Monday Morning Cheat Sheet: 3 Stories Moving Markets



It’s Monday, November 18, and U.S. equities brushed up against fresh highs in early trading. At 8:50 a.m., Dow futures were up 0.28 percent, S&P 500 futures were up 0.14 percet, and Nasdaq futures were up 0.03 percent. The Dow is staring down a benchmark of 16,000, while the S&P 500 is just a few points away from 1,800.

Here are three stories to keep an eye on.

1. U.S. Federal Reserve

After the October fiscal snafu, the Fed is back in focus in the United States, and the big event on the horizon is the transition of power from current Chair Ben Bernanke to Vice Chair Janet Yellen. Despite some opposition from conservatives in the Senate, Yellen is expected to obtain the 60 votes she needs (all 55 Democrats plus five Republicans) to land the confirmation.

Yellen will take the reins of the world’s most powerful monetary institution at a wild time. The Fed is currently engaged in a massive, ongoing, and controversial asset-purchasing program aimed at reducing longer-term interest rates and stimulating economic activity. This strategy has both pros and cons, and increased equity valuations are one of the side effects that could fall into either bucket. A rallying stock market can help lift business activity and economic sentiment, but many fear that prices are inflated and could come crashing back down at the first sign of a taper.

The Senate’s vote on Yellen’s confirmation could come as early as this week, according to some reports.

2. China’s economic reform

Equity markets in Asia surged on Monday as investors and traders rallied behind the idea of long-awaited economic reform. In Hong Kong, the Hang Seng climbed 2.21 percent to 20,850.74, and in Shanghai, the SE Composite climbed 2.87 percent to 2,187.22.

There are five major reform vectors in China. The first addresses the nation’s institution of state-owned enterprises. The Chinese government operates about 117 SOEs that dominate nearly every major industry in the country, from banking to pharmaceuticals to railways and telecommunications. As most economists would be quick to point out, government often lacks the necessary mojo to operate an efficient and competitive business.

Currently, Chinese SOEs return between 5 and 20 percent of profits to the government in the form of a dividend. However, by 2020, the new reforms would open up the SOEs to private equity and allow the organizations some flexibility with their capital mix. The government would take 30 percent of profit produced, using state capital as a dividend. The amount of private equity allowed in an SOE would be capped.

The other reform vectors involve the financial sector (China is highly leveraged), land rights (most land, including farm land, is currently owned by the government), the welfare system (meant to encourage urbanization), and a relaxation of the one-child policy.

3. European economy

The euro area (EA17) logged a trade surplus of 13.1 billion euros ($17.7 billion) in September, according to a preliminary estimate from Eurostat. This is up more than 52 percent on the year and, at a glance, signals increased demand from Europe’s trading partners. August’s trade surplus of 6.9 billion euros ($9.32 billion) was up 35 percent on the year.

Exports climbed 1 percent sequentially, while imports fell 0.3 percent. This is in line with economic data suggesting that Europe’s domestic economy is still weak.

The European Union (EU28) logged a trade surplus of 0.6 billion euros ($0.81 billion), which compares to a deficit of 14.5 billion ($19.59 billion) in the year-ago period. Trade surpluses increased significantly with Switzerland, the United States, Turkey, and Brazil. The EU’s trade deficit with China, Russia, Norway, and Japan fell.

Germany recorded the largest individual surplus within the euro region at +127.8 billion euros ($172.63 billion). France recorded the largest deficit at -50.1 billion euros ($67.68 billion).

European equities advanced in midday trading. In the U.K., the FTSE 100 was up 0.41 percent; Germany, the DAX was up 0.63 percent; in France, the CAC 40 was up 0.68 percent; and the Euronext 100 index was up 0.55 percent.

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