As the US winds down into the holiday season, there are pressing questions about correlations and causality across markets.  Most would argue that the present price action in risk assets looks ugly, with confidence failing across key sectors.

Blame for the pain trade starts with global politics and gets local with this last week bringing to the front fears about less demand for $1000 iPhones and troubles for GE as it faces significant debt rollovers into 2019. Throw in expectations for more Fed rate hikes despite equities, mix with lower oil prices and you have no joy, no glib market relief from policy-makers.

Perhaps the American Turkey, the headline part of the food feast ahead, can shed some light on how we are battling idiosyncratic events with a global culture. The bird meleagris gallopavo become known as a turkey because of Turkey – as the imports of guinea fowls that look similar to the native American bird – came from the Ottoman Empire export machine. Times have changed, exports have changed, but the role of globalization in driving interconnected supply chains hasn’t. 

Fear dominated the week but greed ended it. Last week delivered fear of such from the Italian budget impasse with the EU commission, to the politics of the UK as May struggles to hold her government together after successfully crafting a deal with the EU, as the Trump administration bickers about China trade policy goals and as the economic performance of Germany and Japan suggest a larger global slowdown in play for 4Q. The last week also brought hope for a moderation in the FOMC rate hikes, progress in China/US trade deal talks, a final EU/UK Brexit plan and significantly higher volatility across markets.  

The word turkey also has a derogatory slang meaning in the US – for being naïve, stupid and inept. And to think, Ben Franklin wanted to make the turkey the national bird over the bald eagle. The holiday week ahead will make many wonder if this is a turkey fest and whether the failure of markets rests on confidence in leaders or in the actual market economies with inflation and growth the key drivers.  

What Happened over the Weekend?  

US politics continue to hang over headlines with the battle for the House speaker race ongoing, with races in Georgia and Florida conceded to the Republicans by reluctant Democrats and with Trump facing pushback on his Saudi stance, North Korea’s new weapon test, cabinet shakeups.  European politics were also in the news with Macron facing riots over fuel price hikes, Greece seeing riots break out over the 1973 anniversary, German politicians rush to replace Merkel in leadership roles.  

• US Vice-President Pence: Not in a rush to end trade war.  The US won’t “change course until China changes its ways.” He also called for nations to avoid loans that would leave them indebted to Beijing. For the first time, APEC leaders were unable to agree on a formal written declaration, amid sharp differences between the US and China. On Saturday VP Pence traded barbs with China’s Xi.  In a 40-minute speech, Xi pushed freed trade and multilateralism. “Unilateralism and protectionism will not solve problems but add uncertainty to the world economy,” he said. “History has shown that confrontation, whether in the form of a cold war, a hot war or a trade war, produces no winners.” When it was his turn to take to the podium, Pence was equally fervent but far more direct in his criticism. “We have great respect for President Xi and China, but as we all know, China has taken advantage of the United States for many, many years and those days are over,” he said.
• UK PM May: Brexit won’t be easier if I’m ousted. May told Sky News's Ridge on Sunday it had been a "tough week" but that she would not be distracted. "Politics is a tough business and I've been in it for a long time," she said, adding that the next seven days "are going to be critical" for the future of the UK. Asked whether Sir Graham Brady - chairman of the backbench 1922 committee - had received the 48 letters needed to trigger a confidence vote in her leadership, she replied: "As far as I know, no - it has not." And in a warning to those pushing for a change of leader, she said: "It is not going to make the negotiations any easier and it won't change the parliamentary arithmetic.

Question for the Week Ahead: What matters the most for investors?  

The list of concerns that dominated price action in the last week is well known:

• FOMC reaction functions
• FAANG unwind
• Brexit pain
• US/China trade hope
• Credit Spreads

The question is what of these matters the most as the risk of FOMC speeches and reactions to data in the weeks ahead of their December meeting seems high.

