U.S. vehicle sales expected to improve from hurricane replacements
U.S. stocks enter the most favorable 4-month seasonal stretch of the year
Catalan independence referendum hurts EUR and reminds markets of early-2018 Italian election risks
U.S. vehicle sales expected to improve from hurricane replacements — The market consensus is for today’s U.S. vehicle sales report to improve sharply to 17.1 million vehicles from August’s 16.03 million. The improvement will mainly be due to people replacing their vehicles after the extensive flooding damage in Texas caused by Hurricane Harvey, which made landfall on Aug 25.
IHS Markit estimates that about 500,00 new vehicles will eventually need to be purchased to replace the some 1 million vehicles that were lost or damaged in Hurricane Harvey. Hurricane Irma, which hit Florida on Sep 10, will also boost vehicle sales somewhat in late September and October, although not nearly in the numbers caused by Harvey.
Harvey will likely save the year for auto makers, which have seen vehicle sales fall sharply this year due to consumer caution, high vehicle prices, and tighter credit for sub-prime borrowers. In fact, U.S. vehicle sales in August fell to a 3-1/2 year low of 16.03 million units, which was far below the 12-month moving average of 17.2 million units. Autos have seen particular weakness over the last three years and were down -13.3% y/y in August as consumers shunned sedans in favor of trucks. However, even truck sales have shown weakness this year and were down -2.1% y/y in August.
U.S. stocks enter the most favorable 4-month seasonal stretch of the year — The U.S. stock market has now entered its most favorable 4-month stretch of the year. Over the next four months (Oct-Jan), the S&P 500 index has shown an average monthly gain of +1.3% (Oct +0.89%, Nov +1.54%, Dec +1.63%, Jan +0.94%) since 1950.
However, the latter part of the year also tends to be the time when particularly large sell-offs tend to occur. In the past six decades, there have been eight times when the S&P 500 has shown a monthly decline of more than 10%. Six of those eight plunges occurred during the dangerous period of August through November. The worst months, with two 10%-plus plunges, were September (in 1974 and 2002) and October (in 1987 and 2008). The two other bad months during that time frame, with one 10%-plus plunge, were in August (1998) and November (1973).
The good news is that the U.S. stock market has already made it past the months of August and September without any large downside correction. However, there are still the two dangerous months of October and November left to go.
The fact that the U.S. stock market is at very high valuation levels leaves the market particularly vulnerable to any big disappointments. While unlikely to occur, there are wide variety of events that could nevertheless spark a big stock market sell-off, including (1) a full-fledged U.S. military conflict with North Korea, (2) a potential constitutional crisis in the U.S. depending on what happens with the Mueller investigation, (3) the potential for a large financial default as the Fed keeps ramping up interest rates, (4) renewed stress in the European banking system, or (5) an implosion in the Chinese markets or economy.
Catalan independence referendum hurts EUR and reminds markets of early-2018 Italian election risks — The violence surrounding Sunday’s independence vote in Catalonia hurt the euro on Monday and reminded the markets of the populist/nationalist risks that continue to lurk below the surface of the European markets. It remains to be seen whether the Spain-Catalonia standoff will get worse, which is likely to happen if Catalan political leaders make good on their threat for the Catalan regional parliament to unilaterally declare their independence from Spain. The Catalan problem has already hamstrung Prime Minister Rajoy’s minority government as it loses support from regional parties.
The constitutional problems in Spain also reminded the markets about the Italian national election that must be held by May 2018. The populist and anti-Europe Five Star Movement party is running neck and neck with the ruling Democratic Party in the public opinion polls. If it gains power, the Five Star Movement has said that it would call a public referendum on whether Italy should leave the Eurozone, which of course would raise the specter of a disaster for the Eurozone.
EUR/USD on Monday fell by -0.0081 (-0.69%) to $1.1733 and closed just mildly above last week’s 1-1/2 month low of $1.1717. Monday’s decline in EUR/USD was attributed in large part to the violence surrounding Sunday’s Catalan independence vote, but was also due to technical weakness and strength in the dollar tied to the hawkish Fed. The Spanish IBEX 35 stock index on Monday fell by -1.21%, showing relative weakness to European stocks since the Euro Stoxx 50 index on Monday closed higher by +0.22%. The Ishares MSCI Spain ETF (EWP) on Monday closed -1.78%.
Meanwhile, the Spanish 10-year government bond yield on Monday spiked higher by +8.8 bp to a 2-3/4 month high of 1.685% on Spain’s constitutional crisis. The German 10-year bund yield, by contrast, fell by -1.3 bp to 0.449% on some flight-to-quality. That meant that Spanish-German 10-year yield spread rose sharply by +10 bp to a new 3-3/4 month high of 124 bp.
The Spain-Catalan conflict is not an existential threat to the EU. Indeed, EU officials on Monday refused to recognize Catalonia’s push for independence and said that it is an internal issue for Spain to resolve. Nevertheless, the Catalan independence movement is yet another European centrifugal political force that poses some threats for the Eurozone markets.