Asking the Right Questions
Global equity markets ended the week sharply higher, while European government bond yields continued to move lower, as European Central Bank (ECB) President Mario Draghi upped the rhetoric on more action to reflate the Eurozone economy.
Investors fretting about a possible US Fed rate hike over the last few months are now apparently ‘relaxed’ about a rate rise in December. The implications of a stronger US dollar are yet to be fully considered and sentiment around a US Fed rate hike could change quickly.
For now, the focus remains on ‘Super Mario’ and the ECB, who have set the stage for more aggressive monetary policy in December. Draghi gave a speech on Friday and it was his concluding remarks that everyone seized on as a sign of his commitment to do more: “So let me reiterate what I said here last year: if we decide that the current trajectory of our policy is not sufficient to achieve that objective, we will do what we must to raise inflation as quickly as possible. That is what our price stability mandate requires of us.”
In Europe, the German DAX index was one of the standout performers, ending the week up +3.84%. The DAX index, made up of 30 blue chip German companies, continues to retrace ground lost since April of this year, when it peaked at 12,374. The similarity between then and now is that it was also the euphoria around Mario Draghi’s monetary policy stimulus efforts pushing European equity markers higher. The French CAC 40 index rose +2.14% and the UK’S FTSE 100 index rose +3.54% respectively.
In the US, the S&P 500 index is up +3.27% while the tech-heavy NASDAQ Composite has rebounded +3.59%. 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, subsided to a more benign level, declining -22.96% over the week.
In Asia, Japan’s Nikkei 225 index closed up +1.44%. China’s Shanghai Composite Index of mainland shares finished the week up +1.39%. Chinese equities will get some support from the decision by Index provided MSCI to include all US-listed Chinese stocks in their global indices, to be implemented in two tranches, December 1st this year and June 1st of 2016.
Speculation of further central bank action helped push the prices of core government bonds higher last week. With yields moving inversely to prices, the German Government 10-year bond yield declined 8bps to 0.48%. The US 10-year treasury yield was relatively unchanged at 2.26% while the UK 10-year government bond yield moved down 10bps to 1.88%.
The equivalent Irish Government 10-year bond yield declined 9bps to 1.01%. To put Ireland’s current borrowing costs in perspective, consider where they have come from in the last four years. The 10-year yield peaked at 14.49% on July 11th 2011 at the height of the Eurozone debt crisis, when Ireland was considered one of the PIGS of Europe.
European equity markets have opened higher following a mixed session in Asia overnight. On the macro front this week, the flash purchasing managers’ index (PMI) surveys from around the globe will provide an update on the trajectory of the global economy, amid growing concerns over a loss of momentum. The second estimate of third quarter GDP is expected from the US on Tuesday and the UK on Friday. There are also a number of consumer confidence surveys, providing an update on the all-important consumer.
In Japan, reports on inflation, industrial production and unemployment on Thursday will be eyed as Japan’s economy contracted for a second straight quarter, a technical recession, declining by an annualised -0.8% in the third quarter. Shinzo Abe’s “Three Arrows” strategy may need some fine tuning, with the Bank of Japan the most likely candidate to do more.
U.S. markets are closed on Thursday for the Thanksgiving holiday and open a half-day on Friday, with the economic data released early in the week. Durable goods orders for October are released on Wednesday and there is a plethora of reports on the housing market.