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Global Risk Assets Recover Early Losses to Post Strong Gains; Japan Pension Fund Increases Equity Allocations


Today's financial recap and tomorrow's financial outlook.

European  markets were very weak at the beginning of trading. The Greek ASE Index was down as much a 5% in early trading, but was able to recover half of those losses by the end of the session. Similarly, the large cap German DAX was down 2%, but was able to reverse and finish positive on the day. Preliminary October consumer price data for Germany showed no change with prices growing at an annual rate of 0.8%. Economists had expected inflation to increase to 0.9%.

Similar to the reversal in European markets, US equities were able to mount a sizable comeback. In early trading the S&P 500 (SPX) futures were down 15 points, but at one point were up as much as 22. At 1:06pm ET a number of different US exchanges including the NYSE, OPRA, and AMEX experienced technical outages that caused trading to be delayed or frozen for most equity securities. At roughly the same time a 35,000 contract buy was executed in the S&P 500 e-mini future in one second, the largest on record according to Nanex, which pushed the benchmark indices to new highs on the day. Most trading resumed normally about an hour later, but problems persisted across multiple venues.

It was reported by Nikkei newswires during today's session that the world's largest pension fund the Japanese Government Pension Investment Fund (GPIF) would be dropping its allocation to local government bonds more than expected. The GPIF would only invest 35% of its holdings in JGB's, less than the 40% that was previously announced (down from 60% currently). The announcement is expected overnight in Japan. The extra 5% - the equivalent of $55 billion - will be invested in foreign stocks and most likely bonds.

Because of lower oil, a deflationary pulse was present in markets today. The defensive utilities and health care sectors were the two best performers today. The energy sector was the only one that fell today, and industrials lagged. The SPX closed up 0.62%.

The advance report of third quarter US GDP showed the economy growing at a 3.5% quarterly annualized pace. This compared to estimates of 3.0%, and were down from a 4.9% pace in the prior quarter. The better-than-expected gain was due to larger government defense spending and a larger drop in net exports. The real level of gross domestic purchases remained low, which prompted many forecasters to consider revising their fourth quarter GDP estimates down.

Of note today was the Russian ruble. It gained 3.14% against the US dollar for its largest single day gain since 2003. Tomorrow the Russian central bank is expected to allow the currency to free float (i.e. not defend its peg by selling foreign exchange reserves) and hike rates by 150bps.

Tomorrow's Financial Outlook

There are a number of very important economic events tomorrow morning. The third quarter employment cost index will be released in the early morning. Because wage inflation has been the most important economic variable recently, this will receive a large amount of attention. In the prior quarter, costs rose by 0.7% due to higher health care premiums. In the past quarter costs are expected to have risen 0.5%. The Chicago regional manufacturing index - the most significant - is expected to be little changed at 60 (compared to 60.5 in the month prior), which reflects robust manufacturing gains. Lastly, September personal income, spending, and prices will be released. San Francisco Fed President John Williams will be speaking overnight in South Africa.

The main event overnight will be the Bank of Japan policy meeting. Market participants expect the central bank to keep its dovish tone and downgrade its inflation and growth projections, but not expand its asset purchase program. Japanese consumer prices, personal consumption, and employment report will also be released overnight. In the early morning the eurozone preliminary October consumer price index report will be released. If today's report from Germany is any guide it will be weaker than the 0.4% annual growth that is expected.

Earnings reports tomorrow will largely be from energy companies. Notables include Chevron (CVX), Clorox (CL), Exxon Mobil (XOM), Weyerhaeuser (WY), Madison Square Garden (MSG), Abbvie (ABBV), Hilton Worldwide (HLT), Legg Mason (LM), and Charter Communications (CHTR).

Twitter: @Minyanville

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