Friday November 11 Daily Market Primer

Happy Veteran’s day.   Its also Singles Day in China, an invention of Alibaba to sell billions of dollars worth of merchandise in 24 hours. And its working (BI story below).   

Here’s a very quick Daily Market Primer for those of us working today.  The divergence between the three main US stock indexes yesterday was highest I have seen in a while.  The market is obviously trying to pick winners and losers.  So far, health care and banks are the winners – big league! – and tech stocks are the losers and getting crushed.  This was captured while the market was still open.  The Dow closed up 1.2%, the S&P +.2%, and the Nas,  -.8%.

If you want to see how the UK is viewing the election, read the FT piece near the bottom.  Also the last story on this week’s bond rout is pretty interesting.     

To sum up, what a week! Here’s the news:

Policy positions

President-Elect Donald Trump is showing signs that he intends to follow through on his campaign promises. His transition team have pledged to dismantle the Dodd-Frank Act, a move that saw a bank rally yesterday, with Wells Fargo & C0. climbing 7.8 percent. The election winner's website also gave some details on the plan to abolish Obamacare. On immigration, one of Trump's signature campaign issues, all signs are that he intends to carry out sweeping reform. And yes, the wall is still there.

EM rout

The MSCI Emerging Markets Index slumped 2.1 percent, while EM carry-trades are unwinding, as climbing Treasury yields undermine the case for riskier government debt. The rout doesn't mean there are no opportunities in developing markets. One of the few bright spots is Chinese shares as the Shanghai Composite Index entering a bull market, with metal producers leading gains.

Bonds

The global bond sell-off continues apace this morning, with yields on Italy's 10-year debt climbing above 2 percent for the first time in 14 months. Across the world, more than $1 trillion has been wiped off the value of bonds as President-Elect Trump's policies are seen boosting inflation. U.S. bond-market bears have turned into winners as their contrarian calls for yields to rise come to fruition.

Markets drop

Overnight, the MSCI Asia Pacific Index lost 0.8 percent while Japan's Topix index added 0.1 percent. In Europe, the Stoxx 600 Index was 0.1 percent lower at 5:21 a.m ET, with the benchmark still on track for its best week since July. S&P 500 futures were little changed.

