Archive for month: November, 2014

After a few months of calm, the situation in Ukraine is heating up. Russian tanks were reportedly crossing the border Friday and intense fighting between Russian separatists in Ukraine and government forces was reported over the weekend.

As has been the case, the truly negative event here is a full-on, blatant Russian invasion of Ukraine, but that appears unlikely still. In truth, the ruble has very quietly been crashing in the forex markets, and this move may be nothing more than a political ploy by Putin to re-direct focus to Russian military might.

Regardless, an escalation of violence could be a slight headwind on stocks but nothing major, at this point. Energy, however, will be a big winner from even a slight uptick in tensions, as there is little geopolitical risk premium in the energy complex right now. If you like high risk/reward setups, energy is the way to play this right now (via XLE or XOP/FCG).

This was an excerpt from the equities section of today’s Sevens Report. To continue reading today’s report simply sign up for a free trial on the right hand side of this page.

Jobs Report Preview

The importance of these jobs reports from a Fed policy standpoint is on the rise, and the risk to stocks is for the numbers to run too “hot” and pull forward Fed interest rate increases.

The “Too Hot” Scenario: >300K job gains. A jobs number this strong would likely result in a pulling forward of rate increase expectations, and the markets would react hawkishly: Stocks, bonds and commodities would all decline, the U.S. dollar would continue to rally.

The “Just Right” Scenario: 180K – 290K job gains. This is the “sweet spot” for this report, as it implies a still-healing labor market but not one that’s so strong it would pull forward the date of the first rate hike. A number in this range shouldn’t elicit too much of a market reaction as it’s mostly priced in.

The “Too Cold” Scenario: <180k job gains. Given all the other employment metrics released in October, the chances of this number being a big miss are very remote.

If we get a number below 180K, expect a mildly “dovish” reaction—stocks and the dollar will decline, while bonds and commodities will rally. But, even if this is a big miss, don’t expect markets to move too much as it’ll probably be discounted as a statistical aberration.

Wage Increases and the Unemployment Rate: >2.2% and <5.9% will be taken as “hawkish.”

Given the risk is skewed to the “hawkish” side of things for this meeting, changes in the year-over-year wage gains and unemployment rate are equally as important as the headline jobs number.

An annual wage increase over 2.2% would be considered “hawkish” and elicit a “hawkish” reaction from markets, while a drop in the unemployment rate below 5.9% would also be “hawkish.”

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Midterm Election Takeaways

Ignoring the politics (I’ll leave that to others far more intelligent than I), there are a few potential market takeaways to monitor now that the Republicans will control the 114th Congress (undoubtedly some clients will call asking what the mid-terms mean for the market, and I want to provide some talking points).

First, all the major players meet tomorrow at the White House (Obama, McConnell, Reid, Boehner, Pelosi), but nothing is expected to come out of the meeting other than lip service. AS far as evidence the government may start actually functioning again now that the elections are over, the first major hurdle to watch is immigration. If President Obama uses an executive order to provide amnesty to illegal immigrants and go around Congress, then it’s likely the next two years will be as contentious and useless as the previous two from Washington.

And, while that won’t necessarily cause a market decline, the market would like to see some positive action on corporate tax reform, the Keystone Pipeline and a rollback of some parts of the “Affordable Care Act.” If Obama unilaterally moves on immigration, the chances of any of the above going forward will be materially reduced. Again, it won’t be a market headwind per se. But fixing the corporate tax, approving Keystone, removing the ban on oil exports and changing the ACA would be a positive for the market.

Outside of those policy issues, we also need to consider the impact of a Republican Congress on the Fed. Rand Paul already has legislation to audit the Fed in Congress, and there have been specific requests made by Republicans for a detailed plan on how the Fed plans to normalize interest rates. Bottom line, scrutiny of the Fed could increase materially under a Republican Congress, which could make the process of normalizing policy more difficult.

Bottom line, Washington remains on the back burner from a market standpoint and will remain so until the beginning of next year when the new Congress is seated, barring an executive order from Obama on immigration. But, I think it’s safe to say that this relative quiet we’ve seen from Washington throughout 2014 won’t be repeated in 2015. If the anticipated levels of foolishness from Washington were a chart, it just bottomed.

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