Market Recap: Week of September 29th

Global equity markets struggled again last week as volatility picked up while demand for government bonds saw yields move lower. Of the major indices, Germany’s DAX equity index suffered the steepest decline, down 3.15%. In the US, the tech-heavy NASDAQ fell 1.48%. In Asia, the Hang Seng Index of Hong Kong listed shares fell 2.58% amidst protests against Beijing’s interference in the election process of the autonomous region.

Government bonds were in demand last week with the German 10-Year bond yield closing 7bps lower at 0.97%. This compares to the US Government 10-year bond yield of 2.54%, with the spread over Germany the widest since 1990, drawing further attention to the theme of diverging monetary policy at the US Federal Reserve and the ECB.

This divergence theme has played out in currency markets in recent months with the US dollar moving higher across the board. Meanwhile, the Euro has weakened considerably finishing the week at $1.27 USD, after almost hitting $1.40 earlier in the summer.

Essentially, the US dollar is strengthening on the view that the US economy has reached a sustainable momentum that will allow rates to rise. However, a negative feedback loop could develop whereby the USD strength hurts the economy via weaker exports and thereby delays monetary policy normalisation. The global economic recovery still remains delicately poised!

Outlook

Key macro data includes the final estimate of second quarter GDP growth from the UK and Euro area. However, the purchasing manager index (PMI) reports and confidence surveys from around the globe will provide a more useful indication of the momentum behind the global economic recovery. There are also reports on unemployment and retail sales from the Euro area for August, while on Tuesday the release of the flash estimate of inflation for September will garner significant attention ahead of the European monetary policy meeting on Thursday.

In the US, the employment situation report will be in focus on Thursday after the worse than expected payrolls data last month and the Fed reiterating that “there remains significant underutilization of labour resources”. In Japan, there are reports on retail sales, industrial production and unemployment on Tuesday while the Bank of Japan’s quarterly Tankan survey, an important indicator of business sentiment used in formulating monetary policy, will be released on Wednesday.