Weekly Market Recap: December 1st 2014

Market Recap

Global equity markets edged higher again last week while government bond yields moved lower. Of the major indices, China’s Shanghai Composite was the standout performer, jumping 8%, buoyed by the recent interest rate cut and the prospect of a further loosening of monetary policy. It was a shortened trading week in US markets, with Americans ‘giving thanks’ on Thursday before splurging in the madness that is the Black Friday frenzy.

European government bonds were in demand as speculation mounts that ECB President Mario Draghi will eventually get past German opposition to   purchasing the sovereign bonds of member states. The German 10-Year bond yield dropped to 0.71% while the equivalent yields in France, Ireland and Spain closed the week at 0.97%, 1.38% and 1.90%.

The real story last week was in the oil markets as OPEC, the oil cartel, announced Thursday their decision to maintain the current production level target of 30 million barrels a day. Rather than cut production to stabilise prices (as they would typically do), against a backdrop of lower demand and increased supply from US shale production, they elected to leave it to the free hand of the market to dictate prices.

On the news, the price of a barrel of Brent crude oil fell 6.6% and closed the week down $10.21 at $70.15, the lowest level since 2010 and down almost 40% since mid-June.  As mentioned previously, there are winners and losers at a corporate and country level but it will also be a concern for central banks fighting deflation risk.

Outlook

Key macro data for the week ahead includes reports on GDP, industrial production, employment and trade as well as a host of PMI surveys from around the globe. On Wednesday, Eurostat will publish the latest retail sales data for the Euro area while on Friday there is the release of the second estimate of third quarter GDP growth, after the first estimate showed the economy expanded by 0.2%.

There are a raft of reports from the US, including US factory orders, trade data and the employment situation report. After last week’s GDP report showed that the US economy grew faster than expected in the third quarter, further improvement in the main employment indicators would give the US Federal Reserve more to ponder on the timing of rate hikes.

Monetary policy meetings will take place this week at the Reserve Bank of Australia, the Bank of Canada and the Bank of England while the European Central Bank (ECB) will take centre stage. Over the last few weeks Mario Draghi has talked up his commitment to do more if needed, raising investor expectations for the ECB to follow other major central banks and begin purchasing government bonds. This has boosted European equity and bond markets but investors may be underestimating how high the “hurdles” are for the governing council to agree to more expansive measures.