Weekly Market Recap: W/E October 2nd 2015

Market Recap

After a mixed week in global equity markets, the major US equity indices staged a rebound on Friday following a weaker than expected employment situation report, feeding expectations that the Fed will push out their rate hike till March 2016. This was another case of ‘bad news is good news’ with US equity indices ending the day up more than 1% – 1.5%, after been down that amount in early trading. Government bond yields moved lower and the US dollar weakened. The end of week rally was also helped by a bounce in oil prices. The move higher in oil prices came after a big drop in the number of oil rigs in operation in US oilfields, perhaps a sign that supply/demand dynamics may be starting to find some equilibrium.

Worst quarter for equity markets since 2011….

Wednesday closed off a miserable quarter for equity market investors. In Europe, the FTSE Eurofirst 300 closed down -9.25% in the third quarter. The German DAX index was one of the worst performers, down -11.74%. After rising 26% from the start of the year, the DAX index peaked at 12,374 on April 10th and fell -21.93% to the end of the quarter. The index has been acutely sensitive to news flow from China, an important export market for German companies. In the US, the S&P 500 index fell -7.47% while the tech-heavy NASDAQ Composite fell -6.86%. In Asia, Japan’s Nikkei 225 index fell -14.07% while China’s Shanghai Composite Index was down -28.61%.

As markets shifted back into ‘risk-off’ mode, demand for perceived ‘safe-haven’ assets waned, pushing yields on government bonds higher. The German 10-year bond yield fell -17bps to 0.59% over the month.  By pushing out the timing of rate hikes, both the Bank of England and the US Federal Reserve helped push yields lower. The UK 10-year government bond yield fell -37bps to 1.77%, while the US equivalent fell -27bps to 2.06%.

Plunging commodity prices: three elements to consider….

The price of Brent crude oil fell -23.26% in the third quarter, to $48.51 per barrel. The plunge in commodity prices continues to be a source of major angst for investors.

First of all, the magnitude of the declines across most commodities raises concerns about the fallout for those companies and countries whose revenues have been devastated. The most obvious example of a company rocked by falling commodity prices is Glencore plc, one of the world’s largest diversified natural resource companies. On Monday the stock fell below £0.67p on the London stock exchange, down from £3.44 a year earlier. The stock has staged a rebound close to around the £1 level but still remains down more than 65% YTD, amid concerns over their leverage to falling commodity prices.

Secondly, declining commodity prices adds to fears about the extent of the economic slowdown in China, being the world’s largest consumer of most commodities, and the impact on the global economy. Thirdly, it drives inflation lower and raises the risk of a deflationary spiral, akin to Japan. Draghi will remain vigilant, after annual Eurozone consumer inflation moved back into negative territory in September, falling -0.1%, driven by an -8.9% decline in energy prices from a year earlier.

Week Ahead

European equity markets have opened sharply higher, following over from strong gains in the US on Friday and Asia overnight. Driving the rally is the prospect of the US Federal Reserve pushing out the timing of their first rate hike. Again, we see how sensitive financial markets have become to central bank policy. Japan’s Nikkei 225 index closed up 1.58% while the German DAX index is up over 2% this morning. Chinese markets are closed till Wednesday for National Day holidays.

On the macro front this week there are key reports on trade, retail sales and inflation from around the globe, as well as a plethora of monetary policy decisions to focus on. The Bank of Japan’s (BOJ) monthly report on Thursday will provide an update on Japan’s Shinzo Abe-inspired recovery, which has been fairly mixed so far, with calls mounting for more aggressive easing.

On the central bank front, the Bank of England (BOE) and the BOJ will hold their monetary policy committee meetings this week, with no change in policy expected. The BOE will also release the minutes from their August meeting, providing further insight into the views of committee members. The US Federal Reserve will release the minutes from their most recent meeting on Thursday, providing more detail on their decision to hold rates in September. ECB President Mario Draghi will speak on Tuesday while a number of regional Fed Presidents are also on the speech circuit this week.