News & Views: Monday, October 27
What you need to know for today's trading day.
Bank tests comfort investors but growth worries persist (Reuters)
Oil Speculators Bet Wrong as Rebound Proves Fleeting (Bloomberg)
Rousseff Says Ready for Great Changes After Tight Brazil Victory (Bloomberg)
CGN Power Plans $3 Billion Hong Kong IPO in November (WSJ)
Hong Kong-Shanghai Stock Connect delay hits bourse shares (BBC)
The incumbent in the Brazil presidential race, Dilma Rousseff, took the final vote on Sunday with 51.45% of the total in the closest race since 1945. Brazil Ibovespa mini futures just opened and are trading down 8%, or the equivalent of seven standard deviations (ie a tail event). Similarly, the BRL is weakening versus the USD by 3% or the equivalent of four standard deviations. We knew this would be a binary event, and the explosion did not disappoint. Rousseff promised reforms after her victory, and local business people are reacting favorably, but the market is voting with its feet. All forecasters this morning are pointing towards the election of Rousseff's cabinet because the margin if victory was very small and she will need to form additional coalitions within the government to insure that . Lastly, a credit rating downgrade is expected soon - this was put on hold by the ratings agencies pending the election results.
Of the 25 banks that failed the ECB stress test, a third were Italian. Not surprisingly, Italian equities are showing the largest negative risk-adjusted return in equities (sans Brazil). Italy's economy has already been downgraded internally this year twice and is expected to remain in recession. To make matters worse, bank credit is considered the equivalent of sovereign credit these days, which means that the outlook is not good.
A member of the People's Bank of China's monetary policy advisory committee said that the Chinese economy will grow at a 7.2% annualized rate in the fourth quarter and 7.3% next year. Conversely, the chief economist at the State Information Center said that he sees 7% growth in 2015 due to declines in exports and property development, unless the government utilizies stronger-than-expected stimulus measures. I don't know if this is a call for stronger moves from the government.
The main reason for the weakness in Chinese equities overnight is due to a delay in the Shanghai-HK Connect program. The new initiative would allow foreigners access to the A shares market, which was previously only tradeable by locals. Hundreds of thousands of new brokerage accounts have been opened in Shanghai in anticipation of this new capital entering the country.
Today is the last Treasury purchase by the Fed for QE3, in the long bond.
- German IFO current assessment (Oct) down to 108.4 vs 110 expected, prior 110.4
- German IFO economic expectations down to 98.3 vs 99.2, prior 99.3
US Economics (Time Zone: EST)
10:00 Pending Home Sales MoM (Sep) - expected 0.8%, prior -1.0%
10:30 Dallas Fed - exp 11.0, prior 10.8
11:00 Fed to purchase $850m-$1.05b notes in 23 to 30-year range (last purchase)
11:30 Treasury to sell $24b 3-month bills and $30b 6-month bills
Buffalo Wild Wings (BWLD)
Cliffs Natural Resources (CLF)
American Capital Agency Corp (AGNC)
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