Stock markets take fewer chances pre-NFP

Stock markets look more committed to reducing exposure as the global yield spike verges on notching even higher.


Stock markets look more committed to reducing exposure as the global yield spike verges on notching even higher.

More caution here, than there

Within a broad flight, an undifferentiated retreat from ‘technology’ sectors is also evident in Europe. STOXX’s index for such industries (which tilts more to makers of chips and other components) leads the downside. Still, given the world’s principal ‘technology’ proxy, Nasdaq 100, posted its biggest one-day drop since June and that magnitude was unmatched by the broader market, Wall Street declines are extended more judiciously. Key contracts are barely lower. Dow and S&P mini intermittently flicker higher. It appears negative momentum following the NFP risk event, if any, could be overplayed quite easily. But it’s telling the crude oil industry isn’t being spared in the run-up, even as Brent continues to linger in close vicinity ($2.4 away at last check) to the week’s four-year top. Polls show rising expectations that the market will see $100/bbl. not long after Iran is supposed to exit many markets in November. The potential consequences of a volatile ‘yield shock’ seem to be feared even more. Some of Friday’s position-taking also anticipates the return of Chinese markets next week as tariff-sensitive cars & parts and metals & mining shares reclaim their place amongst the 2018’s worst performers. The game is also up for banks; definitively lower on the day, and on aggregate, on the backfoot for the week. There are healthy and unhealthy rises in borrowing costs after all. As Italy’s Target 2 liabilities tick down to $489.16bn in September from August’s record high, tensions with the EU remain obdurately elevated, or as much as the coalition wishes them to be. After markets pass Friday’s speedbumps, it’s no punchy call to expect Italian budget fallout to roil regional BTP yields, banks the euro and more, once again, next week.

Payrolls meet weather wildcard

Strong outcomes in typical precursors to monthly payrolls (ADP, ISM employment indices) point to upside risks relative to consensus forecasts. Yet weighted consensus estimates for headline payrolls have come down during the week to around 180,000 from a mean of 185,000 last week. The impact of weather is the wildcard forecasters have tried to accommodate. It is also the chief source of something truly surprising occurring in the release. Usually more closely watched earnings growth, by contrast, may be less opaque this time around.  An on target 0.3% rise (after September’s 0.4%) will go a long way to dragging back wilder inflation speculation unleashed by the week’s yield fireworks. There is also upside risk from inclement weather on earnings, if labour hours were restricted, and growth was spread over a lower work force. Even so, we don’t underestimate the capacity of the market to understand that such an effect would be a passing artefact. Furthermore, even if present, it would need to manifest at exponential strength to shift the annual earnings growth above 2.8%. Note that the prior month-on-month reading was weaker than the same month in 2017. Weather increases the variables, but it’s worth having a plan handy in case of a run-of-the-mill outcome.

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