The search for a safe-haven in October has been difficult. There are few places to hide and the threat of more tricks than treats in the week ahead leave few comfortable being long the USD as the safe-haven but for 2018 overall that is the winner. Many see the tricks that have supported markets since 2009 as waning and the sweetness of easy money fails amidst a world filled with political unrest. The rate hikes and the Trump tax reform has lifted the dollar and it has crushed emerging markets, bonds, equities globally. The lack of an obvious set of safe-havens in a correction is part of the FOMC problem and its going to be a focus as the BOE and BOJ meet to discuss their own paths to normalization. The fear that the world growth has turned over rests with China and its reaction function. That the stock market there was the only one up didn’t comfort anyone last week. The faith in policy isn’t sufficient and the PMI reports in the week ahead maybe a key driver for the big 7.0 CNY breakout that so many fear – adding to the USD story. The lack of responses from the Fed or the ECB last week to the market turmoil stands out as different and something that maybe changing should the selling of risk-assets continue. The search for a safe call in bonds maybe the only solace and clearly, that is the play many expect, with a pause in December for the FOMC not impossible.  More pressing will be the mix of jobs and growth data for the US and Europe in the week ahead. What many central bankers have given up on – the Phillips Curve – maybe returning at just the wrong time with inflation risks far underpriced, the volatility in bonds maybe just getting started. Fears are rising for peak earnings, for a FOMC policy mistake, for Trump trade policy to bite growth and for US elections to matter for 2019 growth. Few investors can look at the results from last week and not have a cold, skin-crawling shudder. As JPMorgan Normand notes“only twice in history have markets been this ugly: the 1970’s stagflation and the global financial crisis.”

What Happened over the Weekend? Europe turned back its clocks along with UK moving to Greenwich Mean Time from British Summer Time. This means US/European market overlap is longer for the next week by an hour. US focus was on the Synagogue shooting in Pittsburgh, the ongoing ugly politics blamed along with the pipe bomber Sayoc and his twitter account. The effect on mid-term elections is seen as mixed. 

• Brazil – Election fully expected to go to far-right Bolsonaro. The election ends the 2 party system that held since the end of military rule in the mid ‘80s. 
• Italy – On Friday, S&P cut the outlook for Italian debt to negative from stable but didn’t cut the rating like Moody’s. Deputy Prime Minister Matteo Salvini dismissed S&P's report as "the same old film" and threw doubt on the credibility of ratings agencies which "didn't notice the financial crisis."
• Germany– Another blow to Merkel in Hesse elections. Exit polls show CDU down 10% to 27.9%, SPD down to 19.9% from 30.7%, Greends up 8.5% to 19.5%, the AfD at 12% - with the far right getting seats for the first time, while the FDP was up 2.5% to 7.5%. 
• Ireland – Re-elects Michael Higgins as President for another 7-year term. The 77-year old won 55.8% of the vote. 
• ChinaEconomy– Industrial Profits for September slow to 4.1% y/y after 9.2% y/y – with the Jan-Sep now 14.7% y/y after 16.2% in Jan-Aug.  
• China Geopolitics – President Xi orders the Southern Theatre Command (which covers the South China Sea and Taiwan) to prepare for conflict. During a visit to the region on Thursday (Oct. 25), Xi said it was necessary to “concentrate preparations for fighting a war,” reported the South China Morning Post, citing a transcript of Xi’s speech from state broadcaster China Central Television. “We need to take all complex situations into consideration and make emergency plans accordingly.”
• Philippines– faces Typhoon Yutu heading for Luzon as a category 4 storm. 

Question for the Week Ahead: Is the Fed going to blink? The BOC didn’t mind the equity selling and hiked, the Norges bank continues to plan to hike with the FOMC, the ECB vowed to remove the QE by the end of the year – central banks in the last week didn’t throw the market a lifeline. October has erased $5 trillion from global stocks and bond market capitalization, but the total remains up $15 trillion from 2017. The financial conditions globally moved significantly in the last week and last month but as Deutsche Bank argues along with others, its still supportive for growth. 

