E Markets: Seasoned

The official start of Fall and the Harvest Moon greet markets as they grind into third quarter end and look for the next spice to add to the ongoing rally back in risk. There is a common origin for the act of seasoning and the change in seasons – adding flavor or spices to food or drying, maturing foods or timber, against the time for sowing and harvesting all come from the same Latin root.

If we learn anything in the past week, it’s about timing as the Monday bear market ran into hibernation on the reality of Trump tariffs on China not leading to the end of the world. Similarly, time is the critical component for the week ahead as its timing that drives alpha, along with risk management.

Perhaps we see the return of seasoned traders in leading the pack of returns for the next few weeks. The issues that dominated September aren’t going to go away – just read the weekend headlines – China/US trade issues, UK/EU Brexit talks, Italy’s Budget, German Coalition troubles, Iran Sanctions and oil prices, FOMC policy and normalization in other central banks.

All of the uncertainty around these themes make for the week ahead to be one of difficult choices for investors as they decide to either ramp up risk to drive 3Q returns or to pull back and prepare for more noise and volatility. The drop in the VIX and the higher US yields are a clear indication that most passive flows were running with the bulls last week. What is maybe in the stew for next week comes from the seasoning choices of active managers. The seasonal pressure on risk will be hard to fight – 68% of the time the last week of September has been negative for US shares.

While we all know that past performance is no indication for future returns, caution maybe in the future for investors as they seek to make something good out of a mixed 3Q with the UK, China, Canada, Spain and Italy all in the red while the DJIA is up over 10%, Japan Nikkei up over 7%, India Nifty 50 over 4%. Mean reversion trades will be competing with the momentum chasers into month and quarter-end.

What Happened over the Weekend?  

Risk off news over the weekend will dominate Monday trading despite China and Japan holidays:  

1) Is the US/China trade war back on?  China called off trade talks for next week. Most now expect little chance for new discussions until after the November mid-term elections. The next issue will be if US President Trump follows with further sanctions responding to China’s retaliation. US Secretary of State Pompeo made it clear – the US is “determined to win” the trade war.

2) Italian politics uglier?  Italy’s Deputy PM Salvini pushed back on the central bank’s fiscal caution. He told Corrriere della Sera newspaper: “We’ll do a courageous budget; the deficit isn’t a problem.” The La Repubblica newspaper on Saturday published a leaked tape with PM Conte’s spokesman threatening a purge of Finance Ministry. Casalino said that FinMin Tria “is somewhat involved” in attempts to stymie spending increases. “It’s not acceptable that E10 billion can’t for found for funding citizen’s income. In response, the PM Conte on Sunday was quoted by ANSA newswire saying he has confidence in “all the ministers.”  

3) German politics uglier? Merkel is battling to avert another crisis with her coalition over the spy-chief affair. FT reports that emergency talks with the SPF and CDU are being held today. SPD leader Andrea Nahles told the Bild newspaper that she did not expect the government to collapse over the removal of spy chief Hans-Georg Maassen from his post last Tuesday. The affair has dominated political debate in Berlin for the past two weeks and exposed the fragility of the coalition. But she added: “The basis for our co-operation must be mutual trust and reliability. If that is no longer the case, the government will fail.”

4) OPEC long-term outlook sees US output rising, OPEC lower despite global recovery. Blames US sanctions on Venezuela and Iran for $80bbl oil.  “Declining demand for OPEC crude is a result of strong non-OPEC supply in the 2017–2023 period, most notably from U.S. tight oil,” the Organization of the Petroleum Exporting Countries said in its long-term world oil outlook.  “The U.S. remains by far the most important source of medium-term supply growth, contributing … two-thirds of new supply, driven by surging tight oil output,” it said. Russia and OPEC rebuffed Trump’s call for an immediate supply boost. “My information is that the markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it,” Saudi Oil Minister Falih said.

4) Iran Revolutionary Guard vows to avenge military parade attack which killed 25 and wounded over 70 people.Ahvaz National Resistance, an Iranian ethnic Arab opposition movement which seeks a separate state in oil-rich Khuzestan province, claimed responsibility for the attack. Islamic State militants also claimed responsibility. Neither claim provided evidence. All four attackers were killed. Before leaving for the United Nations on Sunday, Iranian President Hassan Rouhani accused other countries including the United States of provoking the shooting attack.