Tuesday November 1 Daily Market Primer

Happy November.  The US stock market was resilient yesterday in the face of the Clinton email bomb on Friday, and sinking oil prices, which seem to have been correlated with stocks this year, with the major indices flat all day.  BOE Chief Mark Carney ended speculation on his tenure by announcing he will stay until June 2019 and help see the UK through Brexit.  The Bank of Japan met and held monetary policy steady, which was no surprise.  This means negative and zero interest rates will persist awhile longer in Japan.  The Reserve Bank of Australia also met and held its reserve rate at 1.5%. Chinese PMI (Purchasing Managers Index) surprised to the upside with the best print since July 2014 of 50.4.  Overseas, markets are mixed and pretty quiet on Tuesday, and US equity futures are barely positive.

	LAST	CHANGE	% CHG
DJIA	18,142.42	-18.77	-0.10%
Nasdaq	5,189.13	-0.97	-0.02%
S&P 500	2,126.15	-0.26	-0.01%
Russell 2000	1,191.39	3.77	0.32%
Global Dow	2,448.64	4.74	0.19%
Japan: Nikkei 225	17,442.40	-0.97	0.10%
Stoxx Europe 600	338.00	-0.97	-0.29%
UK: FTSE 100	6,963.01	8.79	0.13%
CBOE Volatility	17.09	0.03	0.18%
Australia: S&P/ASX 200	5,290.50	-27.20	-0.51%
China: Shanghai Composite	3,083.88	42.71	1.40%
India: S&P BSE Sensex	27,876.61	-53.60	-0.19%
France: CAC 40	4,499.56	-9.70	-0.22%
Germany: DAX	10,648.89	-16.12	-0.15%
Italy: FTSE MIB	17,137.87	12.82	0.07%
Spain: IBEX 35	9,141.10	-2.20	-0.02%
U.S. 3 Month	0.351	0/32
U.S. 2 Year	0.857	-1/32
U.S. 5 Year	1.331	-3/32
U.S. 10 Year	1.854	-8/32
U.S. 30 Year	2.605	-17/32
Germany 2 Year	-0.605	-1/32
Germany 10 Year	0.182	-5/32
Crude Oil	46.96	0.1	0.21%
Brent Crude	48.32	-1.39	-2.80%
Natural Gas	3.164	-0.031	-0.97%
S&P GSCI	364.94	3.32	0.92%
E-mini S&P 500	2123.75	3.75	0.18%

It’s the first week of the month, and you know that that means…we all look forward to the October jobs report on Friday morning.  I forgot to mention yesterday that CenturyLink is buying Level 3 Communications $34.7 billion.  If you are not familiar with these companies, both own global massive fiber optic networks and provide high speed communications services, mostly for business.  M&A is really heating up lately and this is another pretty large deal.  Shell and BP are out with earnings this morning and both beat expectations as they adapt to lower oil prices with expense cuts.  Global news and financial technology provider Thompson Reuters announced 2000 layoffs today, hopefully not on help desk (they are our go-to information provider with the Eikon desktop platform). 

The last article breaks down services and goods inflation, which are behaving differently.  In case you are wondering how the renewed FBI investigation has effected the race, in spite of endless press chatter about the polls tightening, the scorecard from pollster and statistician Nate Silver’s FiveThirtyEight.com, which is updated constantly, still shows a clear lead for Hillary Clinton:

Here’s the news:

Oil stays low

A barrel of West Texas Intermediate for December delivery was trading near a one-month low at $46.66 at 6:20 a.m. ET with analysts at Goldman Sachs Group Inc. predicting a slide to the low-$40s if an OPEC deal to cut output fails to emerge. Gasoline futures in New York jumped the most in almost eight years after an explosion shut down the largest fuel pipeline in the U.S. In corporate news, BP Plc saw its profits slide by 49 percent in the third-quarter. While that number beat expectations of a larger drop, shares in the oil-major fell in London trading. Royal Dutch Shell Plc's third-quarter profit came in a full $1 billion ahead of the average of analyst estimates, with the company's February acquisition of BG Group Plc boosting production. Shares were 3.4 percent higher at 6:16 a.m. ET.

Carney staying at the BOE

Bank of England Governor Mark Carney says he will remain at the helm of the central bank until June of 2019, ending months of speculation about his future. With the British Prime Minister expected to trigger Article 50 to start the official process of the U.K. leaving the European Union by the end of March next year, and that process expected to take a maximum of two years, the governor's new departure date will see him in position throughout the negotiations. The pound rallied after the announcement and was trading at $1.2249 at 6:08 a.m. ET. U.K. manufacturers are continuing to benefit from weaker sterling, with IHS Markit's Purchasing Managers Index coming in at 54.3 for October, down from the previous month's 55.5, but still well above the 50 level that indicates an expansion.

