October saw the DJIA rally to an all-time high above 12,000, and the Nasdaq composite and S&P 500 both climbed to their highest level since 2001, as crude fell below $57 for the first time in ten months. November poses a new set of risks and opportunities for the markets. This months data, including economic releases, some key earnings reports, may affect markets and drive central banks to adjust their policy. In addition, the U.S. midterm election could shape market events for the next two years.
The US elections may be the premier event of the fall, and have implications for the economy and markets for years to come. The revelations about Congressman Foley, along with the Presidents dwindling approval rating (around 38%) have many political analysts convinced that Democrats will retake one or even both houses of Congress. If Republicans stay at home on November 7th, the US House, led by Nancy Pelosi, could spend much of the next two years blocking Bush Administration initiatives and holding hearings on Iraq. Market watchers may also feel uneasy about the specter of Democratic tax and spend policies of the past returning to Washington (though the Republican-controlled Congress has continued to push government outlays to new records). A resurgence of Democratic power could lead to some less business-friendly legislation, but also may end in the legislative gridlock that helped keep the economy bustling during the Clinton administration.
Consensus among equity analysts is that a convincing Democratic victory could have a big impact on certain stocks, primarily on fears that Democrats might have designs on rolling back capital gains tax cuts. Government sponsored entities (GSEs) FNM and FRE are expected to get a boost from a change in power, as the Democrats oppose new GSE portfolio restrictions, and indeed these stocks have surged in the last couple of months. A Democratic Congress is also expected to push for more price controls on prescription drugs, bolstering generic makers at the expense of big pharmaceutical companies. Should the GOP manage to keep control, it could take some pressure off of energy names, as fears about Democratic calls for windfall taxes are allayed. Another election issue that could cost big oil companies hundreds of millions of dollars in revenue is Proposition 87 on the California ballot. The referendum item proposes a tax on every barrel of oil produced in the state, going toward a fund to pay for alternative fuel primary research (i.e. universities); oil companies will not be allowed to pass along the cost of this tax to consumers. One historical note bodes well for stocks: equity markets have gained an average of 20% in year following the last three times Congress has been thrown over to the opposition party.
On the equity front, a few notable earnings will be issued in November. Technology blue chips Cisco Systems (reports 11/8) and Dell (11/16) will report this month. After reporting its worst earnings per share number in four years last quarter, Dell is expected to show a modest sequential increase for the first time in a year, as it heads into the holiday quarter. Cisco Systems has performed well over the last couple of quarters, propelling the stock to a two-year high; investors will look to see if CEO Chambers can keep the recent momentum going in Q1, typically Ciscos slowest quarter. Five DJIA components will also be reporting: DIS (11/9), AIG (11/9), WMT (11/14), HD (11/14), HPQ (11/16). Wal-Marts report will be of particular interest, as the company has been slowly ratcheting down comparable store sales expectations over the last two months, blaming higher energy costs.
Energy prices fell further in Oct., notwithstanding OPECs announcement to cut output by 1.2M b/d at its meeting in Qatar and an improving demand and supply picture in the U.S. While OPECs declaration was 200,000 b/d more than anticipated, doubts about the cartels conviction to implement the cut persisted during the month as members failed to send a unified message to the market. Today, OPEC skeptics are still jeering after the passing of the self-imposed deadline of Nov. 1 and amid no sign that the producing group, as a whole, will execute the full cut, even though Saudi Arabia gave an assurance there would be no backpedaling. OPEC is next scheduled to meet in December in Nigeria. Whether OPEC will announce any further cuts then remains uncertain, given that some members indicated at month-end that any talk of such cuts was premature.
Unless demand is stoked by a much cooler than normal winter or OPEC show uncharacteristic rigor in implementing its 1.2M b/d cut, energy prices will likely see limited upside in November. Hurricane season is winding down (officially ending November 30) without incident, energy stockpiles remain plentiful, economic growth in the U.S. has slowed, and spare world oil production capacity is expected to rise to 2M b/d in Q2 07 from 1.5M b/d currently, adding weight to the notion that energy bulls wont find a catalyst this month.
