Many of the major equity indices moved marginally higher last week, but Chinese equity markets closed Friday on a sour note as the local regulator launched investigations into the practices of a number of leading Chinese brokerage firms. While there has been no formal charges for violation of securities law, investors were spooked and the Shanghai Composite index of mainland shares fell -5.35%.
In Europe, the FTSE Eurofirst 300 closed up +0.48% for the week while the standout performer was the German DAX index, up +1.56%. On the currency front the Euro continues to lose ground against the US dollar, falling -0.71% to $1.059. The stronger dollar is weighing on the price of Gold, hitting a six-year low and down -11.78% YTD in USD terms. The increase in geopolitical risk helped push oil prices higher, with the price of Brent Crude Oil rising +1.41% to $43.88 per barrel.
Core government bond yields moved lower across the board, with the German 10-year government bond yield declining 2bps to 0.46%. The UK 10-year government bond yield fell 6bps to 1.82% while the US 10-year treasury yield fell 4bps to 2.22%. The prospect of more aggressive action from the European Central Bank continues to push European government bond yields lower, with the Irish 10-year yield closing below 1%, down 5bps to 0.96%.
European equity markets have opened marginally lower, after a weak session in Asia overnight.
On the macro front the main event of the week is the monetary policy meeting at the European Central Bank (ECB). Over the last few weeks Mario Draghi has talked up his commitment to do more if needed, raising market expectations for more aggressive monetary policy by emphatically stating that “we will do what we must to raise inflation as quickly as possible”. He must now walk the walk with a bigger package of measures or risk sending financial markets into a tailspin. An increase to the ECB’s bond purchase program and a cut to the deposit rate seems inevitable, the only uncertainty lies with the magnitude of each.
In the US, the employment situation report will be keenly watched on Friday, providing an update on the labour market, a key indicator for US monetary policymakers. The report last month showed the strongest jobs growth since December 2014, reigniting expectations that the US Federal Reserve will raise interest rates at the mid-December meeting. Fed Chair Janet Yellen and a number of the Regional Fed Governors are also on the speech circuit this week, with markets likely to be sensitive to any comments on the timing of rate hikes.