Weekly Market Recap: W/E November 6th 2015

Market Recap

Most of the major equity indices ended last week in positive territory, but the big move came in the bond markets with yields moving sharply higher. Helping to push yields higher was the much stronger than expected jobs data from the US on Friday, as expectations rose that the Fed will finally increase interest rates in December.

The other main benefactor was the US dollar which rallied strongly on the news. While a Fed rate hike seems to be drawing closer, the Bank of England are projecting that it will more likely be 2017 before the first rate hike happens. The lower for longer tune which has kept market participants dancing continues to blare loudly from the major central banks!

Strongest US jobs growth since December 2014….

As Friday approached the focus was on the US Employment Situation report, the latest monthly update on the US labour market from the Bureau of Labour Statistics. Market participants remain intently focused on any economic data that might influence the ‘data dependent’ US Federal Reserve and their timing for the first rate hike in 9 years.

The report turned out to be much stronger than expected – 271,000 nonfarm payroll jobs were created in October versus the consensus forecast of 190,000 – fuelling expectations that the Fed will raise rates at the December meeting. Janet Yellen, Chair of the US Federal Reserve, has caveated against solely focusing on this “traditional metric of resource utilization” but the continued improvement in the labour market is adding to calls for the Fed to lift rates from current emergency levels. Yellen is in favour of a rate hike so the economic data would need to worsen for a rate hike to be postponed till 2016.

Equity markets continue to edge higher….

In Europe, the FTSE Eurofirst 300 closed up +0.98% for the week while the German DAX index rose +1.27%. In the US, the S&P 500 index rose +0.95% while the tech-heavy NASDAQ Composite rose +1.85%, now up +8.68% YTD. In Asia, Japan’s Nikkei 225 index rose +0.96%. The resurgence in China’s Shanghai Composite index of mainland shares continued last week, rising  +6.13%. The index has now jumped +24.58% from the low reached in August.

Government bonds yields jump on prospect of Fed rate hike….

Government bond yields jumped sharply last week after strong jobs data raised the probability of the Fed raising interest rates in December. The US 10-year treasury yield rose 18bps to 2.33%. The move was not limited to the US. Despite the fact that more aggressive monetary policy is on the way from the European Central Bank, the German 10-year bond yield rose 17bps to 0.70%. As well, the Bank of England told markets that a rate hike might not happen till 2017, but the equivalent UK government bond yield increased 12bps to 2.04%.

On the currency front the Euro continued to lose ground against the US dollar, falling -2.76% to $1.0743. A number of the major commodities were hurt by the stronger dollar. The price of Brent Crude Oil fell -3.01% to $46.99 per barrel.

Super-Thursday: BOE blare the lower for longer tune…

Super-Thursday at the Bank of England (BOE) provided a surprise, further pushing out the projections for reaching the 2% inflation target and most importantly the timing of raising interest rates. At the turn of this year one of the prevailing themes was monetary policy divergence. The Bank of England (BOE) and the US Federal Reserve were perceived to be moving closer to a rate hike, while the European Central Bank and the Bank of Japan were on a path of more aggressive policy easing.

However, both the BOE and the Fed have pushed out the timing of their first rate hike as the global economic outlook has deteriorated. Previously, the BOE pushed the possibility of a rate hike out to early 2016. However, now the BOE are projecting that it will more likely be 2017 before the first rate hike happens. The lower for longer tune which has kept market participants dancing continues to blare loudly from the major central banks!

Week Ahead

European equity markets have opened marginally higher, after a mixed session in Asia overnight. Shares in Japan and mainland China moved higher despite disappointing Chinese trade data.

It is a busy week on the macro front this week with reports on industrial production, retail sales, employment and inflation from around the globe, as well as third quarter GDP data for the Eurozone, Germany and France.  The initial estimate of third quarter GDP growth is published for the Eurozone on Friday with the consensus estimate forecasting a growth rate of 0.4%, quarter on quarter.

In the US, retail sales data and the University of Michigan Consumer Sentiment survey will be closely watched, important indicators for gauging the strength of the all-important US consumer.

In Asia, China remains in focus, with reports on retail sales, industrial production and fixed asset investment released on Wednesday. The Chinese economy is being keenly watched, with its slowdown reverberating across the global economy. The big unknown is just how fast it is slowing, and the true likelihood of a hard landing.

From leadership lessons to philosophy….

Last month I shared some insights from Sir Alex Ferguson, from his new book “Leading”. Arsene Wenger, manager of Arsenal FC and one of Fergie’s main rivals during his time at United, hasn’t written any books but his interview with L’Equipe Sport and Style is well worth a read, for a philosophical perspective on life and management. One of my favourite quotes from the interview relates to time, the past, present and future:

“The only possible moment of happiness is the present. The past gives you regrets. And the future uncertainties. Man understood this very fast and created religion. It absolves you of what you’ve done wrong in the past and tells him not to worry about the future, because he’ll go to paradise. It means make the most of the present.”