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Daily Agenda: European Fears Dominate

Trade data in Japan surprises to the upside, Bank of England notes reveal a dovish slant; more oil data to be released.

Concerns over the fragility of growth in the primary European Union economies continue to dominate market risk narratives today. The latest fear is speculation that a number of key financial institutions will be found lacking when the European Central Bank and the European Banking Authority’s stress test results are released in the coming week. The question facing investors is how to position if Europe is returning to a state of crisis. In a recent clip titled “Where to Invest Now,” David Kostin, the chief U.S. equity strategist at Goldman Sachs Group, predicts a win for those investors who focus on U.S. domestic growth with a target of 2150 for the S&P 500 over the coming 12 months. Kostin argues that those who focus on companies that primarily sell products in the U.S. will fare better. With numerous currency strategists staying the course on further downside for the euro in recent days, the consensus seems to be that for now, U.S. dollar-denominated assets remain the best port for investors seeking to weather the European storm.

Carney stays the course. In the Bank of England’s Monetary Policy Committee October meeting minutes, released today, the language indicated that rates would not rise in the near term, voting seven to two to keep the benchmark rate at 0.5 percent. With continued gloom over the health of the economy across continental Europe, Bank of England policymakers remain focused on nurturing growth at home.

Japanese exports see rebound. Trade data for September released today in Japan registered a strong increase in exports. At 6.9 percent year-over-year expansion, the total climb was the greatest in seven months and surpassed consensus forecasts. With the yen now more than 8 percent lower against the U.S. dollar for the year, any strength in exports supports the assertion by the administration of Prime Minister Shinzo Abe that drastic monetary policy measures can drive external demand to offset the impact of tax hikes at home.

Oil data on deck. Energy Information Administration inventory data to be released today is expected to reveal a decline in distillate stockpiles, according to consensus forecasts from analysts. A modest rebound in recent trading sessions has provided a brief respite for bulls after weeks of selling pressure driven by rising North American production and slack demand.

Quarterly earnings announcements plod on. As earnings season grinds on there will be a host of corporate announcements today including AT&T which will release data after the market close. For the roughly 21 percent of S&P 500 components that have announced quarterly results so far, results in aggregate have been better than forecast.

Portfolio Perspective: U.S. Housing Data not Optimal for GrowthAdrian Miller, GMP Securities

After a slump in housing data in August, September figures suggest a rebound of sorts. After September housing starts rebounded more than expected as permits lagged, existing home sales increased 2.4 percent month-over-month to an annualized rate of 5.17 million units — the most since September 2013 — and compared to expectations of 5.1 million.

Importantly, we failed to see an improvement in first-time buyers with the group representing 29 percent of total sales in September, a level seen since July and only fractionally higher from 28 percent recorded a year ago. Instead we saw a pick-up in investors’ sales (14 percent, compared to 12 percent) as all-cash sales ticked up to 24 percent from 23 percent in August.

So while existing home sales increased to a one-year high, the composition of sales is not optimal for a broadening in the housing market’s recovery and by extension increasing support for GDP growth. And while mortgage rates at 4.20 percent are indeed the lowest since June 2013 as the labor market has improved, the much-needed first-time home buyers as a group is not gaining traction. And if first-time buyers remain relegated to the rental market because in part of strict underwriting standards and limited real income growth, home prices will need to fall further in order to see home sales momentum gain ground. Additionally, first-time buyers pushed to the renters’ market will lead to a higher grind on core inflation with housing costs 41 percent of CPI and rent costs 23.7 percent of CPI.

Adrian Miller is the director of fixed-income strategies for GMP Securities in New York.

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