November 4, 2019 / 8:46 AM / 11 days ago

Daily Briefing: November surge

LONDON (Reuters) - November is being kind to world markets so far, with Wall St's S&P 500 storming to new records and MSCI's all-country index of world stocks clocking up its best levels since February of last year.

FILE PHOTO: Traders work on the floor at the New York Stock Exchange, October 31, 2019. REUTERS/Brendan McDermid

The Vix “fear gauge” of U.S. stock market volatility is at its most subdued levels since July. And the dollar, whose persistent strength has been another source of tension on world markets over the past 18 months or more, is easing back gradually.

The dollar’s DXY index against the world’s most traded currencies fell to its lowest in almost three months on Friday and remains on the back foot first thing this week, while MSCI.s emerging market currency index hit its best levels since July.

The improvement of the global markets picture has been less of a sudden epiphany than a gradual turn in the underlying economic and political sagas that have been dragging on both hard data and sentiment all year.

Without any real specifics, U.S. and Chinese officials have once again convinced everyone they are about to agree later this month the so-called “Phase One” of a bilateral trade deal, to end a year of tariff wars between the world’s two largest economies.

China's Foreign Ministry said on Monday that President Xi Jinping and U.S. President Donald Trump have been in touch all through the recent trade hiatus via various means.

But with Washington insisting planned tariff hikes on Chinese goods scheduled for December are still on the table, and no indication that previous tariff rises will be rolled back, market optimism is still based on a good deal of faith and warm words rather than hard fact.

The other source of relief for investors is that U.S. and global economic data appears to have stopped deteriorating at least, lifting for now fears of an emerging recession over the horizon.

Friday's above-forecast U.S. jobs report still paints a picture of a slowing economy but one that's confounding the worst fears so far, even as the Federal Reserve delivered its third interest rate cut of the year last week. As significantly, U.S. corporate earnings are for the third quarter in a row defying consensus expectations for an annual aggregate contraction in Q3.

With three quarters of firms having reported for Q3, the aggregate is showing a modest profit rise of 0.2%, against pre-season forecasts for a shrinkage of more than 3%. U.S. economic surprise indices remain in positive territory despite a retreat from recent highs and the overall surprise index for the G10 most industrialised economies is flirting with a positive reading for the first time since mid-year.

The U.S. yield curve between three months and 10 years — a key bellwether of U.S. recession when inverted — is climbing yet again, having been negative for much of the time since May. At a positive 23 basis points, the curve is now at its steepest since early March.

Even with Tokyo markets closed on Monday, the rest of Asia major bourses matched Wall St’s rally from Friday. Shanghai was up 0.9%, with HK and Seoul up more than 1% each. European stock futures were up about 0.5% ahead of the open. Euro STOXX 50 futures hit their highest since end-Jan 2018, DAX futures hit their highest since mid-June 2018, and CAC 40 futures shot to their highest in almost 12 years.

The release of October manufacturing business surveys from around the world will be the main economic data news through the day, with Christine Lagarde giving her first formal speech as European Central Bank chief later on Monday.

Euro/dollar was firmer first thing, hitting its highest in two weeks and eyeing three-month peaks on any break of the October highs of $1.1179. With campaigning ahead of the UK's Dec. 12 election now in full swing, sterling was steady as it kept tabs on opinion polls.

In emerging markets, South Africa’s rand surged 1.5% after Moody’s on Friday kept the country’s sovereign credit rating clinging on to investment-grade despite cutting its outlook for the rating to negative once again following dire new government debt forecasts released as part of the medium-term budget last week. The rand has regained about half the losses it suffered after the budget details last Wednesday.

On the European corporate front, the optimism over trade talks is likely to lift car shares. In the automobile sector, there are also some M&A updates as Fiat Chrysler and Peugeot expect to sign a binding merger deal as soon as early December.

Investors also have some new earnings updates to digest. Ryanair is seen opening higher this morning after its quarterly profit after tax beat expectations. The company also cut growth plans as it expects to take delivery of its first Boeing 737 MAX in March at the earliest, two months later than it last forecast, which means the Irish low-cost airline now expects to fly fewer passengers than previously forecast.

Among top movers, Igas Energy shares are seen opening down 15-20% after an UK moratorium on fracking. Shares in Siemens Healthineers were down 4.4% in early Frankfurt trade after results. Shares in Wirecard were up 2.3% after it announced details of a share buyback programme.

Outside Europe, Saudi Aramco finally kickstarts what could be the world's biggest IPO and is expected to sell 1-2% on the Saudi bourse according to sources, but there is scant detail on the number of shares, pricing or when shares will be sold.

— A look at the day ahead from EMEA Markets Editor Mike Dolan. The views expressed are his own —

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