“As you move in the range of policy that by some estimates is close to neutral, then with the economy doing well it’s appropriate to sort of shift the emphasis toward being more data dependent,” Fed Vice Chair Clarida said during a “Squawk Box” interview last week. Similarly, as the Pence/Xi barbs from the weekend suggest, a deal in Argentina at the G20 for US/China trade is still far away. The unwind of the winners of 2018 stocks rests on value, regulation and perceptions of demand into 2019 with the FAANG reversal troubling but not surprising.

Brexit has been dragging the UK down for 2 years and it’s coming to a head in the next week – leaving politics a deadline – and markets some certainty. This leaves the troubling rise in credit as the stand-out surprise from last week that maybe the new theme to fear and respect into the next 6 weeks – and naturally its all connected to the drop in oil prices, US/China trade, the FOMC hike risks and the value of equities. The fall in GE stands out as the new theme that mattered most in the last week.

First let’s review that few facts that drove last week –

1) The NY Fed 3Q Household Debt and Credit report came out last week . US total household debt increased by $219 billion (1.6%) to $13.51 trillion in the third quarter of 2018. It was the 17th consecutive quarter with an increase and the total is now $837 billion higher than the previous peak of $12.68 trillion in the third quarter of 2008. Furthermore, overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.

2) Talking heads warn on credit.  Paul Tudor Jones warned on the corporate credit bubbleand the changing world order. The genuine challenge emerging to global multilateral cooperation and a credit bubble make him risk averse. Jim Cramer and others on CNBC echoed concerns about credit. 

3) Corporate spreads reflect the FOMC cycle, the fear of 2020 recessions and the reality of supply.  The rise of corporate debt over the last 10-years reflects the power of QE and the search for yield. It also has a price in that much of the debt now issued is at the lowest tier. 

4) USD reversal from highs.  The USD touched 17-month highs Monday with rising concerns about Italy and UK driving the flows.  The reversal Friday followed speeches by Fed speakers talking down the path of future hikes and suggestions of caution.  The USD role in global credit – particularly in EM – seems clear. 

The bottom line – markets are nervous about the US credit spreads widening and the risk to growth into 2019.

The data this week isn’t likely going to change any of those fears. There are few Fed speakers – other than Williams this week – and so his speech matters.  The risk-reward for credit maybe pivoting on the USD and EM markets. 

Market Recap:

The last week brought renewed hope for a US/China trade deal (or at least a better outcome on further tariffs), a dovish tilt back to the Fed view – with Vice Chair Clarida comments key – and a sharp rise in fears that UK Brexit deals fall apart with UK PM May struggling to hold power and get here version with the EU through parliament.  

The economic news was mostly ignored again this week – with China data weaker in retail sales, better in industrial production and investments, while total social finance slows sharply and the government schemes for supporting the economy continue. The GDP reports from Japan and German were both weaker and surprised to downside leaving less global growth hope for 4Q. Nevertheless, the price action was supportive for EM, hurtful to Europe and the US was hit with more doubts about debt and credit with a keen focus on GE and with tech still suffering with focus on Apple and Facebook continuing. 

Equities: 

The MSCI all-country World Index fell 1.57% on the week. The MSCI EM index rose 1.04% on the week. The stark contrast was driven by US/China trade talk hopes, stable China data, less US rate hike fears.