What is different this time is that markets are pricing in a Fed reaction function to market turmoil while Fed speakers aren’t so clear about it.  Some of the speakers note that a rate hike in December and 3 more in 2019 aren’t set in stone. However, the actions this week make clear, that financial stability is no longer a third rail for central bankers 10-years after the great recession. The Chinese are the stand-outs for battling against a further stock market decline with the PBOC adding liquidity this week, with the government schemes to provide more to the private sector and to further stimulate the economy against the specter of slowing growth and US tariffs. The global markets are facing a technical bear market like China and the rest of the emerging markets, while the US is merely in a correction. 

Whether this is sufficient for the FOMC to blink seems linked to the data ahead with jobs and inflation driving the show. The market remains hopeful for a treat with 1-2 rather then 2-3 hikes in 2019. Whether the FOMC can follow Trump pushes and Market hopes remains the key driver for volatility.

Market Recap: Another bad week for risk – with many markets entering bear territory and the US firmly in correction. Trading volumes were high across most markets and the VIX rose to new multi-month highs, but not to the February spike. The earnings reports dominated much of the week with 37% of the S&P500 reporting and expectations still robust. GDP was up 3.5% in 3Q and that beat expectations. Neither proved sufficient to support markets. 

Equities: The MSCI all-country World Index fell 2.723% to 480.83 on the week, off 9.03% on the month, but off 6.70% ytd. The MSCI EM Index fell into a bear market down 3.4% to 939.55 on the week, off 11.54% on the month and off 23.03% ytd. 

• US S&P500 fell 3.94% to 2658.69 on the week, down 8.76% on the month and off 0.56% ytd. The DJIA fell 2.97% to 24,688.31 on the week, off 6.69% on the month and off 0.13% ytd. The NASDAQ fell 3.78% to 7167.21 on the week, off 10.93% on the month but up 3.82% ytd. The Cboe VIX rose 21.47% to 24.16% on the week, up 99.34% on the month and 118.84% ytd. 
• Euro Stoxx 600 fell 2.46% to 352.34 on the week, off 8.05% on the month, down 9.47% ytd.   German DAX fell 3.06% to 11,200.62 on the week, off 8.54% on the month and off 13.29% ytd. The French CAC40 fell 2.31% to 4,967.37 on the week, off 9.58% on the month and 6.5% ytd. The UK FTSE fell 1.56% to 6939.56 on the week, off 7.60% on the month and 9.73% ytd. The Italian FTSE MIB fell 2.08% to 18,683.27 on the week, off 9.79% on the month and 14.51% ytd. 
• MSCI Asia Pacific fell 4.41% to 146.60 on the week, off 12.79% on the month, off 15.66% ytd. The China Shanghai Composite rose 1.90% to 2598.85 on the week, but is off 7.89% on the month and remains in a bear market off 21.42% ytd.  The Japan Nikkei fell 5.98% to 21,184.60 on the week, off 1.17% on the month and off 6.94% ytd, while the Topix fell 5.72% to 1596.01, off 12.17% on the month and off 12.19% ytd.  The Hong Kong Hang Seng fell 3.30% to 24,717.63 on the week off 11.05% on the month and off 17.39% ytd. The Korea Kospi fell 5.99% to 2027.15 on the week, off 13.48% on the month and off 17.85% ytd. The Australian ASX fell 4.62% to 5,665.15 on the week, off 8.74% on the month and off 6.59% ytd. The India Nifty 50 fell 2.65% to 10,030.00 on the week, off 8.24% on the month and 4.75% ytd. 

Fixed Income: Between risk-off, the ECB, flash PMI data and supply, global bonds were bid but choppy. US GDP being better wasn’t enough as peak earning fears in equities dominated.  BOC rate hike was expected but the hawkish delivery was a surprise. The Norges bank was also more hawkish while the Riksbank less so. The US auctions were mixed with the 7-year tailing helping many buy into the idea that US risk-off has hit a bottom. Others saw Italy and its budget battles less scary because of the restraint from S&P on its downgrade in view not in ratings.  The UK politics remain a focus but the May Brexit plan holds for now. Most see bonds waiting for more data and the BOE/BOJ meetings next. 

