. The currency has recovered recently from a sell-off driven by concerns over central bank independence and a U.S.-Turkish spat. The impact of the lira’s steep decline on the economy is still being felt with key indicators such as consumer and economic confidence falling to long-time lows and the government cutting its growth forecasts for the next three years.


U.K. Prime Minister Theresa May’s chances of wrapping up a Brexit deal at a special summit later this month seem to be fading as her Cabinet struggles to agree a way forward, people familiar with the matter said. A British official indicated the government was less hopeful of clinching a deal in time for a November gathering of European Union leaders, saying it would be a stretch to get the deal done and signed in the next three weeks. As British ministers fight among themselves over how to break the deadlock in negotiations, companies are not waiting around for clarity. On Tuesday, Schaeffler AG, the German maker of ball bearings, said Brexit was partly to blame as it announced that it will shrink its U.K. workforce by half to 500. Stifel Financial Corp. also said on Tuesday that it will buy the brokerage operations of Germany’s MainFirst Holding AG, ensuring that the U.S. firm can keep offering financial services in the EU after Brexit, Bloomberg reported. The U.K. will leave the EU with or without a deal on March 29, 2019. While 95 percent of the divorce has been already agreed to, negotiations are still stuck on the thorny question of how to avoid customs checks on the land border between the Irish Republic and Northern Ireland. Unless this issue can be resolved, there will be no withdrawal agreement at all, and the U.K. will crash out of the bloc with no deal. That outcome can cause major economic upheaval and could hit U.K. GDP by as much as 10 percent, according to government forecasts.


An interesting piece of news occurred in the energy market: U.S. oil production jumped to a record 11.6 million barrels a day last week, and rising U.S. output is a factor that could prompt OPEC members and allies to react when they meet over the weekend. Oil prices have cratered amid concerns of a global supply glut, and the jump in U.S. output to a point where it is now surpassing Russia, in addition to Saudi Arabia, only adds to these concerns. WTI futures are now down 20 percent from the near four-year high reached on Oct. 3. U.S. production is up a stunning 2 million barrels a day from the same period last year, and 400,000 barrels from the week earlier, based on weekly U.S. government data. Weekly numbers are often revised, but the higher production figure is in line with growing U.S. output expectations. OPEC’s Joint Ministerial Monitoring Committee will meet this weekend in Abu Dhabi, ahead of next month’s broader meeting in Vienna, and production levels are expected to be discussed. Saudi Arabia, de facto leader of OPEC, and Russia had agreed to raise production ahead of U.S. sanctions on Iranian oil, and the joint committee could decide to recommend lowering production. Analysts say Russian production is about 11.4 million barrels a day, and Saudi Arabia production is up to about 10.7 million barrels, after it upped production to compensate for the potential of Iran barrels coming off the market. Prior to early October, oil prices had been rising as Venezuela supply continued to dwindle and Iranian barrels came off the market. WTI futures topped out at $76.90 in early October. Cynically, we believe that it was not coincidental that oil prices dipped sharply during the month preceding the midterm elections as Trump called for lower oil prices quite loudly and publicly and he also appealed to Saudi Arabia forcefully to make that happen. Of course, the goal was to please voters before they cast their ballots. Now that the election has passed, we would not be surprised to see the oil prices go right back up.


Finally, as we write, the USD is on the rise and close to its 2018 highs. As we have been saying time and time again, we do believe in the continuing strength of the USD as the US economic fundamentals are way better than those of the other developed countries, and as the interest rate differential of 3% against the EUR, JPY and CHF stays as is or could even increase further in the future.


After this election week, we leave you with this timely quote: “Voters don’t decide issues, they decide who will decide issues”- George Will.