• US S&P500 fell 1.61% to 2,736.27 on the week with Monday highs unwound to Thursday lows with focus on Apple and GE particularly. DJIA fell 2.22% on the week while the NASDAQ fell 2.15% to 7,247.87 on the week. The Cboe VIX rose 4.5% to 18.14% on the week with Thursday morning 22.42% highs reversed sharply through Friday. 
• The Stoxx Europe 600 fell 2.2% to 357.71 on the week with Monday highs almost repeated on Wednesday – with focus on Brexit, Italy key. UK FTSE fell 1.29% to 7,013.88 on the week. Italian MIB fell 1.97% to 18,878.31 on the week.  The German DAX fell 1.63% to 11,341 while the French CAC40 fell 1.6% to 5025.20 on the week. 
• The MSCI Asia Pacific Index fell 0.26% to 151.87 on the week. The biggest loser was Australia ASX 200 off 3.23% to 5730.55 with RBA rate hike risks returning with stronger jobs, while Japan Nikkei wasn’t far behind off 2.56% to 21,680.34 and the Topix off 2.61% to 1629.30 on the week.  The winner was China with Shanghai Composite up 3.09% to 2679.11 on the week. Hong Kong Hang Seng rose 2.27% to 26,183.53 on the week. The Korea Kospi rose 0.30% to 2092.40 while the Indai Nifty 50 rose 0.92% to 10,682.20. 

Fixed Income:

The rally in US bonds followed more dovish Fed comments, with Vice Chair Clarida flipping risks for 2019 hikes sharply lower. Markets in Europe were already bid with Brexit and Italy worries dominating on the week and with oil prices lower adding. Market in fixed income is offsetting the equity pain trade as well with China rally notable this week. 

• US bonds rally sharply, curve flattens with FOMC views shifting  on the week– 2Y off 12.5bps to 2.80%, 3Y off 15bps to 2.842%, 5Y off 16bps to 2.878%, 10Y off 12bps to 3.063%, 30Y off 6.5bps to 3.316%.
• Canadian 10-year bond yields off 14bps to 2.36% on the week– lower oil, less obvious BOC action ahead.
• Japan JGB yields fell 2bps to 0.092% on the weekwith 3Q GDP miss a driver.  The 20Y sale next issue ahead. 
• Australia 10-year bond yields fell 7.5bps to 2.675% on the week– with jobs report strong enough to keep RBA hike 3Q2019 back in play. 
• UK Gilt yields fell 8bps to 1.408% on the weekwith Brexit politics a mess and growth hits expected.
• German Bund yields off 4bps to 0.365% on the week– slow grind for safe-haven with Italy likely back in focus next week, UK dominated last week. 
• French OAT yields fell 2.5bps to 0.76% on the week. Macron politics – strikes and fuel hike protests issues. 
• Italian BTP yields rose 9bps to 3.485% on the weekwith EU Commission response to budget key in next week risk for 3.75% again.
• Spanish Bono yields up 3.5bps to 1.63% on the weekwith focus on Italy still – data mixed. 
• Portugal 10-year bond yields rose 3bps to 1.965% on the week– with supply and growth key.
• Greek 10-year bond yields up 18bps to 4.52% on the week– no pension reform, more election focus – less faith in debt sustainability. 

Foreign Exchange:

The US dollar index fell 0.5% to 96.42 – first weekly drop in a month – reversing from 97.69 highs Monday. In Emerging Markets, the USD was mixed with EMEA stronger, ASIA mixed and with LATAM the loser for the week – EMEA: ZAR up 2.6% to 13.993, TRY up 2.3% to 5.333, RBU up 3% to 65.985 – even with oil lower; ASIA: TWD off 0.4% to 30.887, KRW flat at 1128.60, CNY 6.9380 up 0.25%, INR 71.925 up 0.8%; LATAM:BRL off 0.25% to 3.739, MXN off 0.15% to 20.166, ARS off 1.5% to 35.94.  

In Crypto Currencies – a rough week with Bitcoin cash fork driving selling – BTC futures fell 14.3%, BTC break of $6000 triggered stops to $5400, now off 10.1% to $5585. ETH off 17% to $176.50 while Ripple off just 5.5% to $0.512. 

