Monday October 31 Daily Market Primer

Happy Monday. Stocks fell slightly on Friday, but held up well overall, considering the latest chapter in the Clinton email saga broke while the market was still open.  The NASDAQ fell .5% as tech stocks continued to give up some recent gains.  US consumer spending, which accounts for about 70% of GDP, rose .5% in September, after falling .1% in August. The Fed’s favorite inflation measure, core PCE, increased .1% in September, and is running at 1.7% for the trailing 12 months.  This is slightly below the Fed’s target inflation rate of 2%.  Oil prices are sinking again after several members of OPEC ask for exemptions from production caps at talks in Vienna.  It seems like limiting production is a great idea – for everyone else.  Markets overseas were mostly down and US futures are just barely in the green.

	LAST	CHANGE	% CHG
DJIA	18,161.19	-8.49	-0.05%
Nasdaq	5,190.10	-25.87	-0.50%
S&P 500	2,126.41	-6.63	-0.31%
Russell 2000	1,187.61	-2.33	-0.20%
Stoxx Europe 600	339.53	-1.27	-0.37%
UK: FTSE 100	6,965.22	-31.04	-0.44%
CBOE Volatility	16.31	0.12	0.74%
Australia: S&P/ASX 200	5,317.70	33.90	0.64%
China: Shanghai Composite	3,083.88	42.71	1.40%
India: S&P BSE Sensex	27,930.21	-11.30	-0.04%
France: CAC 40	4,521.76	-26.82	-0.59%
Germany: DAX	10,669.18	-27.01	-0.25%
Italy: FTSE MIB	17,187.82	-136.41	-0.79%
Spain: IBEX 35	9,155.50	-45.80	-0.50%
U.S. 3 Month	0.289	-0/32
U.S. 2 Year	0.853	0/32
U.S. 5 Year	1.313	2/32
U.S. 10 Year	1.831	5/32
U.S. 30 Year	2.595	14/32
Germany 2 Year	-0.624	0/32
Germany 10 Year	0.156	4/32
Crude Oil	48.17	-0.53	-1.09%
Brent Crude	48.97	-0.74	-1.49%
Natural Gas	3.305	0.042	1.29%
S&P GSCI	367.58	-2.44	-0.66%
E-mini S&P 500	2127.25	3.5	0.16%

I don’t have to tell you what happened Friday with the FBI reopening the Hillary email investigation, unless you’ve been off-planet this weekend.  The main significance of this from a capital markets perspective is that it increases uncertainty about the election outcome as the polls have tightened again in the wake of the new revelations.  

There was speculation all weekend on the fate of BOE governor Mark Carney,  who was very popular before the Brexit vote but is less so now.  We should find out this week whether he leaves in 2018 or stays to 2021.

GE and Baker Hughes announced a deal which combines GE’s energy assets with Baker, but falls short of a merger. GE will own two thirds of a new public company.  Both stocks are up in the premarket.  Elon Musk, the Steve Jobs of his generation, unveiled a solar roof and more powerful batteries Friday in an attempt to influence investors ahead of the Tesla – Solar City merger which will be voted on November 17.  The reveal was on the old set of Desperate Housewives on the Universal lot in Hollywood.

Here’s the news:

E-mail saga

Hillary Clinton's once commanding lead in the polls is in jeopardy after the FBI announced on Friday that it would revive its probe into her e-mail practices, citing a fresh trove of correspondence said to be relevant to the case. With FBI Director James Comey Comey also coming under fire, an ABC/Washington Post poll finds Trump has gained ground, with Clinton ahead by just one point, compared with a 12-point gap a week earlier. With the FBI obtaining a warrant to search through the emails, Citigroup Inc. says the odds of a Clinton victory have fallen from 81 percent to 75 percent, adding that 'Black Swan' events have the potential to roil global markets. U.S. stock-index futures rose 0.01 percent, bucking losses in Europe.

Carney conjecture

Bank of England chief Mark Carney faces a torrent of speculation about his future after weekend reports that the governor looks poised to leave his position in 2018 — sticking to his original five-year commitment. However, the Financial Times reports that the Governor will serve a full term through 2021, citing friends close to the matter, pushing back against fervent Brexit supporters who have called for his resignation. Carney could put an end to speculation about his future as early as Thursday when the central bank holds a press conference to detail its latest policy decision. The pound barely budged in morning trading at $1.22.

