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News & Views: Monday, November 17

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What you need to know for today's trading day.

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This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

Halliburton to Buy Baker Hughes for $34.6 Billion (WSJ)

Ibovespa Futures Rise Before Petrobras Call on Delayed Results (Bloomberg)

Carney Sees Disinflationary Forces, Haldane More Dovish (Bloomberg)

Norway Wealth Fund Outsmarts Flash Boys as Algorithms Abandoned (Bloomberg)

Japan Unexpectedly Enters Recession as Abe Weighs Tax: Economy (Bloomberg)

Views
Japan entered recession (QoQ annualized -1.6% vs +2.2% exp) - the textbook version where they had two quarters in contraction - in the third quarter. The assets having the largest negative risk-adjusted return are most sensitive to that subject: the Japanese Nikkei, Yen, and AAA-rated sovereign bonds. The theme has also dragged down some other Asian equities. However, the USDJPY has retraced all of its losses overnight (i.e. Yen strength) and is flat this morning. The bottom line is that the sentiment from the market indicates that waiting to increase the sales tax is not going to magically fix a demand-constrained economy, no matter how many equities the GPIF and BoJ are buying. More is needed from the fiscal side, or even backtracking on some of the tightening steps will need to be taken, which defeats the purpose of lowering debt.

The causa proxima of the decline in Japan's GDP was a still low level of inventories gains because of above normal levels in the second quarter, although consumption and corporate spending were below expectations. We're seeing in real time what it looks like to raise prices without underlying growth in wages.

The first day of the Shanghai-HK Connect program saw foreign investors fill their quota of $2.1bln in a short period of time and only a fraction of onshore investors bought Hong Kong H-sharers. Even though the large cap Shanghai Composite (SHCOMP) was slightly down, breadth on the exchange was better than 2:1. Additionally, the small and mid-cap Shenzen Comp (SZCOMP), which foreigners are not even allowed to invest in with this new plan, is having the largest risk-adjusted return overnight in the global equity indices that I track.

For lack of a better phrase, fixed income overnight are showing "risk off" with UK Gilts and US Treasuries leading, and risk-sensitive credit lagging.

Bank of England (BoE) Governor Mark Carney made a speech in Singapore yesterday. He said that low rates around the world have created an illusion of liquidity by compressing risk premiums for all assets, and he expects those premia to be repriced once global central banks begin raising rates. Additionally, in an interview at the G-20 summit in Australia, Carney mentioned that the UK has huge disinflationary pressure from the Eurozone and because of lower commodity prices (not he did not specify oil). His chief economist Andy Haldane said in the same interview that lower levels of household inflation expectations has the central bank more cautious about tightening policy too quickly. The first rate hike in the UK may now come at roughly the same time as in the US. In July of this year that gap was as wide as six months ahead of the US.

ECB chief economist Peter Praet - considered the mouthpiece for Draghi - will give a speech in London at 8:30am ET today. ECB President Draghi will give the central bank's quarterly testimony to Europe's Parliament in Brussels at 9:00am ET.

Data:
- Japan GDP annualized QoQ (3Q prelim) down -1.6% vs 2.2% expected, prior -7.3%
-- QoQ private consumption up 0.4% vs 0.8% exp, prior -5.0%
-- QoQ business spending down -0.2% vs 0.9% exp, prior -4.8%
- Japan GDP deflator YoY up 2.1% vs 1.9% exp, prior 2.0%
- Eurozone trade balance (Sep) up to 17.7B EUR vs 16B exp, prior 15.4B

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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