• EUR: 1.1415 up 0.7% on the week with 1.12 base holding and 1.15 next resistance – all about US rate hike risks vs. Italy and Brexit drags.
• JPY: 112.85 off 0.9% on the week with EUR/JPY 128.80 off 0.15% on the week – risk off in Nikkei, US rates and 114 capping open 112.50 pivot for 110 again. 
• GBP: 1.2830 off 1.1% on the week with EUR/GBP .8895 up 1.8% on the week – all about Brexit deal push-back and UK May politics – with 1.2750 key for 1.25 and lower with 1.3050 resistance.
• CHF: 1.000 off 0.6% on the week with EUR/CH 1.1415 up 0.15% - not the JPY safe-haven even with Italy/Brexit flows watching .9920-1.0080 again. 
• AUD: .7330 up 1.45% on the week with A$ bid on commodities/RBA outlook post jobs, and crosses – break of .7250 opens .74 next. NZD up 2.1% to 0.6880 at key resistance with .70 next – RBNZ focus after good data.
• CAD: 1.3150 off 0.5% on the week– lags A$ move with oil and BOC doubts in play – watching 1.30 base against 1.3250 still. 

Commodities:

The S&P/GSCI total return index fell 2.1% on the week to 2,538.22. Biggest winner NatGas up nearly 15% with Hogs second and Palladium third while Oil and Cocoa dragged. 

• Oil: $56.46 of 6.20% on the week. Brent off 4.87% to $66.76. This was the sixth weekly loss for oil with production cut talk from OPEC supporting but US inventories hurting along with the weaker global outlook. WTI watching $55-$58 now while Brent is $65-$68.  Also notable on the week was the 14.9% weekly gain in NatGas with Wednesday highs the most in 4-years.
• Gold: $1223.35 up 1.1% on the week. USD lower, gold higher with Brexit, Italy, US rates all driving as well.  Gold held $1200 so back to $1235 tests. Silver up 1.9% to $14.42 on the week with $13.80 base for $14.50 pivotal tests again. Platinum fell 0.8% to $846.20 on the week while Palladium rose 5.4% to $1177.
• Corn: $375.75 off 1.35% on the week. Corn to Oil price correlation restarts as a driver while US/China trade hopes help other grains. Soybeans up 1.95% to $892.25. Wheat up 0.95% to $515.25. 
• Copper: $2.7920 up 1.45% on the weekbut unable to hold over $2.85. Copper futures $2.81 March up 4.25% - breaking away from equity connection for now. China trade data helped.  Iron Ore was a different story with Dec Futures $71.38 off 2.25% on the week. 

Calendar for the Week Ahead: 

A light week for economic news with focus on US housing data, flash PMI reports, Japan CPI with Thanksgiving holiday likely driving down volumes. Europe will focus on Italian budget response from EU commission and ECB meeting accounts. UK remains mired in Brexit debates with only CBI and PSNB report otherwise. 

Monday, November 19: Eurogroup meeting, Japan trade, Fed Williams

• 0445 pm New Zealand 3Q PPI output (q/q) 0.9%p /input 1%p
• 0650 pm Japan October trade surplus Y140bn p –Y70bn e / exports -1.2%p +9%e / imports 7%p +14.5%e
• 1030 pm BOJ Kuroda speech
• 0400 am Eurozone Sep C/A surplus E20.5bn p E40.5bn e
• 0500 am Eurozone Sep construction output (m/m) -0.5%p (y/y) +2.5%p 3.6%e
• 1000 am US Nov NAHB housing market index 68p 67e
• 1045 am NY Fed Williams speech
• 1130 am US Treasury sells 3M and 6M bills

Tuesday, November 20: US housing starts, BOC speeches

• 0730 pm RBA Meeting Minutes
• 0130 am French 3Q ILO unemployment 9.1%p 9.2%e
• 0200 am German Oct PPI (m/m) 0.5%p 0.3%e (y/y) 3.2%p 3.3%e
• 0500 am UK BOE Carney speech / Autumn inflation forecast 
• 0600 am UK Nov CBI industrial trends -6p -6e
• 0800 am Hungary central bank rate decision – no change from 0.9% expected
• 0830 am US Oct housing starts (m/m) -5.3%p +1.5%e / 1.201m p 1.23m e
• 1130 am US Treasury sells 4-week bills
• 0100 pm BOC Wilkins speech
• 0430 pm US weekly API oil inventories 8.79mb p 4.8mb e
• 0500 pm BOC Lane speech