Tech slump

The so-called FANG stocks — Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc., — each closed more than 1.9 percent lower yesterday as concerns over Trump's trade policies weighed them down. Investors' expectations of a future Trump presidency also afflicted Tesla Motors Inc., which closed 2.5 percent lower, as clean-energy policies may get less attention under the new administration. In Asia, Alibaba Group Holding Ltd. broke its $14 billion Singles' Day sales record, with room to spare. Stocks hit all-time highs on Thursday. The Dow Jones Industrial Average gained 1.2% on Thursday to finish at 18,807.88, its highest close on record. The benchmark index has gained more than 500 points, or 2.6%, since Donald Trump was elected president. The US Treasury market is closed. Friday's closing for Veterans Day comes after yields at the long end of the curve have surged by more 40 basis points off Tuesday night's low following the election of Trump. The Bank of Korea kept policy on hold. The central bank held its key interest rate unchanged at 1.25%, as expected. "Looking at the Korean economy, exports have continued their trend of decline while the improvements in domestic demand activities appear to have weakened a bit," the BOK said in its statement. The Korean won ended Friday down 1.3% at 1,164.66 per dollar. The British pound is at its highest level since the "flash crash." The currency is up 0.7% at 1.26236, its highest level since the October 6 "flash crash," but remains nearly 20% below its pre-Brexit level. Alibaba is having a huge Singles' Day. The online retailer broke last year's record of $14.3 billion worth of sales and there are still six hours to go, South China Morning Post reports. ESPN is crushing Disney. Disney earned an adjusted $1.10 a share on revenue of $13.1 billion, both short of estimates, amid a drop in advertising revenue at ESPN. Nordstrom beats. The retailer beat on the top and bottom lines, earning an adjusted $0.84 a share on revenue of $3.54 billion. The results capped off a strong Thursday for the retail space as Kohl's, Macy's, and Ralph Lauren also topped estimates. J.C. Penney reports. On an extremely light day for earnings, the retailer is expected to announce a loss of $0.21 a share on revenue of $2.95 billion. Stock markets around the world trade mixed. China's Shanghai Composite (+0.8%) was among the overnight leaders, while Spain's IBEX (-1.6%) is a laggard in Europe. US economic data is light. University of Michigan consumer confidence will be announced at 10 a.m. ET, and the Baker Hughes rig count is due out at 1 p.m. ET. The Handover Begins Donald Trump’s transition team raced to form his cabinet on Thursday as more names were floated for some of the biggest jobs in the president-elect’s administration, including a foe of financial regulation for the powerful position of Treasury secretary. U.S. Rep. Jeb Hensarling, a Texas Republican known for his sharp criticism of the 2010 financial regulatory overhaul, is among a growing list of potential nominees for the cabinet, including Alabama Sen. Jeff Sessions and former New York Mayor Rudy Giuliani, among others. Mr. Trump’s campaign manager Kellyanne Conway said on Twitter that she has already been offered a White House job. Meanwhile, Mr. Trump met with President Obama for the first time in the Oval Office, as well as with Republican leaders on Capitol Hill. His transition team, which relies on a mix of GOP traditionalists and outsiders, promised to dismantle the 2010 Dodd-Frank law, while we report that Mr. Trump’s goal of undoing Nafta would confront the globalized auto industry. Confidence Boost The Dow industrials climbed to a record and bond yields rose around the world for a second day Thursday, as investors applauded the prospects of expansive fiscal spending under a Trump administration. The Dow has risen 2.7% since its close Tuesday, reflecting a bet that Republican control of the White House and Congress would enable passage of a fiscal stimulus plan, tax cuts and a regulatory rollback. Selling intensified in the bond market, with the 10-year Treasury note’s yield rising for the fourth straight day to 2.118%. Yet some believe a reckoning could await, reflecting unease over volatile stock and bond markets, tepid economic fundamentals and uncertainty over what policies will actually move forward in coming months. We probe why bank investors are predicting a Trump windfall, which sectors have been losers and winners since Tuesday and why forecasts for a Trump victory market collapse were so wrong. Holiday Cheer With just two weeks until Black Friday, executives at the nation’s biggest department stores said Thursday they are seeing signs that consumers are turning their attention from voting to shopping. Macy’s and Kohl’s cited improving sales trends and gave upbeat outlooks for the key holiday season, despite posting another quarter of declining sales as the chains struggle with changing shopping habits and competition from discounters. Nordstrom, meanwhile, reported a sales increase and lifted its financial targets for the year. As for an election hangover, Macy’s CEO Terry Lundgren said: “To have a group of the population feeling like their voices have been heard is a positive thing.” Shares of the companies rallied in Thursday’s trading, giving a lift to other retail stocks. Trump's tax cuts may be more important for the economy than his trade policies. Pimco has its first inflows since 2013. Blankfein quips Dimon should run Treasury for two reasons. China's tech giants are cloning the Apple store. The Bank of England's chief economist is thinking outside the box. EU’s Malmstrom signals free-trade talks with U.S. to be frozen. Nerdy Fed avoids politics. Donald Trump’s Foreign Policy Stances Sow Uncertainty Trump’s Vow to Target China’s Currency Could Be First Step to Trade War

This election post partum is from the FT:

Trump’s victory was a (white) working-class revolt

The post-mortem of Donald Trump’s election victory has been marked by new iteration of the “socio-economic anxiety or cultural and racial status anxiety” debate we addressed during the campaign. With new information about how people actually voted, many have insisted that it’s wrong to see a class revolt of the economically left-behind, pointing to exit polls and other polling data showing that Hillary Clinton beat Trump among the lower-paid but lost among the higher-paid. But a proper reading of the exit polls, and of geographic voting data from the actual election, confirm that this was indeed the left-behind striking back.

