Market Recap: September 15th 2014

Global equity markets moved lower last week with the main headlines assigning blame to better than expected US economic data, retail sales moved higher and consumer sentiment hit a 14-month high. Yes that’s right, we live in a perverse central bank led world where financial markets fret that stronger than expected economic data will bring forward the timing of rate hikes. The previous week, they revelled in the ‘good news’ that US employment was weaker than expected as fewer payroll jobs were added in August, hence prolonging the timing of rate hikes. It’s bizarro world, where stronger than expected is bad and weaker than expected is good!

The major equity indices in the US and Europe fell in the region of 1%, while emerging markets, which have become increasingly sensitive to US monetary policy, suffered much bigger losses. The MSCI Emerging Markets Index fell 3.2%, the largest weekly drop since the ‘taper tantrum’ of June 2013 when the Fed intimated the coming end of their bond purchase program. The prospect of the US Federal Reserve raising rates sooner than expected also hit the bond markets, with the US 10 Year government bond yield jumping 18bps to 2.61%, the largest weekly increase since mid-August last year.

Beyond the equity and bond markets the performance of some of the major commodities in recent months, in particular the price of oil, paints a more subdued picture of the outlook for global economic growth. Brent crude oil is down 15% since June 19^th on lower demand but also increased supply, to the lowest level in over two years. I have read that there may be certain interests, on the opposite side of the standoff with Russia, who are driving increased supply to push the price lower. It wouldn’t be surprising.

Week Ahead

European equity markets have opened lower this morning ahead of a busy week on the economic front. There was also some weaker than expected data from China over the weekend, with industrial output rising at the slowest rate since the global financial crisis. Speculation has already begun that the Chinese government will ramp up stimulus to meet their GDP target growth rate of 7.5%. In Europe there are reports on the balance of trade, inflation and the latest ZEW Economic survey from Germany, which in August hit the lowest level since December 2012. The ECB will initiate their Targeted LTRO facility this week with the focus on the level of participation from the banks.

There is a host of data released from the UK including inflation, retail sales and the labour market, as well as the minutes from the Bank of England’s most recent monetary policy meeting. Bank of Japan Governor Haruhiko Kuroda will give a speech on Tuesday which investors will watch for clues that they might be preparing further stimulus measures. In the US we have updates on industrial production, inflation and housing while the Federal Reserve’s monetary policy meeting will be centre stage. The Fed are expected to further cut their monthly bond purchases by $10 billion, but the focus is on their statement and whether they keep the wording previously used to describe the labour market (“significant under-utilization”) and the timing of rate hikes (“considerable time”) for a read on forward guidance.

Away from the market noise and the fear that Scotland may self-combust, the Champions League kicks off this week, easing the pain from Liverpool’s miserable display Saturday and the “new beginning” hype in Manchester. Luis Van Gaal has morphed back from devil to King, talking about the title after one win against a promoted team, akin to the Greek finance minister telling us to now “bet on Greece”. Still, King Luis has a week off to rejoice in his first premier league win as he watches the big clubs from his couch!