BOJ holds, China data beats

The Bank of Japan voted to keep its monetary policy unchanged while delaying the projected timing for reaching its 2 percent inflation target to beyond the end of Haruhiko Kuroda’s term as governor. The yen was trading at 105 to the dollar at 6:20 a.m. ET, near a three-month low. In China, an official manufacturing purchasing managers index rose to 51.2 in October, the highest level since July 2014, while non-manufacturing PMI rose to 54. Also in China, trading in credit default swaps began yesterday on the nation's interbank market as the country faces mounting bond failures.

Markets inch higher

Overnight, the MSCI Asia Pacific Index added 0.3 percent while Japan's Topix index closed the session broadly unchanged. In Europe, the Stoxx 600 was 0.2 percent higher at 6:17 a.m. ET with Standard Chartered Plc dropping 5.5 percent following disappointing earnings. S&P 500 futures advanced 0.2 percent.

One week to go

This day next week will be voting day the in long-anticipated U.S. presidential election. Last week's revelation that the Federal Bureau of Investigation is reopening its inquiry into Hillary Clinton's use of private e-mail has put the election back to the top of currency traders' list of worries, as polls that had shown the Democratic nominee with a commanding lead start to tighten. The two leading candidates have drawn up plans for a post-vote battle in case there are opportunities to challenge results in decisive states. Keep up with all the final week developments at Bloomberg Politics.

China's factories grew at their fastest pace in over two years. China's manufacturing PMI rose 0.8 points to 50.4 in September, making for the fastest expansion in the sector since July 2014. Economists were expecting the reading to remain in contraction (below 50.0) with a 49.6 print.

The Bank of Japan kept policy on hold. Japan's central bank voted 7-2 to keep its key interest rate and target for the 10-year JGB yield at -0.1% and 0%, respectively, warning that risks to growth and inflation were "skewed to the downside." The Japanese yen is weaker by 0.2% at 105.01 per dollar.

Australia's central bank held rates. The Reserve Bank of Australia held its benchmark interest rate at 1.50%, as expected, and said "the Bank's forecasts for output growth and inflation are little changed from those of three months ago." The Australian dollar is stronger by 0.8% at .7671 against the dollar.

Korea's exports slid. Often referred to as the world's economic canary in the coal mine, or a preview of what's to come, Korea's exports fell by 3.2% to $41.9 billion. In this case, however, labor strikes at major automakers and the production stoppage of Samsung's Galaxy Note 7 were largely to blame. The Korean won rose 0.4% to 1139.77 per dollar.

The Fed begins its 2-day meeting. Ahead of the Fed's meeting, Peter Hooper, Deutsche Bank's chief economist, answered some questions from Business Insider's Akin Oyedele on the Fed and what to watch for in the global economy next year. Fed funds futures data compiled by Bloomberg shows the market is pricing in a 16.1% chance of a November interest-rate hike and a 71.4% chance of a rate hike before the end of the year.

Gasoline is surging. An explosion of a Colonial pipeline in Alabama is causing gasoline futures to skyrocket higher. Futures for December delivery are up by 10.8% at $1.5730 a gallon.

October was a record-breaking month for deals. Mergers-and-acquisitions volume totaled $489 billion in October, the highest monthly amount in at least 12 years, Bloomberg's Elizabeth Fournier reports.

Stock markets around the world are mostly higher. Hong Kong's Hang Seng (+0.9%) led in Asia, and Britain's FTSE (+0.3%) paces the advance in Europe. The S&P 500 is looking at a higher open of about 0.4% near 2,133.

Earnings reporting remains heavy. Archer Daniels Midland, Coach, Kellogg, Molson Coors Brewing, and Pfizer highlight the names reporting ahead of the opening bell while Herbalife, Sturm Ruger, and Texas Roadhouse are among the companies releasing their quarterly results after markets close.

US economic data flows. Markit US manufacturing PMI will be released at 9:45 a.m. ET before construction spending and ISM manufacturing both cross the wires at 10 a.m. ET. The US 10-year yield is higher by 2 basis points at 1.84%.

Eight Days A Week
Donald Trump is sharpening his case against Hillary Clinton and laying down stakes in Democratic-leaning states as renewed scrutiny of her emails buoys his campaign in the homestretch of the 2016 race. Mrs. Clinton is seeking to get back on offense by dismissing the importance of the FBI’s renewed focus on her and her senior aides, but as the candidates’ strategies shift, some polls showed a slight tightening in the race. Meanwhile, the Justice Department said in a letter to lawmakers Monday it would work with the FBI to resolve the Clinton email investigation as soon as possible, but the message appeared unlikely to tamp down the emotions surrounding the issue. With the help of sophisticated technology, the most relevant of the trove of 650,000 emails could likely be pinpointed by Election Day, experts say. But FBI Director James Comey’s bombshell disclosure will be felt long after the election, writes our Washington bureau chief Gerald F. Seib.

