Chinese stocks tumble during holiday week
September 6, 2016
In a holiday-shortened week, stocks barely budged, except in China, where the main Shanghai Index tumbled 5.5 percent on Friday over concern about the government's investigations into three brokerage houses and weak manufacturing numbers.
Industrial profits in China fell 4.6 percent in October from a year earlier. There was also speculation that Chinese investors had cashed in to get ready for this week's initial public offerings, which have been banned since July when the government stepped in to halt the stock market's slide.
Bonds on the move
The European Central Bank is more than likely to take new stimulus steps to combat low inflation and feeble growth when it meets on Thursday. Investors also drove the yield on the benchmark German two-year note down to a new low of -0.412 percent last week. The lower yields in Europe, along with the prospect of a still stronger dollar, sent investors into United States Treasurys, lowering interest rates there as well, with the yield on the 10-year bond falling to 2.222 percent.
In a year of mega-deals, the largest yet seems to be coming together as Pfizer and Allergan announced a $150 billion merger that would create the world's largest pharmaceutical company as measured by revenue, eclipsing Johnson & Johnson. The deal was immediately criticized because the new company would be based in Ireland, where Allergan is headquartered, which was seen as a move to avoid U.S. taxes. Ian Read, Pfizer's CEO, countered by saying a lower tax bill would allow the new firm to invest in its U.S. operations and add jobs.
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More stress and a looming veto?
Daniel Tarullo, the Federal Reserve governor who oversees banks, said there was "more than a pretty good chance" that the stress tests the nation's biggest banks undergo to ensure they can weather a crisis may get tougher, with the banks required to hold more capital. Meanwhile, the GOP is reportedly adding measures to weaken the Dodd-Frank legislation created after the recession to the recently brokered bill to avert a government shutdown that has yet to be passed. Treasury Secretary Jacob Lew told the president that if the bill included any regulations that would "take us back where we were before the financial crisis," he'd recommend a veto.
A change in Portugal
António Costa, an anti-austerity advocate leading a far-left coalition, is Portugal's new prime minister. In October, his predecessor Pedro Passos Coehlo's party won the national elections but nonetheless lost its majority in parliament. Costa has pledged to stick to the terms of the agreement with Portugal's creditors but to also recast austerity.
Earnings go negative
According to the Commerce Department, third-quarter earnings, adjusted for inventory and depreciation, were down 1.1 percent from the second quarter to $2.1 trillion. In addition, they were 4.7 percent lower than the year before, the biggest year-over-year decline since the second quarter of 2009.
Enjoy the ride
Despite the higher tension in the Middle East after Turkey shot down a Russian plane over Syria, holiday gas prices fell to the lowest level since 2008. On Thanksgiving Day, the national average was $2.05 a gallon, according to the American Automobile Association (AAA), down $0.76 from a year earlier.
Growth pushed up
As expected, the government's first revision for second-quarter GDP pushed the figure up to 2.1 percent from the original 1.5 percent, mainly because of larger business inventories. The final revision will come out on Dec. 22. In other news, the Commerce Department said that consumer spending gained just 0.1 percent in October, a signal that fourth-quarter growth may be weak. Personal income increased 0.4 percent to $68.1 billion and wages and salaries climbed 0.6 percent, the largest gain since May. In a sign that inflation is still sluggish, the Consumer Price Index was up 0.2 percent for the last year through October. Core consumption, excluding food and energy, rose 1.3 percent over the past year for the tenth month straight. The National Association of Realtors said that existing home sales fell 3.4 percent to an annual rate of 5.36 million in October, perhaps because higher home values are giving some sellers pause – the number of listings fell 4.5 percent from a year earlier, but overall sales were up 3.9 percent over the last year. The Standard & Poor's/Case-Shiller Home Price Index for 20 major metro areas improved 0.6 percent in September from August and 4.9 percent from a year earlier. The Commerce Department said that sales of new homes jumped 10.7 percent in October to 495,000 units. Spending on core capital goods, that is, nonmilitary capital goods, excluding aircraft, increased a solid 1.3 percent in October; durable goods orders gained 3 percent after having dipped a revised 0.8 percent in September. Lastly, the Conference Board said that the Consumer Confidence Index fell from 99.1 in October to 90.4 in November, its lowest point in a year, as Americans were worried about jobs despite the strong numbers for October.
A look ahead
Investors will be waiting for Friday's unemployment report for November, with the assumption that anything positive will be the final evidence needed in the Fed's case for a rate hike (the forecast is for 205,000 new jobs).
The Fed's Chairwoman Janet Yellen will also deliver a speech in Washington D.C. on Wednesday and appear before the Joint Economic Committee of Congress on Thursday. Overseas, as noted, all eyes will be on the ECB. It will meet Thursday and is expected to move in the opposite direction from the Fed, increasing its stimulus spending or perhaps lowering its benchmark rate. In addition, there will be updates on pending home sales, vehicle sales, construction spending, manufacturing, factor orders and the Fed's Beige Book.
This commentary was prepared specifically for local wealth management advisers by Northwestern Mutual Wealth Management Company.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
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