• US bonds rally with bull flattening on risk-off in equities- 2Y off 10bps to 2.806%, 3Y off 13bps to 2.855%, 5Y off 14bps to 2.907%, 10Y off 12bps to 3.076%, 30Y off 6.5bps to 3.31%.
• Canada 10-year bond yields fell 10.5bps to 2.39% on the week– despite a hawkish BOC hike, C$ weaker and data mixed on growth. 
• Japan JGB yields off 4bps to 0.099% on the week with focus on BOJ talk and equities.
• Australian 10-year bond yields fell 8bps to 2.59% on the week with focus on China/US rates and policy, government fragility.
• UK Gilt yields fell 19.5bps to 1.38% on the week with Brexit politics, weaker equities, GBP all in play.
• German Bund yields fell 10.5bps to 0.35% on the week with the focus on ECB then equities then Italy with 0.25%-0.50% range back in play.
• French OAT yields fell 10bps to 0.735% on the week with Macron politics focus but French data marginally better
• Italy BTP yields fell 3.5bps to 3.44% on the week with weaker equities help drove hope for ECB buying, relief on ratings also key.
• Spain Bono yields fell 16bps to 1.565% on the week– quick snap back with focus on growth and politics next.
• Portugal 10-year bond yiels fell 12bps to 1.895% on the week– fiscal focus returning
• Greece 10-year bond yields fell 5.5bps to 4.25% on the week– tracking Italy and waiting for more growth evidence. 

Foreign Exchange: The US dollar index rose 0.7% to 96.35 on the week but is well off the 96.86 highs from early NY Friday and failed to take out 97 again, however, the USD is well off the Monday 95.46 lows.  Key levels are 93.00 – 200 day support, 95.30 55-day and 97 the 2018 high.

In Emerging Markets, USD was mostly bid but with TRY, BRL and PHP the winner for the week and the month while focus remained on CNY and 6.96 stops – EMEA: ZAR off 1.3% to 14.599, TRY up 0.85% to 5.593, RUB off 0.2% to 65.597; ASIA: TWD off 0.2% to 30.988, KRW off 0.85% to 1141.85, INR off 0.2% to 73.466 and CNY off 0.2% to 6.9435; LATAM: ARS of f0.8% to 36.83, BRL up 1.9% to 3.642 with election key, MXN off 0.4% to 19.361. In Crypto Currencies – calm continues– BTC off 1% to $6405 while CME futures were up 0.15%, ETH off 3.1% to $201.25 while XRP off 1.6% to $0.4575. 

Carry and Risk appetites continue to break down as AUD/JPY shows in FX

• EUR: 1.1380 off 0.95% on the week, off 2.85% on the month. The 1.13-1.15 levels now key with Italy, risk-off, ECB and growth key. 
• JPY: 111.90 up 0.55% on the week, up 0.75% on the month with EUR/JPY 127.60 off 1.55% on the week and 3.75% on the month – 128 break opens 125.50 next with risk-off in equities key, 110.50 next.
• GBP: 1.2830 off 1.9% on the week, 2.55% on the month with EUR/GBP up 0.9% on the week, but off 0.35% on the month. 
• CHF: .9970 off 0.1% on the week, 3.1% on the month with EUR/CHF 1.1375 off 0.8% on the week, up 0.3% on the month. CHF trying not to be a safe-haven with .99-1.0050 keys for $ but focus is Italy, equities.
• AUD: .7090 off 0.4% on the week, 2.3% on the month with focus on China, rates, data ahead with NZD .6505 off 1.4% on the week and 2.4% on the month – trade and catch up trade on crosses. 
• CAD: 1.3105 flat on the week, up 0.65% on the month with BOC more hawkish in its hike but oil, crosses, growth all in doubt – 1.30-1.32 keys. 

Commodities: The S&P/GSCI total return index fell 1.37% to 2,760.87 on the week, still up 7.99% ytd. For the week, Hogs, Cocoa and Palladium lead while Lumber, Gasoline and Red Wheat were the losers. 

• Oil: $67.59 off 2.21% on the week, Brent off 2.71% to $77.62 with $66 in WTI and $76 in Brent key support – focus was on Saudi pumping, equity thumping leading to less growth, US inventories.
• Gold: $1233.55 up 0.57% on the week– dancing around $1236 but unable to really break out with risk-off in equities insufficient to counter bid USD, focus is on $1225 base building for $1266 next. Silver up 0.53% to $14.70 with $14.77 the key resistance. Platinum up 0.21% to $832.71 and Palladium up 2.1% to $1105.70. 
• Corn: $367.75 up 0.2% on the week. Shifting from harvest focus back to demand. Friday rally saved Corn but not Soybeans $$857.75 off 1.4% on the week and Wheat off 1.85% to $505.25 on the week. 
• Copper: $2.8005 off 0.25% on the week but Futures for Dec $2.74 off 1.23%. Focus was on equities and China stimulus countering. Iron Ore rallied 4.25% to $75.14 for November.