Following heightened rhetoric on inflation by Fed officials during the month--with Chairman Bernanke, Vice Chairman Kohn, and Richmond Fed President Lacker, all expressing concerns about the elevated level of the core PCE (see October Preview)-- the FOMC opted nevertheless on Oct. 26 to leave its target rate unchanged at 5.25% for the third consecutive meeting. The FOMCs statement largely mirrored its previous one in September, though differed in two notable respects: the phrase that prices of energy and commodities have the potential to sustain inflation was omitted, while language was inserted acknowledging the slowing of the economy over the course of the year along with an expectation that the economy should continue to grow at a moderate pace. The statement, in conjunction, with 3Q GDP data released on Oct. 27--which showed the economy slowing more than expected to 1.6% from 2.4% in Q2-- brought about a shift in interest rate sentiment back to one of looser monetary conditions in the 1H 07 from a symmetrical or even tighter monetary outlook. As a result, the US dollar suffered its largest weekly decline in the 4th week after gaining against major world currencies in the first two weeks of the month.
Although core PCE remained above the Feds perceived 2% ceiling at 2.4% annualized in September, down from 2.5% in August, economists point out that inflation lags economic growth and therefore, may have already peaked in light of the Q3 GDP data. Assuming this is true, a scenario in which the Fed may be more concerned about the risks of a weaker economy, in particular, a sharper than anticipated decline in the housing sector, than inflation would be less supportive of the US dollar heading into the New Year. While growth in Q4 is expected to rebound on the back of lower energy prices, which will impact consumption and trade favorably, the Fed can be expected to remain on guard about the correction in the housing sector, thus precluding any higher interest rate outlook to the benefit of the dollar over the near-term.
Taking a cue from the weaker than expected Q3 GDP data and Chicago PMI data for September, Fed fund futures rose toward-month end to indicate more than a 50% chance of a quarter-point rate cut by May of next year versus less than a 50% probability of easing in 1H 07 at the end of September. Still, risks to this scenario remain, including a sooner than anticipated recovery in the housing sector, a rebound in energy prices and increased wage cost pressures due to a continued high level of resource utilization (e.g. tight labor market). In light of this, Novembers Fed-speak will be closely watched: the minutes of the Oct 24 rate decision will be released on 11/15, Chicago Fed President Moskow speaks on the economy on 11/6, and Richmond Fed President Lacker speaks to economists on 11/16.
In contrast to the slowdown in the U.S., the economic recovery in the Euro-zone has been on firm footing and become more broad-based. According to figures released by the EU Commission at the beginning of Oct., growth in the Euro-region reached an annual rate of 3.4% in 1H 06, its highest level in 6 years. Also during the month, the Bank of France upped its growth forecast for the year to 2.2% from 2.1%, while the German government increased its outlook to 2.4% from 1.6%. The EU Commission now expects growth of 2.5% in 06, down slightly from its previous estimate, but said in a recent report that risks were tilted to the upside thanks to falling energy prices and lower employment. On the inflation front, preliminary figures for Oct. showed that inflation fell to 1.6% annualized from 1.7% in September, both below the ECBs target of 2.0%. However, the German Statistics Office reported that German CPI in Oct. was expected to rise faster than economists estimates by 1.2%. The German data, taken together with recent comments by ECBs Weber, who said that the current decline in inflation was at best temporary and that inflation may rise above 2% in 2007, suggest that the ECB will not relax vigilance on inflation anytime soon.
While the ECB left rates unchanged on November 2 at 3.25%, the market expects the ECB will move in December. This view should underpin the euro against major currencies in November. Looking beyond December, ECB officials, Weber and Smaghi, have signaled that further rate increases cannot be ruled out. Smaghi said recently that If the economy grows above its potential and the output gap becomes positive, keeping inflationary pressures and expectations under control could require that the interest rate is increased above the long-term equilibrium level."