Market Weekly Highlights

Currencies & Commodities

  • The greenback has continued its way up since the start of the year despite the small set back on the back of US-China continued trade disputes. The USD climbed in October amid Federal Reserve’s expected rate hike guidance for 2019 and confirmation of a strong US Economy outlook. This week, the DXY strengthened and is currently trading at almost 97, fuelled by yesterday’s FOMC confirmation of the December expected rate hike and US mid-term election results, which are removing uncertainty. As a general remark, global trade disputes, US sanctions, latest Turkey and Italian contagion fear on Europe, Fed interest rate anticipations will remain present and add volatility to currency markets.
  • The EURUSD pair is lower this week at 1.1340 currently. The pair will remain volatile and under pressure on the back of the recent concerns expressed by the European Union over Italian government’s expansionary fiscal plans, raising overall conflicts within the common currency zone.
  • The CHF has also lost some value this week, with the USDCHF pair trading above parity, while the EURCHF was trading at 1.1422 this morning.
  • The Pound stopped its ascent, finishing unchanged this week, at 1.30, as the Northern Irish Democratic Unionist Party raised alarm over inclusion of EU’s backstop proposal in the Brexit deal, and the latest growth and production UK data. This figure is still higher than 1.2660 seen in the middle of August but well below the 1.4375 top seen early this year in April.
  • The JPY lost almost all the strength accumulated in the latest 2 weeks, now trading down for the week with the pair moving from 111.38 at the end of October, currently showing 114.00.
  • In EM, both the Russian Ruble and Turkish lira are suffering amid US sanctions for the former and economic crisis and political turmoil for the latter. However, since mid-September the Russian Ruble has strengthened against the USD trading from 70 to recently 67, as did the Turkish Lira which reached 7.23 in early August and is now at 5.49.
  • The Brazilian Real is slightly down for the week, now at 3.75 against the USD. However, it enjoyed a 13% pre-election rally, but has not fully recovered from the 20% losses since the start of the year amid lower appetite for emerging market currencies sparked by trade-war fears and rising US interest rates.
  • Bitcoin has been very stable these past few weeks, at around 6’400$.
  • Crude oil WTI is down again this week, to $59.77 per barrel, amid US dollar strengthening, Trade War escalation and mounting pressures from US sanctions on Iranian Oil; Brent is trading at about $69.70.

Fixed Income

  • 10Y U.S. Treasuries yields, which had traded in a range during the last quarter of 2017 from 2.30% to 2.40%, crossed the 3.25% this month amid inflationary pressures and FED rate hikes, ending up currently at 3.20%.
  • The Japanese 10-year JGB yield has traded in a range from 0.020% to 0.060% for the first 6 months and then hit 0.16%; as BOJ tapers and it has dropped back to 0.12%, levels seen in early February.
  • In Europe, the German Bund yield nearly doubled at one point this year, jumping from 0.40% to 0.80%, but then came back down as low as 0.20% in May on the back of Italian crisis fears. Now it is at 0.43%, on the back of the latest election results, higher than where it closed 2017. Same goes for the French 10Y Yield, which had crossed the 1% during February but dropped as much as 0.60% in summer, to then trade back higher at almost 0.90%, and now currently reaching 0.80%.
  • In Peripheral Europe, Italian 10Y yields are now trading just below 3.50%, levels seen in May when their internal political turmoil kicked-off, well above the 1.70% low April levels. The Spanish 10Y yields trade some 200 bps, lower than Italy at 1.60%, just where it started the year at 1.61%.


  • Markets in the US are almost all up since last Friday, with futures pointing south for the moment. All Indices remain positive for the Year 2018, with NASDAQ being the strongest performer and posting +9.09% positive yearly return, despite the 10% drop from the highest levels reached this year. SP500 and DJIA are up, respectively by +4.98% and +5.95% YTD. The SP500 is currently at just above 2’800, the DJIA being just a couple of points below 26’200, while Nasdaq is trading some points below 7’335.
  • In Europe, markets are all down for the week and showing important negative returns for the year so far. The Eurostoxx50, DAX, Spanish IBEX 35, Italian FTS MIB and Swiss SMI are all down by -8.34%, -11.28%, -9.36%, -12.14% and -3.63%.
  • In Asia, the Nikkei was almost flat for the week and negative for the year marking -2.26%, while Hang Seng is down by -14.43%. BOVESPA is down for the week but turned positive for the year showing a strong positive performance of +12.07% helped by the election optimism.


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