Calendar for the Week Ahead: Heavy week for news and trading with month-end, then usual flash HICP, Manufacturing PMI and ISM, US jobs. The BOE and BOJ both meet as well with clock flip in EU leaving US markets another hour of EU trading overlap.  UK Autumn Budget, US earnings. 

Monday, October 29: Japan retail sales, UK consumer credit, US PCE, UK Autumn Budget. 

• 0750 pm Japan Sep retail sales (y/y) 2.7%p 1.6%e
• 0500 am Italy Sep PPI (m/m) 0.4%p 0.3%e (y/y) 4.4%p 3.8%e
• 0530 am UK Sep mortgage approvals 66.44k p 64.75k e / Cons. Credit G1.11bn p G1.20bn e
• 0600 am Eurozone Economic Forecasts from EU Commission
• 0700 am UK Oct CBI retail trade survey 23%p 21%e
• 0830 am US Sep personal income (m/m) 0.3%p 0.3%e / spending 0.3%p 0.4%e / core PCE 0%p 0.1%e
• 0945 am Chicago Fed Evans speech
• 1030 am Dallas Fed Oct Manufacturing Index 28.1p 25.1e
• 1130 UK Autumn Budget
• 0200 pm Fed Senior Loan Officer survey

Tuesday, October 30: Japan jobs, German jobs, Eurozone GDP

• 0750 pm Japan Sep unemployment rate 2.4%p 2.4%e / applicants to jobs 1.63p 1.63e
• 1010 pm RBA Bullock speech
• 0230 am French 3Q GDP (q/q) 0.2%p 0.5%e 
• 0345 am French Sep consumer spending (m/m) 0.8%p -0.6%e
• 0400 am Spanish Oct flash HICP 
• 0400 am Swiss Oct KoF LEI 102.2p 100.6e
• 0455 am German Oct unemployment change -23k p -12ke / rate 5.1%p 5.1%e
• 0500 am Italy 3Q GDP (1/1) 0.2%p 0.2%e
• 0600 am Eurozone 3Q GDP (q/q) 0.4%p 0.4%e (y/y) 2.1%p 1.9%e
• 0600 am Eurozone Oct economic sentiment index 110.9p 110.0e / business climate 1.21p 1.15e
• 0700 am German Oct flash CPI (m/m) 0.4%p 0.1%e (y/y) 2.3%p 2.4%e / HICP 2.2%p 2.4%e
• 0900 am US Aug S&P/Case-Shiller home prices (y/y) 5.9%p 6%e
• 0430 pm US API weekly crude inventories 9.88mb p 1.7mb e

Wednesday, October 31: German Holiday, Japan IP, Australia CPI, BOJ policy decision, German retail sales, Eurozone flash HICP, US ADP, Chicago PMI, Brazil rate decision

• 0750 pm Japan Sep Industrial Production (m/m) 0.2%p -0.2%e
• 0830 pm Australia Sep private sector credit 0.5%p  0.4%e
• 0830 pm Australia 3Q CPI (q/q) 0.4%p 0.4%e (y/y) 2.1%p 1.9%e / RBA trimmed mean 1.9%p 1.9%e
• 0900 pm China Oct CLFP manufacturing PMI 50.8p 50.7e / Services 54.9p 54.9e
• 1100 pm BOJ policy decision – no change from -0.1% expected. 
• 0100 am Japan Oct Consumer Confidence 43.4p 43.5e
• 0100 am Japan BOJ 4Q outlook
• 0130 am BOJ Kurodoa press conference
• 0300 am German Sep retail sales (m/m) -0.1%p 0.5%e (y/y) 1.6%p 1.0%e
• 0345 am French Oct flash HICP
• 0400 am Spanish 3Q GDP (q/q) 0.6%p 0.6%e (y/y) 2.7%p 2.8%e
• 0600 am Italy Oct flash CPI (m/m) 1.7%p 0.3%e (y/y) 1.5%p 1.8%e
• 0600 am Eurozone flash HICP (y/y) 2.1%p 2.2%e / core 0.9%p 1.0%e
• 0600 am Eurozone Sep unemployment rate 8.1%p 8.1%e
• 0815 am US Oct ADP employment change 230k p 190k e
• 0830 am US 3Q employment cost index 0.6%p 0.7%e
• 0830 am Canada Sep Industrial PPI (y/y) 5.8%p 5.4%e / raw materials (m/m) -4.6%p -1.5%e
• 0945 am Chicago Oct Manufacturing PMI 60.4p 60.5e
• 1030 am US weekly EIA crude inventories 6.35mb p
• 0500 pm Brazil COPOM rate decision – no change from 6.5% expected. 