Health Care Blues
When Affordable Care Act insurance marketplaces launched in fall 2013, Arizona seemed like a success. Eight insurers competed to sign up consumers, offering a wide variety of plans and some of the lowest premiums in the country. With ACA enrollment starting today, Arizonans will find in most counties only one insurer selling exchange plans for 2017, and premiums for some plans will be more than double this year. Only last-minute maneuvering prevented one Arizona county from becoming the first in the nation to have no exchange insurers at all. And a similar dynamic is playing out in other states’ exchanges: About one-third of U.S. counties are estimated to have just one exchange insurer next year, up from 7% this year. Our look at what happened in Arizona shows problems with the design and implementation of the ACA, combined with early missteps by insurers.

China Bubbles
China’s financial markets have long been topsy-turvy, but the last few years have been especially bumpy. Booms and busts—some lasting months, others just weeks—have rippled from stocks to bonds to commodities to virtual currency. A succession of asset bubbles has formed in the world’s second-largest economy, caused by a torrent of speculative money chasing too few investment opportunities. Regulators are playing a game of whack-a-mole against speculators, quashing one bubble only to see another inflate. The biggest apparent bubble is in housing, but prices have surged for niche assets, too, such as calligraphy, antiques and art. The zooming prices and frenetic trading are alarming to economists and Chinese leaders, who worry the volatility could mean China’s credit expansion has gone too far and is producing hazardous economic side effects. The risks have global significance.

Experts: China's asset bubbles signal economic issues

Asset bubbles ranging from housing to art to iron ore are popping up in China, and futures prices are jumping around, creating fear in investors, experts say. "There would have to be an improbable number of economic coincidences coming together for all of these minibubbles not to be a sign of a bigger economic issue," said Michael Pettis, a Peking University finance professor. The Wall Street Journal (tiered subscription model) (01 Nov.) 

Metal investors expect the worst is over

After a three-year slump in metal prices, investors and traders have taken positions worth $16 billion, indicating confidence that zinc, copper, aluminum and nickel prices will rebound. Financial Times (tiered subscription model) (31 Oct.) 

CenturyLink to pay $24B for Level 3 Communications

CenturyLink said it will take over Level 3 Communications in a cash-and-stock deal valued at about $24 billion. After the announcement, CenturyLink's share price dropped 12.5%, while Level 3's rose 4.5%. Reuters (31 Oct.) 

Blackstone to pay 33% premium for TeamHealth

TeamHealth Holdings said it will be acquired by private equity firm The Blackstone Group in a deal worth $6.1 billion. The $43.50 a share Blackstone is paying is a 33% premium to TeamHealth's price when markets closed Oct. 3, immediately before reports of talks between the companies became public. Reuters (31 Oct.) 

Oppenheimer launches 2 ETFs implementing ESG strategies

OppenheimerFunds has brought to NYSE Arca two exchange-traded funds investing in equities based on environmental, social and governance principles. The Oppenheimer ESG Revenue ETF is designed to deliver the performance of the OFI Revenue Weighted ESG Index, while the Oppenheimer Global ESG Revenue ETF seeks to replicate the performance of the OFI Revenue Weighted Global ESG Index. ETF.com (31 Oct.) 

How a smooth talker convinced bankers to invest $32 million, then vanished.

A waterfight like no other may be brewing over Asia's rivers.

History might well remember 2016 as the year that populism swept the developed world.

Why electric cars excite the world's biggest mining company. 

Bitcoin isn't anonymous enough.

Cashew prices go bananas.

Oregon Voters Asked to Boost Corporate Tax Rate

With Oil Deal, GE CEO Immelt Revamps His Strategy

Bank of England’s Mark Carney Extends Term to Stay On Through Brexit Talks

The Market Sends a Miserable Message: More Inflation, Weak Growth

When will inflation show up? That's a question that people have been asking non-stop for years since the financial crisis. But instead of asking "when" the inflation will come, it's better to ask "where" there are signs of price increases. Here's where it gets interesting. As George Pearkes of Bespoke Investment Group pointed out yesterday, following the release of the latest Personal Consumption data, services inflation is up 2.4 percent year over year while goods inflation is down 1.1 percent over the same period. As the attached chart shows, services prices have been remarkably firm and steady since the crisis, whereas the pricing of goods has jumped all over place and remains in deflation. A key difference between goods and services is that the former are sold and traded on a much more global market, and thus more prone to reflect international economic conditions such as spare capacity in China, which is beyond the Federal Reserve's control. This is a topic that Matt Busigin of New River Investments tackled in a recent blog post. "The consequence of trade is that there has been a bifurcation of price level change, but not upon the stunted pivot of need or want, but rather on domestic or international," he writes. This, then, is the key thing to watch with inflation: What's happening with slack for domestic industries and for goods that are traded around the world? If the U.S. services sector continues to stay firm and slack begins to get gobbled up internationally (note the strong Chinese manufacturing PMI and surging zinc prices) then a key drag on aggregate inflation could rapidly diminish.

Source: Bloomberg, BI, WSJ, CFAI Fin. Newsbrief, Reuters, FT,  ETF.com, FiveThirtyEight.com