Weekly Market Recap: W/E August 28th 2015

Market Recap

Eurofirst 300 Index +0.49% German 10-Year Yield 0.73%; EUR/USD $1.117; Brent Oil $50.05

Global equity markets ended the week marginally higher, masking the stomach churning volatility across all asset classes which provided flashbacks of 2008.

It was really a week of two halves in equity markets, early week losses were recouped after strong gains on Wednesday and Thursday.

Dismal first half of week for investors

The equity market sell-off from the previous week carried forward into Monday, spreading from Asia, Europe and into US markets. China set the tone with the Shanghai Composite Index of mainland shares closing down -8.5% on Monday. European equity markets followed Asia’s lead lower while the open in US markets left investors shell-shocked.

The Dow Jones Industrial Average, the much watched index of 30 blue chip US companies, opened 1,089 points lower, representing a drop of-6.61%. The move has been blamed on another ‘flash crash’ as ‘bids vanished’ – no buyers – on some securities momentarily. While the index quickly recouped half of those losses, investors were left questioning the underlying fragility of capital markets and the ever increasing role of technology.

As panic set in, the much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, spiked higher, closing above 40 on Monday for the first time since October 2011. The index closed the week around 28 as markets rebounded on Wednesday and Thursday.

Second half of week sparked into life

Interest rate cuts from China’s central bank, soothing comments from a number of central bank officials in Europe and the US, and upbeat economic data – most notably the stronger than expected second quarter US GDP data – all served to feed the equity market rally in the second half of the week.

The major equity indices in Europe and the US clawed back losses to end the week higher. In Europe, the FTSE Eurofirst 300 was marginally higher while the German DAX index was one of the standout performers, rising 1.72%.

In the US, the S&P 500 index ended the week up 0.91%. The tech-heavy NASDAQ Composite was a standout performer, rising 2.6%, a staggering reversal for an index that was down almost 9% at one point in the week.

In Asia, Japan’s Nikkei 225 index finished down -1.54%, amid concerns about their all-important neighbour, China. Despite a more than 10% rally on Thursday and Friday, China’s Shanghai Composite Index of mainland shares fell -7.8% over the five days.

Oil price rally

After a difficult couple of months there was some relief last week in the commodity markets, as oil prices rebounded from 6 ½ year lows. The price of Brent Crude oil surged 16% over Thursday and Friday, from $43.14 a barrel to $50.05. The same factors that boosted equity markets are also being cited for the rally, as well as talk of short covering as traders betting on oil price declines were forced to buy back oil to cover their positions.

Risk-off/Risk-on

The Euro USD exchange rate has become the ultimate barometer for risk assets, given the Euro’s status as a preferred funding currency. As risk assets were sold off aggressively on Monday the exchange rate spiked to around $1.17 for every Euro. However, as fear subsided and the market moved backed into ‘risk-on’ mode the Euro moved lower, ending the week just below $1.12.

Likewise, as ‘risk-on’ sentiment buoyed global equity markets, demand for perceived ‘safe-haven’ assets waned. With yields moving inversely to prices, the German 10-year bond yield jumped 13bps to 0.73% over the week. After breaking below 2% on Monday, the US 10-year treasury yield rose 19bps to 2.18% while the UK 10-year government bond yield moved 27bps higher, to 1.97%.

After some strong gains in previous weeks, the price of gold fell -2.3% to around $1,333 per troy ounce. The stronger US dollar weighed on the precious metal.

Week Ahead

On the macro front this week there are a number of important reports for investors to focus on. Purchasing managers’ index (PMI) surveys from around the globe, starting with China on Monday, will provide an update on the trajectory of the global economy, amid concerns over a loss of momentum.

There are reports on inflation, retail sales and unemployment from the Eurozone this week, but the monetary policy meeting at the European Central Bank on Thursday will be centre stage. While no change in policy is expected, in his press conference following the announcement, Mario Draghi will likely try to talk up the ECB’s commitment to do more if needed.

The US non-farm payrolls employment report released on Friday will be keenly watched, carrying even more significance than usual as market participants try to gauge the timing of interest rate hikes. Despite strong second quarter GDP data, the probability of a rate hike in September is falling, given the recent market turmoil and developments in China.

Overall, it has been a challenging month for investors. The record reversal in equity markets last week should be taken as an opportunity for people to reassess their own risk and return objectives, to set realistic goals and to ensure their existing investments remain suitable.