Equities start off the month with gains as the S&P500 approaches its record high. The S&P500 gained 1.2% to 2,104 and the Dow finished up 0.9% to 17,829. The S&P500 is less than 1.5% from its record of 2,134 and the Dow now has a 0.03% gain year to date. Asian markets drew pessimism from manufacturing PMI indices in China which reflected slight contraction compared to an even 50.0 reading which was expected. However another PMI index from the region rose to 48.3 in the biggest single month increase in over one year, and this development has an analyst at Danske Bank believing that the manufacturing sector has reached a trough. In Europe government bond yields rose after a manufacturing PMI index from that region was revised upward for October to 52.3. The 10 year bund yield rose 4 basis points to 0.56% and the Italian and Spanish yields rose 7 and 8 basis points each. The euro gained fractionally against the dollar to $1.1009. Similarly the US 10 year yield rose 3 basis points to 2.19% after the ISM manufacturing index met expectations and the new orders component of the index rose to 52.9. Accordingly the US 2 year yield rose 2 basis points to 0.76%. Concerns after the data out of China sent commodities down with Brent closing at $48.79.
A Financial Times article written by Mohamed El-Erian discusses the expectation that monetary policy from central banks is set to diverge over the coming months. In light of recent central bank statements from the Fed and the ECB it appears that two large central banks are both set to implement opposite monetary policies in December. The Fed hinted at a potential rate rise at it’s next meeting and the ECB has indicated further easing by that same time. El-Erian identifies a strong dollar, high equity and interest rate spread volatility as a result in the short term. As a result of Fed tightening in the US, Treasury yields are expected to rise. In contrast as a result of further ECB easing eurozone yields particularly the German bund are set to fall. Therefore El-Erian expects this spread to widen in the aftermath of policy divergence. As a result of longer term uncertainty regarding the duration of divergence and lasting effects El-Erian suggests that holding cash might be a wise consideration as it provides a cushion against uncertainty. In addition it will allow investors to take advantages of strategic opportunities that arise as a result of drastic price changes.
Recep Tayyip Erdogan’s political party won a strong majority in Turkey’s elections. The Turkish lira rose against the dollar to 2.76 (lira per dollar) and the stock index rose by a similar amount. The decisive victory for the AKP party will provide more stability for the political and economic environment in the country over the next few years. One concern that remains is central bank independence as Erdogan has been highly critical of the central bank. The AKP party will likely push for fiscal reforms such as a higher minimum wage, tax cuts and increasing pensions. Morgan Stanley considers Turkey to be in the “fragile five” countries with high current account deficits which may be more negatively impact in times of global economic turbulence.
The PBoC raised the daily fix of the renminbi by the most in ten years however the currency still fell against the dollar. The midpoint was raised by 0.54%, however the currency still fell 0.4% on the day against the dollar to 6.3420 (renminbi per dollar). The renminbi gained against the dollar on friday by 0.62% to 6.3175 however traders speculate that this may be a result of PBoC intervention. China is hoping that the IMF will decide in November to include the renminbi in the group of reserve currencies, and China is trying to appease the IMF by allowing it to move more with the market. Similarly an announcement on Friday also will make it easier for foreign investors to invest in China, which is also a desire of the IMF. That announcement as well may have contributed to Friday’s renminbi appreciation.