Take the exit polls first. It is always the case that the Republican party does relatively better higher up the income scale. What is more interesting is the direction of change — the swing in the margin of victory of one side over the other compared with previous elections. (The New York Times has created some wonderful visualisations of the margin swing by voter group.) This year, the voter group with the single largest swing from the Democratic to the Republican candidate since 2012 consisted of those on incomes below $30,000 a year. The swing in that group was 16 percentage points, which is enormous. The next group up also saw a sizeable swing towards Trump, while higher-income groups swung the other way. (The Resolution Foundation’s Torsten Bell discusses the importance of these findings at some length.)

Grouping voters by education, which is of course highly correlated with income (both are an aspect of class), unsurprisingly tells a similar story. The Pew Research Center highlights a 7 percentage point swing towards Clinton among college graduates (or higher degrees), against a 12 percentage point swing towards Trump among those with at most a few years of college but no degree. Looking at white voters only, the education gap is starker: a 10-point swing for Clinton among degree holders and a 14-point swing for Trump among non-degree voters (taking it to a 39-point Republican margin for that subgroup, the widest on record).

Exit polls correlate individual attributes with how people voted but are vulnerable to statistical problems such as unrepresentative or biased samples or respondents not telling the truth. In contrast, actual voting data cannot be known at an individual level (fortunately) — but it can be disaggregated by voting district and is at least accurate and complete. And it turns out that local election results confirm a strong connection between economic fortunes and voting behaviour.

In Brussels, a Bruegel analysis shows that states with greater income inequality were more likely to vote for Trump — even after taking into account the influence of income and education levels and of ethnic diversity and presence of immigrants. Meanwhile Jed Kolko finds that the county-by-county victory margin for Trump, while not correlated with the local unemployment rate, is highly correlated with the share of jobs that are classified as “routine”. And more importantly, the swing towards Trump was “much stronger in counties with a higher share of routine jobs; [and in counties] where unemployment was higher, job growth was slower and earnings were lower”.

And finally, a Wall Street Journal analysis of both exit polls and county-by-county results finds a greater explanatory role of scepticism towards international trade and economic worries generally than of worries about immigration, especially in the Rust Belt states where Trump’s decisive breakthrough occurred.

Admittedly, economic and racial-cultural concerns are entangled, both in the data and in the minds of many voters. There is no denying that Trump support often takes the form of unsavoury aggression within the white working class towards immigrants and minorities. But it is obvious, too, that this support comes from groups and places that face real economic pressures.

Kolko is right to conclude that “it is clear that the places that voted for Trump are under greater economic stress, and the places that swung most toward Trump are those where jobs are most under threat . . . Trump’s appeal was strongest in places where people are most concerned about what the future will mean for their jobs, even if those aren’t the places where economic conditions are worst today.”

Those who rightly worry about the nativist and racist strands of Trump’s populism need to be clear-eyed about the role of economic frustration in enabling or intensifying them. Trump’s policies are not likely to alleviate those frustrations. That doesn't mean it would not be good to do so.

There are all kinds of interesting moves happening right now in financial markets. Correlations that had been stable are blowing up. Commodities are surging while emerging markets are plunging. Stocks have been soaring, but so have bond yields. The Dow hit new highs yesterday while the NASDAQ tumbled. Of course, the strong "risk on" rally in the developed world since Tuesday night has given people serious whiplash, while leaving strategists (who basically all got it wrong) grasping for an explanation. Yesterday on What'd You Miss, Eric Lonergan, a hedge fund manager at M&G Limited, explained that in markets, price always moves before the narrative. For example, when markets briefly crashed after Trump's win, there was a narrative about populism and uncertainty. When they rebounded and surged, the narrative switched to being about deregulation and reflation. The point is that nobody really knows. On the subject of the bond plunge -- which has erased $1 trillion in value this week -- he argued that bonds are suddenly perceived as having risk again. In other words, it's not necessarily about "reflation" or "infrastructure spending" but the realization that bonds are capable of losing money is contributing to the violent sell-off. To Lonergan's point: it feels like it's time for some new market narratives.

Source: Bloomberg, BI, WSJ, FT