Weekly Market Recap: W/E September 18th 2015

Market Recap

Global equity investors suffered another challenging week. Most of the major indices had notched up strong gains in the early part of the week, ahead of the US Federal Reserve’s all-important monetary policy meeting on Thursday. However, accompanying their decision not to raise interest rates, the Fed offered a more downbeat than expected view of the global economy, causing equity markets to sell off and bond yields to decline sharply.

Standard & Poor’s downgraded Japan’s long-term sovereign debt rating one notch, from AA- to A+ (four notches below the top rating of AAA). The ratings agency now believes that the recovery in Japan will be weaker than anticipated, adding a damning assessment of the policies of Prime Minister Shinzo Abe and the impact on Japan’s creditworthiness: “Despite showing initial promise, we believe that the government’s economic revival strategy—dubbed ‘Abenomics’—will not be able to reverse this deterioration in the next two to three years”.

Equity markets move lower on downbeat message from the Fed….

In Europe, the FTSE Eurofirst 300 closed down -0.25% for the week. The German DAX index fell -3.06% on Friday, ending the week at 9,916. The index has now fallen -19.87% from its peak in April, as concerns over the outlook for China and the global economy continue to weigh on investor confidence.

In the US, the uncertainty emanating from the Fed filtered through to equity markets, a sense of ‘where do we go from here’ pervaded the market chatter after the Fed’s announcement on Thursday. The S&P 500 index ended the week slightly down for the week, falling -0.15%. 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, eased lower throughout the week, before moving back up above 22 on Friday.

In Asia, Japan’s Nikkei 225 index fell -1.06%, while Chinese investors enjoyed another roller-coaster week of big daily moves. The Shanghai Composite index of mainland shares closed down -3.20%. Many of the emerging market equity indices ended the week in positive territory, buoyed by the Fed’s decision to delay raising interest rates.

Government bond yields retreat, lower for longer theme persists….

After moving higher throughout the week, government bond yields retreated sharply following the Fed’s announcement on Thursday. The US 10-year treasury yield fell 13bps to 2.16%, down 2bps over the week. The German 10-year bond yield declined 12bps to 0.67% on Friday, ending the week 2bps higher. UK government bond yields also moved lower, as the timing of any rate hike from the Bank of England has also been pushed out.

On the currency front the US dollar weakened on the prospect of rates staying near zero for longer. The early week rally in oil prices, on lower US inventory, was eroded after global growth concerns came to the fore. The price of gold moved higher amid increased volatility in markets.

Week Ahead

European equity markets have opened marginally higher, despite a mixed session in Asia overnight.

On the macro front this week we have the final estimate of second quarter GDP from the US along with reports on durable goods orders and housing. There are a host of Purchasing Managers Index (PMI) surveys from around the globe as well as consumer and business confidence surveys which should provide a useful update on the momentum behind the economic recovery. The Bank of Japan will report the August inflation data on Friday.