Market Recap Week of October 6th

Global equity markets closed lower last week despite a late relief rally on Friday after better than expected US payroll data. While the unemployment rate is at a 6-year low of 5.9%, weak wage growth dynamics and the labour force participation rate being at a 36-year low will prevent the Fed from moving faster on rate hikes. European PMI data provided further concern for the slowdown in Europe, but it was the ECB’s Mario Draghi who caused the most upheaval in markets last week, the “detailed modalities” he promised on the ECB’s ABS program just weren’t detailed enough!

Overall, volatility has started to pick up recently as financial markets digest the mixed economic data and what it means for monetary policy from the world’s ‘omnipotent’ central banks. The major equity indices in the US fell less than 1%, while the major indices in Europe and Asia were down in the region of 2% to 3%. The German DAX and Japan’s Nikkei 225 were among the worst performers, down 3.11% and 3.21% respectively. Core-government bond yields were moved lower last week with the German 10-Year yield closing at 0.93%.

Beyond the equity and bond markets a more subdued outlook for the global economy and a stronger US dollar are weighing on the performance of commodities. Brent crude oil is down 20% since mid-June, the lowest level in over two years. Gold has given up all of the YTD gains, the precious metal falling to $1,192 per troy ounce.

Outlook

On the macro front this week there are reports on industrial production, trade and inflation from around the globe. Germany, the powerhouse of the Eurozone economy, will be in focus with reports on factory orders, industrial production and the balance of trade. The standoff between the West and Russia has definitely been felt in Germany and if the slowdown gathers pace the Eurozone economy could be in deeper trouble.

Of the major central banks, the Bank of England and the Bank of Japan will both hold their monetary policy committee meetings this week. No change in policy is expected from either central bank but there is a chance that the Bank of Japan may do something to show their commitment to ridding Japan of deflation. The US Federal Reserve will release the minutes from their most recent meeting on Wednesday, providing further insight into the Fed’s thoughts on the normalisation process. On Thursday, ECB President Mario Draghi will give a speech and participate in a panel discussion with US Federal Reserve Vice-Chair Stanley Fischer in Washington DC, while a number of regional Fed Presidents are also on the speech circuit this week.