Daily Comment (November 7, 2023)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM EST] | PDF

Good morning.  It’s a risk-off day in the markets.  As we noted above, global equities are mostly lower.  Commodities are weaker as well on fears of weaker economic growth.  We are seeing a rally in Treasuries in light of broader market weakness.  It’s election day in the U.S.  Although today’s elections are local, political analysts will be looking hard at the results for any insights into next year’s presidential race.

In today’s Comment, we start our coverage with an update on the situation in Gaza.  China is up next, economic and finance news follows, and we close with our international overview.

Gaza:  Netanyahu claims Israel will take “indefinite” control over the Gaza Strip, and the death toll is mounting.

China Update:  Australia is improving relations with Beijing, the U.S. and China are setting up meetings, as are EU officials, and China’s exports remain weak.

Economic Roundup:  The Senior Loan Officers Survey was released yesterday; we offer details.

  • The Senior Loan Officer Survey was released yesterday afternoon. For the most part, credit standards remain tight but have loosened somewhat.

Demand also showed signs of improvement.

The willingness to make consumer loans was mostly steady.

However, demand from consumers remains soft.

Overall, the survey suggests financing conditions are not getting much worse, but overall, lending standards remain tight.

  • Higher interest rates and dollar strength are taking their toll on emerging markets.
  • As commercial banks face increasing capital restrictions, they are developing novel ways to distribute lending risks. Banks are increasingly using synthetic risk transfer products, which allow banks to reduce their capital charges on loans.  In return, buyers of these instruments receive high returns.
  • In general, funding for any asset can come from either debt or equity. The attractiveness of either method depends on the cost of the funding.  As mortgage rates hit 8%, homebuyers are being offered instruments which are essentially equity participation in the home-buying process.  The firms providing the equity are then creating bonds to sell to investors.

International Roundup:  Germany is struggling to deal with the Alternative for Germany party (AfD), and the incumbent in El Salvador can run again.

  • A close advisor to the head of Ukraine’s armed forces was killed yesterday by a bomb hidden in a birthday gift. Major Gennadiy Chastyakov, an aide to General Zaluzhny, died when the package exploded.
  • In democracies, there are situations where, if power is closely balanced, individuals can have an outsized impact on policy. In the U.S., such situations are uncommon because a two-party system tends to overwhelm its dissidents.[1]  Multiparty systems, such as those seen in continental Europe, are much more prone to minority parties having significant power.  Major parties rarely win a majority outright, and thus, must court minor parties to form governments.  This means that if the lesser parties become unhappy, they can bring down governments.  We are seeing something like this in Germany.  The AfD has seen its power rise in recent local elections.  The major parties are trying to avoid a situation where they need the AfD to form a government.  What’s driving the AfD’s success is  German’s anger over immigration and energy policy.  Sometimes, minor parties in government can force the larger parties into policies that are unpopular.  If that occurs, as we are seeing in Germany now, it can lead to political tensions.
  • In El Salvador, an election tribunal decided to allow Nayib Bukele to run for a third term, in contradiction of the nation’s constitution. Bukele is very popular but was being prevented from running again due to legal restrictions.  Now that those are out of the way, he will likely win; elections will be held in February 2024.

[1] Although uncommon, it isn’t unprecedented.  The power of Sen. Manchin and Sen. Sinema was in evidence from 2020-22.  And, the power of the Freedom Caucus has had an impact on the House of Representatives.

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