U.S. Treasury prices finished Oct. with slight gains following weaker than anticipated U.S. economic data toward month-end, including Q3 GDP, Existing Homes Sales and the Chicago Purchasing Manager Index for September, and a benign FOMC statement. Heading into November, action in the Treasury market should likely remain dictated by the evolution of the housing market and prices. Investors will be looking for an end to the blood-letting in the housing data, which showed some signs last month that the decline may be slowing. Existing Home Sales (to be released 11/28 ) hit another 2-year low last month, while Building Permits (11/17) slumped to a 5-year low last month. Housing starts (11/17) did manage to perk up a bit last month, as did the New Home Sales (11/29), after a sharp decline that began this past winter. Notably, some FOMC members have expressed optimism that the housing decline is subsiding; even the normally hawkish Jeffrey Lacker recently stated that the fundamentals of the housing market are still solid.
In sum, the events in November, headlined by the US election could trigger a new trend in markets. With data scenarios continuing to be confirmed, central bankers in Europe and the US could soon find reason to implement a new round of tightening. Should the voters put Democrats back in control of Congress for the first time since 1994, and if the Fed feels freer to act after the election, the markets may find this month unsettling and see reason to reverse some of the recent strength.
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Trading commodity futures and options involves substantial risk of loss. The recommendations contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results. This is not a solicitation of any order to buy or sell, but a current futures market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!
Economic Reports and Expiration Notices
Source: Moore Research Center, Inc.
| Date |
Reports |
Expiration & Notice Dates |
11/09
Thu |
7:30 AM CST - Supply & Demand
7:30 AM CST - Crop Production & WASDE
7:30 AM CST - Import & Export Prices(Oct)
7:30 AM CST - Trade Balance(Sep)
7:30 AM CST - USDA Weekly Export Sales
7:30 AM CST - Initial Claims-Weekly
9:00 AM CST - Wholesale Inventories(Sep)
9:30 AM CST - EIA Gas Storage
3:30 PM CST - Money Supply
Cotton Ginnings
|
|
11/10
Fri |
2:00 PM CST - Dairy Products Prices
|
LT: Nov CRB Index(NYBOT)
Nov CRB Index Options(NYBOT)
Dec Coffee Options(NYBOT)
Dec Sugar Options(NYBOT)
Dec Cotton Options(NYBOT)
|
11/13
Mon |
1:00 PM CST - Treasury Budget(Oct)
|
LT: Nov U.S. T-Bill(CME)
Nov LIBOR(CME)
Nov LIBOR Options(CME)
|
11/14
Tue |
7:30 AM CST - Business Inventories(Sep)
7:30 AM CST - PPI & Core PPI(Oct)
7:30 AM CST - Retail Sales(Oct)
|
LT: Nov Soybeans(CBT)
Dec Crude Oil Options(NYM)
|
11/15
Wed |
7:30 AM CST - NY Empire State Index(Nov)
9:30 AM CST - API & DOE Energy Stats
11:00 AM CST - FOMC Minutes(Oct 24)
|
FN: Dec Cocoa(NYBOT)
LT: Nov Lumber(CME)
Dec Platinum Options(NYM)
|
11/16
Thu |
7:30 AM CST - CPI & Core CPI(Oct)
7:30 AM CST - USDA Weekly Export Sales
7:30 AM CST - Initial Claims-Weekly
8:00 AM CST - Net Foreign Purchaes(Sep)
8:15 AM CST - Capacity Util & Indus Prod(Oct)
9:30 AM CST - EIA Gas Storage
11:00 AM CST - Philadephia Fed(Nov)
3:30 PM CST - Money Supply
|
FN: Nov Lumber(CME)
LT: Nov Feeder Cattle(CME)
Nov Feeder Cattle Options(CME)
|
* Please note that the information contained in this letter is intended for clients, prospective clients, and audiences who have a basic understanding, familiarity, and interest in the futures markets.
** The material contained in this letter is of opinion only and does not guarantee any profits. These are risky markets and only risk capital should be used. Past performances are not necessarily indicative of future results.
*** This is not a solicitation of any order to buy or sell, but a current market view provided by Cannon Trading Inc. Any statement of facts herein contained are derived from sources believed to be reliable, but are not guaranteed as to accuracy, nor they purport to be complete. No responsibility is assumed with respect to any such statement or with respect to any expression of opinion herein contained. Readers are urged to exercise their own judgment in trading!
Financial Times
CBOT
Wall Street Journal
MarketWatch