Markets still climbing a Wall of Worry in November


Few global equity markets escaped October’s selloff and November is shaping up to be another volatility fueled month.  Markets closed out the month of October largely in negative territory as a host of factors weighed on market sentiment.  From a broad perspective, global equities were down roughly 6.5 percent in October with negative performance showing up across nearly all major market indices tracked by MSCI.  One regional exception was Latin American, whose stocks broadly managed to rally nearly 2 percent during the month on trade deal and elections hopes in Mexico and Brazil.  Rates on major government bonds were largely unchanged at the end of October with the yield on the 10-year U.S. Treasury hovering around 3.2 percent.

Markets still climbing a Wall of Worry in November

So far, global financial markets have had a mixed start to the month of November.  Asian, European and Latin American stocks rallied into the close of the week on optimism surrounding a U.S.-China trade deal.  This optimism didn’t take hold in the U.S. as equity markets were down on Friday, but nevertheless up for the first month of November.

Looking forward, markets are on track for another bout of volatility in the week (and month) ahead as investors look to mid-term election results due out on Tuesday and the Federal Reserve’s key policy meeting on Thursday. This uncertainty likely had some part to play in US equity markets underperforming global stocks on Friday despite growing optimism surrounding the potential for a U.S.-China trade deal.

From an elections perspective, expectations are set for control of the House to turn over to the Democrats on Tuesday with the Senate likely to remain firmly in GOP control.  We believe that this is the base case scenario for the markets at this point. While a divided congress would make it more difficult for the Republicans to push forward their agenda, the result would nevertheless be seen as a market positive.

A key reason for this positive outlook stems from the fact that Democrats would be hard pressed to overturn any of the tax cuts pushed through Congress late last year. A turn of the House and Senate on the other hand would be perceived as a market negative given that a roll back of tax cuts would not only be in the making, but also the very real potential that a Democratic majority could step up their impeachment rhetoric against the sitting President.

Negatives outweigh the positives this month

Market participants will nevertheless continue to contend with more negatives in the week and month ahead beyond US politics. Policy makers at the Fed are expected to hold rates steady at their upcoming meeting next week yet markets likely will be closely scrutinizing the FOMC’s statement for potential policy path deviations as uncertainties weigh on the US economic outlook. Friday’s jobs report pointed to higher wage gains, which some view as supportive of inflation and more tightening by the Fed. Yet, growth in headline consumer prices remain subdued when measured on a yearly and monthly basis. A key risk to market sentiment is that the Fed may signal a more hawkish tone in the coming week despite some signs of weakness in the US economy, which could prematurely tip the economy into a recession.

Market sensitivity to Brexit is also likely to gain pace this month as the January deadline for a much-needed deal for the U.K. to exit the EU quickly approaches. News surfaced this week that an exit agreement could come as soon as later this month, but such promises have come and gone over the past 18 months.  The question regarding how the Irish border will be handled post-Brexit has hung up all negotiations and is jeopardizing the UK’s much needed 2-year transition period following Brexit Day on March 29, 2019. We believe that a failure by the UK to clinch a deal by the end of November will not only contribute to a new spell of market volatility but also potentially setup another sharp drop in prices through year end that could overshadow last month’s selloff.

Finally, as we mentioned earlier markets internationally caught a bid last week on rumors that a trade deal between the U.S. and China could be in the making. While Asian and European markets rallied on the news, optimism quickly faded as the U.S. administration’s economic advisor Larry Kudlow came out on Friday and stated that the President was ready to increase tariffs on Chinese goods at the start of the year despite the trade deal rumors. In other words, some market participants were getting ahead of themselves. Not all hope is lost however.  We believe that a meeting between Presidents Trump and Xi at the G20 meeting later this month could help deescalate ongoing trade related tensions.  Elections, Fed, Brexit and Trade – November is nevertheless shaping up to be another volatility fueled month as market participants continue to climb the wall of worry.

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