The Daily Prophet: Goldman's Stock Clients Can Rest Easier

Connecting the dots in global markets.

In a research note dated Oct. 20, the equity strategists at Goldman Sachs wrote that the most common question they get from clients is this: When will the rally in the S&P 500 Index end? Judging by the corporate earnings reports Tuesday, the answer is probably not anytime soon -- and probably not even if the promised tax cuts from the Trump administration fail to materialize.

Major U.S. stock averages soared anew, with the Dow Jones Industrial Average reaching yet another new high and the S&P 500 on pace to finish higher for the 12th consecutive month based on total returns, matching the records set in the 1930 and late 1940s. After starting out on the soft side, third-quarter earnings results are now coming in strong: 80 percent of the S&P 500 members have reported results that topped estimates. Caterpillar, 3M and McDonald’s all reported results that exceeded forecasts, according to Bloomberg News' Elena Popina and Brian Chappatta. U.S. corporate earnings are now on track to rise for a fifth straight quarter.

The results from Caterpillar are particularly notable, mainly because the company is seen as a global economic bellwether given its widespread operations. Not only did the maker of construction equipment say earnings beat estimates for the third quarter, it also raised its profit and revenue forecasts for the year. Equities "have been responding not necessarily because of tax reform or the possibility of it, but because global growth has been so good,'' Barbara Reinhard, Voya Investment Management's head of asset allocation, said on Bloomberg Television.

SHORT GERMAN BONDS -- NOW!
That's the advice of strategists before a European Central Bank policy meeting on Thursday when officials are likely to say that monthly bond purchases will be cut in half to 30 billion euros ($35 billion) for most of next year. Barclays, Deutsche Bank, JPMorgan and BNP Paribas all advocate shorting German debt by putting on trades that would profit from either a drop in bond prices or higher yields, according to Bloomberg News' Stephen Spratt. Steven Englander, the head of research and strategy at Rafiki Capital Management, wrote in a research note that the ECB is likely to say that the 30 million euro buying program will last for six months, with no commitment to either terminate or extend it at that point. This will be viewed as moderately hawkish because it will firm up the date of the likely first rate increase by the ECB since 2011, Englander wrote. "A mid-2018 end to QE is viewed by the ECB hawks as long enough and will firm expectations that rates policy rates will begin to rise sooner rather than later," Englander wrote. "It is not ultra-hawkish unless there is some explicit language that indicates impatience to get on with the process."

POLITICS ROIL EMERGING MARKETS
It seems political turmoil can still impact financial assets. Emerging-market stocks and currencies are suffering a bit of pain amid fresh turbulence in Brazil, Turkey, South Africa and Mexico. In Brazil, the real was hurt by reports that the government was downsizing its ambitions for proposed pension reform. The Temer administration is braced for sweeping concessions to an earlier proposal that was projected to save around 600 billion reais ($186 billion) over 10 years. Only a few core elements would remain, though, such as introducing a minimum age of 65 years for men and 62 years for women. In Turkey, a local paper reported that six Turkish banks may face penalties resulting from a U.S. investigation into their dealings with Iran. Regulators denied the news and the publisher pulled the story, but Turkish assets still fell. In South Africa, a government cabinet shuffle revealed stresses within the ruling ANZ. In Mexico, the peso is under pressure as President Donald Trump threatens to rip up the North American Free Trade Agreement if current talks aren't favorable to the U.S. Any one of "these factors are unlikely to be resolved anytime soon," a strategist at Brown Brothers Harriman wrote in a research note Tuesday.  

GOLDMAN JUMPS ON COPPER BANDWAGON
It's been a big year for copper. The metal has gained about 27 percent since the end of December and about 50 percent over the past 12 months to trade at about $7,035.50 a metric ton. The gains are linked to evidence of a rare synchronized global economic recovery. Now, Goldman Sachs is saying the highest copper prices in three years will be around for a while, Bloomberg News reports. “While many industry participants agree that growth is good, the markets have not fully appreciated the synchronized nature of global growth and the reduced downside risks from China,” Goldman analysts led by Hui Shan wrote in a research note Tuesday. Copper will trade at $7,050 in 12 months, they wrote, raising their forecast from $5,500. The bank’s observation on the synchronized nature of global growth was reflected in the third-quarter results of machinery giant Caterpillar, which on Tuesday reported increased demand in every region it does business. Other firms are not so certain prices will hold. The surge above $7,000 may be overdone in the short term, Barclays analyst Dane Davis wrote in a research note last week, calling the rally “distinctly odd” and predicting a pullback when inventories in China rise.

PROOF THAT KIWIS CAN'T FLY
The biggest loser in the currency market since June is the New Zealand dollar, which has seen more of its value evaporate more than even the Turkish lira. Things got worse Tuesday for the kiwi -- so-named for the rendering of the flightless bird on one side of the country's NZ$1 coin -- as incoming Labor Prime Minister Jacinda Ardern announced she would reform the Reserve Bank of New Zealand. Before the nation's Sept. 23 elections, Ardern proposed changing the central bank’s single mandate of stable prices to a dual mandate of full employment and stable prices, just like in the U.S. That could mean interest rates stay lower for longer. The Bloomberg Correlation-Weighted Currency index that tracks the kiwi against its major peers fell to its lowest level since June 2016, bring its drop for the year to 6.94 percent. The foreign-exchange strategists at Brown Brothers Harriman wondered in a research note whether the declines are overdone. They say that the weakness looks similar to what happened to the Canadian dollar in 2015 when Prime Minister Justin Trudeau's liberal party unexpectedly won big. The loonie initially declines as Trudeau offered a modest fiscal stimulus package before recovering.

TEA LEAVES
One of the bigger surprises in markets last quarter was the two -- yes, two -- rate increases by the Bank of Canada. The move drove the Canadian dollar up about 7 percent against a basket of major economy currencies. Since that last hike on Sept. 6, though, the loonie has faltered as the economic data has largely come in weaker than forecast. Now, some investors are questioning whether that second rate boost was needed. Officials will get a chance to explain themselves Wednesday when Bank of Canada Governor Stephen Poloz releases the central bank's monetary policy report. CME Group data show currency traders are clearly expecting Poloz to retain his hawkish leanings, as non-commercial accounts have near-record net long positions, according to BNY Mellon foreign-exchange analyst Neil Mellor. Anything else from Poloz may cause the bulls to capitulate, triggering a sharp decline in the currency, Mellor wrote in a research note Tuesday. 

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