OPEC failure

Oil fell after talks among producing nations in Vienna stalled over how to implement a deal to cut supply, with Iran and Iraq blamed for the deadlock. Talks will resume again in late November, with Oman and Russia stating they will only abide by a supply cut once OPEC has secured an agreement. Oil futures in New York fell as much as 1.1 percent after tumbling 2.1 percent at the end of last week, with Brent crude for December settlement trading at $49.57 a barrel.

Stocks drop

Energy shares and the Russian ruble tumbled after the OPEC news, with a gauge of energy stocks on the MSCI All-Country World Index slipping to one-month lows. In Europe, the Stoxx 600 Index was also dragged down by energy stocks, dropping 0.45 percent lower, The South African rand strengthened after fraud charges against Finance Minister Pravin Gordhan were dropped. The yield on 10-year U.S. Treasuries barely budged at 1.84 percent, after kissing a five-month high of 1.88 percent on Friday, amid a global bond rout. U.S. futures are modestly higher.

Spain stability

Over the weekend, Spanish Prime Minister Mariano Rajoy secured a second-round confidence vote in parliament, paving the way to form a minority government after a 10-month political impasse. Rajoy faces a delicate balancing act in his second term as he battles to address Spain's budget deficit and high unemployment rate amid a fractious parliament. GE is merging its oil and gas business with Baker Hughes. General Electric will own 62.5% of the combined company, and Baker Hughes shareholders will receive a one-time special dividend of $17.50 a share when the deal closes, Reuters reports. Tesla unveiled a solar roof. CEO Elon Musk unveiled the new product at Universal Studios in Los Angeles on Friday night, calling it a "fundamental part of achieving differentiated product strategy." Sony slashed its profit outlook. The electronics giant expects an operating profit of 270 billion yen ($2.6 billion) for the year ending in March after previously forecasting a 300 billion yen profit, Reuters reports. The reduced outlook comes as a result of impairment losses related to the sale of its battery business. One of the hedge fund industry's biggest names is shrinking. Brevan Howard has received redemption requests for about $2 billion, according to people familiar with the matter. The redemptions will take assets under management down to approximately $11.7 billion, or nearly half the size of a year ago. Charges are being dropped against South Africa's finance minister. The National Prosecuting Authority says it is dropping fraud charges against finance minister Pravin Gordhan because he "did not have the requisite intention to act unlawfully," Bloomberg reports. The South African rand is stronger by 1.4% at 13.6300 per dollar. Eurozone inflation is up. Consumer prices in the eurozone rose 0.5% year-over-year in October, up from the 0.4% YoY reading in September. The euro is lower by 0.4% at 1.0958. Oil is clawing back its early losses. West Texas Intermediate crude oil opened up to a loss of 1.0% after non-OPEC members failed to commit to a production cut. The energy component, however, has trimmed its early losses and now trades down at 0.5% at $48.38 a barrel. Stock markets around the world are lower. China's Shanghai Composite (-0.1%) slipped in Asia, and France's CAC (-0.7%) lags in Europe. The S&P 500 is looking to open high by about 0.1% near 2,128. Earnings reporting remains heavy. Cardinal Health, Loews, and Lumber Liquidators are among the names reporting ahead of the opening bell, while General Growth Properties and Tenent Healthcare highlight the companies releasing their quarterly results after markets close. US economic data flows. Personal income and spending will be released at 8:30 a.m. ET before Chicago PMI and Dallas Fed manufacturing cross the wires at 9:45 a.m. ET and 10:30 a.m. ET. The US 10-year yield is little changed at 1.85%. The Feds at War The surprise disclosure that agents from the FBI are taking a new look at Hillary Clinton’s email use lays bare, just days before the election, tensions inside the bureau and the Justice Department over how to investigate the Democratic presidential nominee. Investigators found 650,000 emails on a laptop that they believe was used by former Rep. Anthony Weiner and his estranged wife Huma Abedin, a close Clinton aide, and underlying metadata suggests thousands of those messages could have been sent to or from the private server that Mrs. Clinton used while she was secretary of state. The new investigative effort shows a bureau at times in sharp internal disagreement over matters related to the Clintons, and how to handle those matters fairly and carefully in the middle of a national election campaign. Mrs. Clinton’s team worked Sunday to play down the news and to undermine the credibility of FBI Director James Comey, while Senate Democratic leader Harry Reid sent a letter to Mr. Comey, accusing him of unlawful interference in the presidential race. Meanwhile, the late-breaking drama has even some Democrats wondering if Mrs. Clinton might be forced to rethink Ms. Abedin’s role if she is elected president. Bundle of Energy General Electric has reached a deal to combine its oil-and-gas business with Baker Hughes, creating an energy powerhouse that would give GE a cost-effective way to play any recovery in the industry. GE will contribute its oil-and-gas business and some cash to the new entity, which would have publicly traded shares and be controlled by GE. The combination creates a company with more than $32 billion in revenue that could cut costs to better compete with rivals such as Schlumberger to provide equipment and services to oil rigs and wells. It would enable GE to benefit from an expected recovery in the industry without having to splash out for a full acquisition of Baker Hughes. When Bots Attack The recent cyberattack that rendered more than 1,200 websites unreachable was a warning. Experts say a similar, or larger, attack could be launched tomorrow, and we’d be powerless to prevent it. No one seems to know who was behind the attack, launched by a “botnet” of thousands of internet-connected devices. That sounds reassuring, but is scary, writes our  Keywords columnist Christopher Mims. It doesn’t take a government or even a skillful hacker to make much of the internet inaccessible to millions. Anyone can buy similar capability for less than $1,000. Meanwhile, U.S. domestic law-enforcement agencies are on the cusp of gaining broader authority to hack into computers suspected of involvement in a cyberattack or other crime. In the end, all the proposals for a better-defended internet feel inadequate, but we may have no choice. Falling bonds said to signal economic improvement The 1.2% drop in Treasurys this month, the biggest loss in nearly two years, is a sign that the economy is recovering, says Bob Doll of Nuveen Asset Management. "I like the fact that interest rates are moving up a little bit. It means the overall environment is healing," he says. Bloomberg (31 Oct.)  S&P questions sterling as reserve currency The British pound's sharp drop in value threatens its global reserve currency status, S&P Global Ratings said. The country lost its top rating after the Brexit vote. Financial Times (tiered subscription model) (28 Oct.)  Ackman's Pershing Square Revamps Fee Structure as Losses Persist Oct 28 2016 | 6:15pm ET Bill Ackman's Pershing Square Capital Management has become the latest large hedge fund manager to offer its clients new fee arrangements in the face of poor performance, according to an investor letter seen by Reuters. Reuters Survey: Global Managers Sell Bonds, Raise Cash to 16-Month Highs Oct 28 2016 | 9:14pm ET Global investors raised their cash levels to 16-month highs in October by selling off bonds, according to a new Reuters poll, amid fears that the multi-decade bull market in bonds is actually nearing an end