Thursday, November 1: All Saints Day Holiday – Italy, Spain, France. Global Manufacturing PMI, PBOC meeting, BOE meeting, US ISM, auto sales

• 0730 pm Australia Oct AIG Manufacturing PMI 59p 56e
• 0830 pm Australia Sep trade surplus A$1.604bn p A$1.70bn e
• 0830 pm Japan Oct final Manufacturing PMI 51.3p 50e
• 0945 pm China Oct Caixin manufacturing PMI 50p 50.1e
• 0245 am Swiss 4Q SECO consumer climate -7p
• 0415 am Swiss Oct CPI (y/y) 1.0%p 1.1%e
• 0530 am UK Oct Manufacturing PMI 53.8p 53.0e
• 0800 am BOE rate decision – no change from 0.75% expected.
• 0830 am BOE Carney news conference
• 0830 am US weekly jobless claims 215k p 215k e
• 0830 am US 3Q productivity 2.9%p 2.0%e / ULC -1%p +1.2%e
• 0930 am Canada Oct Manufacturing PMI 54.8p 54.5e
• 0945 am US Oct final Manufacturing PMI 55.6p 55.9e
• 1000 am US Oct Manufacturing ISM 59.8p 59.0e
• 1000 am US Sep construction spending 0.1%p 0.1%e
• 0330 pm US Oct total vehicle sales 17.44m p 17.10m e

Friday, November 2: Australian retail sales, Europe Manufacturing PMI, US jobs report, US trade, Canada jobs, trade. 

• 0830 pm Australia Sep retail sales 0.3%p 0.3%e
• 0415 am Spanish Oct Manufacturing PMI 51.4p 50.8e
• 0445 am Italian Oct Manufacturing PMI 50p 49.5e
• 0450 am French Oct final Manufacturing PMI 52.5p 51.2e
• 0455 am German Oct final Manufacturing PMI 53.7p 52.3e
• 0500 am Eurozone Oct final Manufacturing PMI 52.1p
• 0530 am UK Oct Construction PMI 52.1p 51.9e
• 0830 am US Oct jobs report – NFP 134kp 190ke / earnings 0.3%p 0.3%e / rate 3.7%p 3.7%e
• 0830 am US trade deficit $53.2bn p $53.6bn e
• 0830 am Canada Sep trade surplus C$0.53bn p C$0.3bne
• 0830 am Canada Oct employment change 63.3k p 10k e / unemployment 5.9%p 5.9%e / participation rate 65.4%p 65.6%e
• 1000 am US Sep Factory Orders 2.3%p 0.4%e / ex trans 0.1%p 0.1%e

Conclusions: Will growth and earnings be the driver for a bounce? The 3Q GDP in the US at 3.5% was stronger than the 3.3% expected and continued to show strong domestic consumption. When you look at the components exports were a drag, inventories a key support and corporate investment spending flat – disappointing some that hoped for extended post-tax reform capex. The consumer remains the key for US growth.

The role of higher oil, ugly politics, higher rates, lower 401k savings maybe starting to show up in 4Q and this is the fear that puts the talk of peak earnings for stocks and a more cautious consumer in play.  The University of Michigan Consumer Sentiment slowed to 98.6 from 100.1 – down from the preliminary 99 in the middle of October. 

Whether jobs spark inflation and the Phillip’s Curve returns to bite matters in the week ahead. For many, the sharp pullback in US rate hike fears last week means the USD is going to retreat and not break out of the 2018 97 index highs.  We now live in a data-dependent world and either inflation or more growth will keep the pressure on markets as the key fear of a policy mistake into 2019 rises regardless of the present boom.