Wednesday, November 21: EU commission decision on Italian Budget, US durable goods, existing home sales

• 1130 pm Japan Sep activity index (m/m) 0.5%p -0.8%e
• 0430 am UK Oct PSBN GBP3.259bn p GBP5.7bn e
• 0540 am German 5Y BOBL sale
• 0830 am US weekly jobless claims 216k p 215ke
• 0830 am US Oct durable goods orders (m/m) 0.8%p -2.5%e / ex transport 0.1%p 0.4%e
• 1000 am US Oct existing home sales (m/m) -3.4%p +1%e / 5.15m p 5.23m e
• 1000 am US Nov Michigan consumer sentiment 98.3p 98.6e
• 1000 am US Oct conference board LEI 0.5%p 0.1%e
• 1030 am US weekly EIA crude inventories 10.27mb p 3.2mb e

Thursday, November 22:US Thanksgiving Holiday, Japan CPI, Canada financial stability review

• 0630 pm Australia Oct Westpac Leading index -0.1%p +0.1%e
• 0630 am Japan Oct core CPI 1%p 1%e / core-core 0.4%p 0.4%e / headline 1.2%p 1.4%e
• 0245 am French Nov Business Climate 104p 104e
• 0440 am Spanish 3-5-10Y Bond Sale 
• 0500 am French 3-5Y BTAN sale
• 0730 am ECB meeting accounts
• 0800 am South Africa interest rate decision – no change from 6.5% expected
• 0945 am BOC Wilkins on Canada Mortgage Panel
• 1000 am Eurozone Nov consumer confidence -2.7p -3.0e

Friday, November 23:Japan Thanksgiving Holiday, Global flash PMI

• 0200 am German 3Q revised GDP (q/q) -0.2%p (y/y) 1.1%p
• 0315 am French Nov flash manufacturing PMI 51.2p 51e/ services 55.3p 55e / composite 54.1p 53.8e
• 0330 am German Nov flash manufacturing PMI 52.2p 52.1e / services 54.7p 54.4e / composite 53.4p 53.1e
• 0400 am Eurozone Nov flash manufacturing PMI 52p 51.7e / services 53.7p 53.5e / composite 53.1p 53e
• 0830 am Canada Sep retail sales -0.1%p 0.3%e/ ex-autos -0.4%p 0.2%e
• 0830 am Canada Oct CPI (m/m) -0.4%p +0.2%e(y/y) 2.2%p 2.2%e/ core 1.5%p 1.5%e
• 0945 am US Nov flash manufacturing PMI 55.7p 55.7e / services 54.8p 54.9e / composite 54.9p 56e

Conclusions: Forget the turkey its Black Friday shopping that matters

The fear about confidence waning in markets matters only if it infects the consumer. Respect for the season may be something to consider in the week ahead. For many in the US, the Black Friday shopping spree has become part of the holiday, a jump-start into December holiday spending, and an important part of how retailers survive (moving from red to black).  

For the shoppers among you, here is the cheat sheet guide where tvs, tablets and home devices dominate the sales agenda. Interestingly, this US phenomena has spread across to the UK and Europe. For 2018, the NRF expects consumers to spend 4.1 percent more than they did during the 2017 winter holidays. Overall, the federation is forecasting that holiday sales will increase between 4.3 percent and 4.8 percent. 1 For 2017, the group forecast that holiday sales would gain between 3.6 percent and 4 percent and that individuals would increase their spending 3.4 percent. Sales actually rose 5.5 percent. Predictions aren’t as compelling as facts but for that we will have to wait until next week.