Weekly Market Recap: W/E September 25th 2015

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Market Recap

A strong rally in equity markets on Friday helped brighten up what was otherwise a miserable week for equity investors. Against an uncertain backdrop, the confession from Volkswagen that they had used software to cheat US emission standards, heaped further pressure on an already fragile market. Shares of the iconic German company plunged -34% over the week, with European equity markets falling sharply on Tuesday and Thursday, before recouping some losses on Friday.

Talk of a Fed rate hike this year buoys equity markets Friday…..

A speech from Janet Yellen, Chair of the US Federal Reserve, on Thursday night at the University of Massachusetts, provided the impetus for equity markets to move higher on Friday. After spooking markets the previous week by holding interest rates and offering a downbeat tone on the global economy, Yellen lifted equity markets by confirming that she is still in favour of a rate hike later this year.

In her speech entitled “Inflation Dynamics and Monetary Policy”, which was so long she was left dehydrated, Yellen concluded that “Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter”.  Of course there was the caveat: “But if the economy surprises us, our judgments about appropriate monetary policy will change”.

Another challenging week for equity investors…..

Despite the rally on Friday, most of the major equity indices closed in the red for the week. In Europe, the FTSE Eurofirst 300 closed down -1.65%, while the German DAX index was one of the worst performers, down -2.30%. In the US, the S&P 500 index fell -1.37% while the tech-heavy NASDAQ Composite lost -2.92%. In Asia, Japan’s Nikkei 225 fell -1.05%, while China’s Hang Seng Index of Hong Kong listed shares fell -3.35%. Government bond yields were relatively unchanged on the week.

Stronger US dollar and EM weakness…..

The US dollar notched up gains after Yellen talked up the prospect of a rate hike this year. The emerging markets currencies came under further pressure with the Brazilian real hitting a record low against the US dollar. Brazil’s woes continue to mount, amid dismal economic growth, high inflation and rising borrowing costs, made worse by the recent downgrade of their sovereign debt rating to junk status by ratings agency Standard & Poor’s.

Week Ahead

European equity markets opened have opened lower after a mixed session in Asia overnight. On the macro front this week, the purchasing managers’ index (PMI) reports and confidence surveys from around the globe will provide a useful leading indicator on the global economic recovery. In Europe, the flash estimate of inflation for September, released on Wednesday, will garner significant attention as speculation mounts that ECB President Mario Draghi will unleash QE2.

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. Janet Yellen, Chair of the US Federal Reserve, last week acknowledged the “considerable progress” made in recent years, with the unemployment rate falling to 5.1%. However, she did caveat solely focusing on this “traditional metric of resource utilization” which “almost certainly understates the actual amount of slack that currently exists”. For example, the labour force participation rate remains low by historical levels, there is  still a large number of people working part time who would prefer full time work and the pace of growth in hourly wages has been slow.

There is a raft of data from Japan, including reports on inflation, industrial production, retail sales, unemployment and household spending. Prime Minister Shinzo Abe’s policies aimed at reflating Japan’s economy, termed “Abenomics”, have come under fire in recent months after failing to deliver on expectations. However, he continues to press ahead, announcing three new goals – “strong economy”, “support for families” and “social security” – as ‘abenomics moves to the second stage’. The Bank of Japan’s quarterly Tankan survey, an important indicator of business sentiment used in formulating monetary policy, will be released on Wednesday. There is a high likelihood that the Bank of Japan will pursue more aggressive easing in the coming months.

Time for some perspective

The legendary Sir Alex Ferguson released another book this week, “Leading”, in which he shares his views on leadership, the principles that have formed the basis of his winning style over the years. I finished it last night so I might make room for “Fergie Time” in next week’s commentary, as there are some important lessons that are relevant to business and investing. Even if you are a Liverpool fan, it is worth a read.

Meanwhile, if you are looking for some real perspective, away from the fear-inducing headlines, check out this YouTube video from a team in the US who have built the first scale model of the solar system. “We are on a marble, floating in the middle of nothing”….

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