Daily Agenda: What, If Anything, Has Changed in the Economy?

Apple earnings in the spotlight, Germany reports PPI levels and gold bulls return.


Yuriko Nakao

Last Wednesday, suburban Chicago–headquartered pharmaceutical company AbbVie abandoned its plans to acquire Irish counterpart Shire in a would-be tax inversion. Shire’s stock price fell by 30 percent upon the announcement, dealing a blow to arbitrage portfolio managers who were betting on the deal coming to fruition. Merger arbitrage is not alone in underperforming in recent weeks, however. Commodities markets have caught many global macro managers off guard and some volatility-focused funds got caught on the wrong side of the VIX spike. Thus the big question on many investors’ minds as the new week begins is whether or not it is time to fire managers and shift allocations. “It’s far to early to tell. The economy hasn’t changed from a month ago,” says Neal Berger, CEO of New York–based hedge fund firm Eagle’s View Capital Management, adding, “this is a hedge fund unwind problem, and investors need to wait for the dust to settle a bit before making longer-term decisions.” Berger has seen this dilemma from both sides of the table. “In my opinion, markets tend to lead economic cycles, rather than the conventional wisdom that the economic cycles tend to lead markets. The real economy will respond to the markets with a lag.” According to Berger, “the Alibaba IPO may have represented a crescendo in market sentiment and now we are seeing massive liquidation as hedge funds got caught offside after five years of smooth and favorable market conditions.” Berger advises investors wait to see how if a manager has performed as anticipated, as opposed to the investor’s predetermined expectations in the context of the market environment once markets calm down a bit. Managers who have performed outside the boundaries of what an investor would normally expect may be candidates for reevaluation. Berger suggests caution in drawing conclusions about a manager or strategy over a very short horizon and sample size in the market, however.

Apple announces quarterly earnings. While a number of large cap equities will report earnings today, Apple’s postmarket close announcement will likely be the most closely anticipated by investors. Consensus forecasts among analysts are for over 6 percent top-line revenue growth year-over-year. Expectations are high that the analysts call will feature projections for the company’s new payment processing platform, Apple Pay.

Two Japanese cabinet members resign. Trade and Industry minister Yuko Obuchi and Justice minister Midori Matsushima both stepped down over charges of ethical violations, dealing a significant political blow to Prime Minister Shinzo Abe’s administration.

Prices down at the factory gate in Europe. The German Federal Statistical Office released producer price index (PPI) levels for September earlier today, registering at 104.80, down 1.0 percent from 104.90 in August. The data raises questions yet again about the commitment of the largest economy in the European Union to adapting to Union strategic shifts if European Central Bank monetary policy is unable to reverse deflationary trends.

Ivy League endowments report huge gains. On Friday Princeton University reported growth of 19.6 percent over the past fiscal year for the New Jersey institution’s endowment, with an increase in assets to $21 billion. This constitutes the second-highest fiscal 2014 return in the Ivy League, after New Haven, Connecticut–based Yale University’s endowment reported an increase of 20.2 percent to $23.9 billion for the year ending June 30, 2014.

Gold regaining its luster? U.S. Commodity Futures Trading Commission data released Friday showed net-long positions for contracts on gold increase for the first time in more than two months. Increased flows into the metal via futures and exchange-traded products in recent weeks drove prices for the precious metal higher while equities tumbled. At a 2.5 percent increase year-to-date it continues to lag the S&P 500, however.


Portfolio Perspective: Fresh European RisksDerek Holt, Scotiabank

The emergence of fresh market-based risks to the outlook may begin to show up in another round of manufacturing and service sector purchasing managers’ index (PMI) data next week. The consensus view is that Germany will report a small drop in manufacturing PMI on Thursday, but the risk is that the period for sampling opinion falls short of the market turmoil this week. As such, while fresh data will further inform our views on recent momentum, the sharper risk might have to wait until the next round of survey sentiments comes out in a month. This is likely to continue to point toward elevated concern over the health of European economies.

Don’t tell that to the Brits. Third-quarter U.K. growth probably hung in quite nicely at about a 3 percent handle according to the Bloomberg consensus. That’s a smidge softer than 3.2 percent during the second quarter. Crisis, what crisis? Look to the higher frequency indicators for a sense of resiliency — or not — we’ll start to get into a round of them next week. Retail sales are expected to be flat for the month of September, and the Office for National Statistics’ index of services for back in August is expected to register a decent gain. All of this data is likely to be discounted, however, as the attention has shifted to evaluating resiliency over coming months. The same may apply to next Wednesday’s minutes to the Bank of England’s October 9 meeting, which may be partly stale. Whether they represent the present thinking or not depends one part upon further market developments and another part on how the Monetary Policy Council reads the balance of upside and downside risks to the economy stemming from recent market developments. Either way, the plunge in U.K. inflation is about to head even lower over the remainder of the year in lagging fashion to what we can already observe in broad commodities price indexes. As a result, market expectations for the first Bank of England hike have been steadily pushed outward in time.

Derek Holt is a vice president at Scotiabank in Toronto.