Many of the major equity indices ended last week sharply lower, as some of the issues that caused the market sell-off in the third quarter came back to the fore. Economic data – a mixed picture from China, slower than expected Q3 Eurozone GDP growth, weak US retail sales – added to concerns about the loss of momentum behind the global economy. The decline in commodity prices resumed with little in terms of the economic backdrop or the supply/demand dynamics to provide comfort that the bottom has been reached. As a result, energy related companies were hit hard, intensifying the declines across the major equity indices.
As well, while many would like to see the US Federal Reserve raise interest rates in December, as reassurance that the US economy is now on a solid footing, there is real concern on the part of others that a Fed rate hike in the face of a slowdown in the global economy could be disastrous. The Fed is left with a delicate balancing act as it weighs the improvement in the domestic economy against the slowdown in global trade and investment. At the same time if the Fed finally diverges from their central bank peers by raising rates while others are easing further, it will provide additional impetus for the US dollar to move higher, which would come with its own set of challenges for the US economy.
All of this uncertainty is going to continue to add to volatility in markets over the coming months as more clarity is sought by investors on the extent of the slowdown in the emerging markets and the unfolding situation in China, as well as the knock-on effects emanating from the collapse in oil prices and other commodities. As ever, the focus remains firmly on the all-powerful central banks. The pressure is now on ‘Super Mario’ Draghi at the ECB to follow through in December with a bigger package of measures to stimulate the Eurozone economy. Draghi will be acutely aware that any failure to meet market expectations will almost certainly end any hope of a Santa rally.
In Europe, the FTSE Eurofirst 300 closed down –2.74% for the week. The UK’S FTSE 100 index fell –3.71%, hurt by its high weighting to energy related companies. The German DAX index fell -2.54% while the French CAC 40 index lost -3.54% of its value.
In the US, the S&P 500 index fell -3.67%, moving back into negative territory for the year, while the tech-heavy NASDAQ Composite fell -4.26%. However, for Euro investors, the stronger dollar has outweighed losses on US holdings, with the US dollar up +11.32% against the single currency this year. 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 last week, up +40.13% to 20.08.
In Asia, Japan’s Nikkei 225 index bucked the trend, finishing +1.72% for the week. China’s Shanghai Composite index of mainland shares finished the week relatively flat despite mixed economic data, while the Hang Seng index of Hong Kong listed shares dropped -2.06%.
Government bond yields moved lower across the board last week, with the biggest move seen in European bond yields. Slower than expected GDP data and dovish comments from ECB President Mario Draghi served to push yields lower. With bond yields moving inversely to bond prices, demand drove the German Government 10-year bond yield down 14bps to 0.54%. The equivalent Irish government bond yield declined 17bps to 1.10%. The 10-year bond yield in the UK and the US also dropped 6bps to 1.98% and 2.28%, respectively.
Of course all of the above was overshadowed by the events in Paris on Friday, where members of the terrorist organisation ISIS wreaked havoc on the City of Love. 129 people were killed and 352 are reported injured, 99 of which are critically injured. These latest attacks will be a setback for greater integration in Europe, but also raise real questions about the policies pursued by Western nations in the Middle East region since September 11th 2001. Billions spent on waging wars and Big Brother’s watching eye seems to be everywhere at home. Yet it is hard to argue the world is a safer place now.
European equity markets have opened marginally higher, despite a weak session in Asia overnight.
Eurozone inflation reported this morning came in at 0.1% for October, from a year earlier, higher than the preliminary estimate of 0% and -0.1% recorded in September. Mario Draghi is making a number of speeches again this week which will be watched for any clues on the measures to be introduced at the December meeting of the ECB’s monetary policy committee. In the UK reports on retail sales and inflation will be eyed.
In Asia, the Bank of Japan (BOJ) will hold their monetary policy committee meeting on Thursday. While no change in policy is expected, many are looking to the BOJ to add further stimulus sooner rather than later, if they are to stand any chance of exiting their two decade long deflationary spiral. GDP data released this morning showed the Japanese economy contracted further in the third quarter.
There is a raft of data released from the US, with updates on inflation, housing and industrial production. The minutes from the US Federal Reserve’s most recent monetary policy meeting due out Wednesday will provide further insight into the views of committee members as investors try to gauge whether the Fed will actually move on rates this year. A number of the Regional Fed Governors are also on the speech circuit this week, with any comments on the possible timing of the first rate hike sure to move markets.
Closer to home, the real action will be in Aviva stadium tonight. Come on you Boys in Green!