The Daily Prophet: Stock Traders Avoid a Dubious Distinction

Connecting the dots in global markets.

It wasn't pretty, but the S&P 500 Index managed to eke out a gain for the first time in a week, rising 0.29 percent. For a while, it looked as if Thursday would be the fifth straight day that the benchmark failed to gain, which would have been the longest such stretch this year.

Whether it was due to some vague optimism that the proposed U.S. tax overhaul plan will, in fact, boost corporate profits or that Friday's monthly jobs report will reinforce notions that the economy is in strong shape, the rally was notable in one regard:  Consumer discretionary shares were among the best performers. That's important at this time of year, when consumer spending on the holidays can make or break economic momentum. Beleaguered U.S. retailers are actually seeing a wave of optimism, as seen in the rising number of options being used by investors to bet on the widely followed SPDR S&P Retail ETF. The number of contracts outstanding on the exchange-traded fund has climbed to more than 530,000, the most since January 2014, with the ratio of bearish-to-bullish options falling along with the cost of protecting against declines in the coming month, according to Bloomberg News' Cecile Vannucci. The S&P 500's three biggest gainers over the past month are Foot Locker, Macy's and The Gap.

Consumers should be feeling flush. Figures from the Federal Reserve on Thursday showed that U.S. household wealth rose to a new record in the third quarter, gaining $1.7 trillion, to $96.9 trillion, driven by a surging stock market and property values. The figures also showed that U.S. household debt is the lowest in more than a decade, at 77.2 percent of gross domestic product, according to Bloomberg News' Matt Boesler. That figure is down from almost 98 percent in 2008.

Thursday was one of the rare days recently when the difference between two- and 10-year Treasury yields didn't narrow. The so-called yield curve widened to 56 basis points from 53 basis points on Wednesday as longer-maturity debt sold off ahead of Friday's all-important jobs report and next week's meeting of Fed policy makers when they are widely expected to raise rates. Besides bitcoin, betting on a shrinking curve this year has been one of the surest moves in markets this year, as the gap has narrowed from 128 basis points in January. And now's not the time to abandon those wagers. Despite the outlook for stable economy, more bond strategists are warming to the idea that we could see an inverted curve -- which is often cited as a signal of a coming recession -- as soon as next year, according to Bloomberg News' Brian Chappatta. Six of 11 analysts surveyed by Bloomberg News since last week said the curve will invert at least briefly within 24 months, with four calling for it to happen in 2018. Yields on the maturities will meet somewhere between 2 percent and 2.5 percent, according to the respondents predicting inversion next year. That would coincide with the range the 10-year note has plied throughout 2017. “That weird combination of decent growth forcing the Fed’s hand to tighten, and on the other hand inflation not running away, biases the curve to flatten,” John Herrmann, director of rates strategy at MUFG Securities Americas, told Bloomberg News.

Despite the sense that the U.K. government is in turmoil -- unable to agree on how to exit the European Union and with Prime Minister Theresa May facing opposition from her own cabinet -- by one measure, sterling is doing just fine. The Bloomberg Pound Index, which measures the currency against a basket of peers, rose the most since October, putting it at its highest level since May on a closing basis. Most analysts seem to agree that the pound is likely to strengthen next year, according to Bloomberg News' John Ainger and Anooja Debnath. That view is mostly pegged to the notion that the U.K. will achieve a transitional arrangement with the European Union before the country leaves the bloc in March 2019. Sterling “has suffered since the Brexit vote, but a lot of bad news is already in the price,” ING strategists led by Chris Turner wrote in a note to clients. The greenback is another currency on the move, with the Bloomberg U.S. Dollar Spot Index rising in eight out of the past nine trading days. Just this week, the Citi Economic Surprise Index for the U.S. -- which measures data that exceed forecasts relative to those that miss -- rose to its highest since early 2014.

This should be the perfect environment to be long gold. Stocks are wobbling, the bond market's yield curve is flagging a slowing economy, Hamas’s leader called for a third intifada against Israel after President Donald Trump declared the U.S. would recognize Jerusalem as the Israeli capital and North Korea is saying a nuclear war on the Korean Peninsula has become a matter of when, not if. And yet, gold is having its worst week since early July, dropping 2.60 percent. Metal for immediate delivery fell to the lowest in four months at $1,252.44 an ounce in London. Traders say the precious metal is under pressure due to the likelihood that the Federal Reserve will raise interest rates next week. “The rate hike is now looming and people are suddenly realizing that gold may not be the most attractive long position at the moment,” David Govett, the head of precious metals trading at Marex Spectron in London, told Bloomberg News. Strategists have been cutting their outlook for gold as the prospect for more Fed rate hikes next year increase. The median estimate of analysts surveyed by Bloomberg is for gold to trade at about $1,227 in mid-2018, down from the more than $1,300 they forecast back in early September. A weekly survey by Bloomberg News found that gold traders are their most bearish since at least April 2015.

It was good day for Latin American equities, with all the major bourses showing gains. There was one big exception: Brazil. The Ibovespa fell as much as 2.6 percent, the most on a closing basis since May 18, before recovering some of those losses in late trading. The real lost 1.77 percent of its value, the most among the more than 30 developed and major emerging-market currencies tracked by Bloomberg. The declines were blamed on traders reassessing the chances of the country’s pension overhaul being approved this year after lawmakers said the government still lacks enough votes to pass the bill, according to Bloomberg News' Aline Oyamada and Paula Sambo. The bill is seen as the cornerstone of the nation’s fiscal adjustment. "The market needs a signal that the pension bill will actually be voted, or that they have enough votes to do so," Thais Zara, an economist at consultancy Rosenberg Consultores Associados, told Bloomberg News. Much of the gains in Brazilian markets this year were tied to hopes President Michel Temer would implement fiscal tightening measures, especially a reform of the country’s pension system. The overhaul is not only seen as key to trimming the budget deficit and putting the nation’s debt on a more sustainable path, but could also allow interest rates to keep falling.

Back to normal. That's how economists are describing Friday's monthly jobs report from the U.S. Labor Department. The government is likely to say the economy added 190,000 jobs last month, according to the median estimate of economists surveyed by Bloomberg News. While that would be down from 261,000 in October, it's not far from the average of 176,000 before Hurricanes Harvey and Irma distorted the September and October numbers. This month's numbers have some added importance because they are the last big economic data point that Fed policy makers will get before they meet next week. Even though the actual number of jobs created fell below estimates each of the last three months, traders expect the figure to beat forecasts for November. The so-called whisper number is for a gain of 222,000 jobs for last month, according to data compiled by Bloomberg.

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