Banks are hoarding $2.4 trillion of bonds.

The surging dollar might slam the brakes on a Fed rate-hike.

China's factories may export inflation around the world.

Europe's banks still have a $1.3 trillion bad-loan pile.

South Korea's president is in big trouble.

Clinton's strategy to question the legitimacy of a revived FBI probe brings risks.  Inflation, Long Quiescent, Begins to Stir Bank of England’s Mark Carney Faces Backlash From Brexit Backers Goldman Sachs Has a New Model: Apple Skyrocketing West Texas Land Prices Have Oilmen Uneasy EU, Canada Sign Landmark Free-Trade Agreement

The shock news on Friday that the FBI has more Clinton emails to review had an immediate impact on financial markets. The Mexican peso instantly weakened, rising above 19 to the dollar, and the S&P 500 slid about 20 points. Yields on 10-year U.S. Treasuries also fell — although not too dramatically. It's not particularly surprising that equity markets reacted negatively to the news. Markets, as they say, hate uncertainty. And a Trump presidency would be a sharp break from the status quo — a status quo that has been very good for stocks for the last several years. What Treasuries would do under a Trump presidency is perhaps a more interesting question. Friday's move showed an immediate bout of Treasury buying when the news hit. But some have argued that Trump would be bearish for U.S. government debt due to his tax cuts and fiscal stimulus plans. It's unclear if the market has internalized that view. Nevertheless, it seems safe to say that the next week of trading will be dominated by the election. There's no other story that's going to break through until at least the middle of next week and perhaps longer. So keep an eye on Treasuries to see how they react to the final furious set of headlines and poll numbers that we're about to come out.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, FINalternatives