US equities enjoyed significant gains in the week just past us after trading sideways for most of the summer. The S&P 500 was 1.25% above its closing value last Friday, closing now firmly above the 2,000 level at 2,010. The index clocked in its largest gains mid-week, on the back of soft inflation data and the decision by the Federal Reserve not to alter its accommodative monetary policy stance in the near future. Similar gains were enjoyed by the DJIA, which was up 1.72% above last week’s closing value. The NASDAQ instead saw a more modest gain of 0.27%, but it is noteworthy that all US indices are at or very close to their 52-week highs. Absent from the indices is Alibaba, which completed its IPO on the NYSE successfully to become the largest US tech IPO. Its shares are currently trading above $90.
US government bonds did not record significant moves during the week, with the front end of the curve firmly anchored at zero and the 10-year maturity reference securities yielding 2.60%. Rates are markedly higher with respect to summer levels, especially at the 5 and 10 year tenor, where yields are higher than the ones of one month ago by respectively 24 and 20 bps, as can be seen in the chart below. However, along with soft inflation data this week and downscaling of the FOMC US growth estimate for 2015 to 2.8% from 3.1%, it is difficult to foresee higher inflation that will force higher short-term rates in the near future.


Still, the divergence of US monetary policy from its European and Japanese counterparts is most evident in the value of the dollar, which trades higher in euro terms by 1% and in Japanese yen terms by 1.5%.
The most significant pieces of economic data coming out next week for the US will be the existing and new home sales, durable goods orders, manufacturing and services PMIs, as well as the final print for the second quarter GDP of 2014. These data will help evaluate the strength of the US recovery and will give hints at whether the trends we are observing in asset prices will be sustained.


This week’s main driver in the European markets has been the results of the first TLTRO take-up which surprised the markets. Banks across the Eurozone demanded only a meagre €82.6 billion out of the €400 billion set out for the program. This number shocked the markets as the expectation had been that banks would request about €172 billion. The low number of take-ups is a troubling signal of weak euro area demand for loans as prices fall and as growth slows. With an inflation rate of only 0.4% on the euro area, and with growth of less than 1%, people are afraid to demand loans which it is harder to pay in real terms.
The low demand for the TLTROs however can also be attributed to the negative deposit interest rates set by the ECB. Although the negative deposit rate was set with the main aim to increase liquidity by making it more profitable for the banks to lend out reserves, when combined with the TLTRO, this negative deposit rate seems to have had a negative effect on the TLTRO take-up instead. Banks, which know that they might have to keep some of the TLTRO cash for some time before they lend it, cannot deposit it at the central bank due to the negative rates, therefore they demand less of the TLTROs.
The EUR/USD exchange rate moved quite interestingly this week. On September 18th, when the number of the take-ups of TLTROs came out, the markets priced in the new information as a failed attempt by the ECB to fight deflation, and the euro strengthened to about 1.292. However, the next day, the marketplace started to price in more possible quantitative easing (QE) due to the low take-up of TLTROs, and the euro fell to 1.282.


Draghi had already said at the last meeting that he wants to see the ECB balance sheet increase by about €750 billion. But the low take-up of TLTROs, if it persists, will have to be balanced by heavier quantitative easing in the covered bonds market and in the asset backed securities market.

Probably the most noise-causing events this week were the Scottish vote polls and finally, the poll itself. The polls pictured a victory for the YES campaign, and the ripples were heard throughout the markets. The GBP fell to a low of 1.60494 on September 10th, and kept trading in the range 1.6194 to 1.62654 for most of the consecutive week. On the 19th of September, the day when Scotland decided to stay in the 307-year old union, the GBP reached a high of 1.6520.


The FTSE 100 also went on a negative trend during the week due to the increased uncertainty of the result of the vote and due to the polls which kept emphasizing the catching-up of the YES campaign. It reached a low of 6750 on September 16th. However, on September 18th the FTSE100 reached a high of 6822.60, and a high of 6870 on September 19th, and will probably go slightly higher the following days in order to correct the negative trend.
Bank of England’s MPC also decided to keep rates on hold, as they believe there is no signs of possible strong inflation since the cost of labour remains low. The financial markets, however, expect rates to rise in the first or second quarter of 2015.


The result of the vote against independence has increased certainty about the economic environment in the UK. Demand is expected to pick up, and so is investment, both of which were halted somewhat in anticipation of the result. What most economists are interested in, however, is the new laws expected to be passed which will define public finances for the years to come. Therefore, some uncertainty does remain. Will the new laws regarding public finances become a boon for the UK economy or will they become a burden?

This week was crucial for the Japanese markets and it was dominated by three main facts.

1) The Bank of Japan bought for the first time in its history one-year Japanese government debt at negative yield
2) The Yen continued its free-fall and touched a six year low at 108.87 versus the Dollar
3) Japanese imports slipped 1.5% in August missing estimated of -1.2%.

On Friday the Bank of Japan broke new ground by buying three- and six-month bills at negative yields, meaning that it is guaranteed to lose money when the bills are redeemed. Many market participants had bought newly auctioned one-year bills aggressively on Wednesday in anticipation that the central bank would soon pay even higher prices.
Friday’s purchases are a mark of the bank’s commitment to hitting the aggressive targets set out last April, when governor Haruhiko Kuroda said he aimed to buy enough government bonds and other assets to double base money to Y270tn ($2.5tn) by the end of 2014.
The central bank activity was one of the main driver of the downward trend in the Yen but not the only one. Surely, the aforementioned dollar strength heavily contributed to the rise in the USD/JPY, but one of the main actors was GPIF, the $1.2 tn sovereign pension fund. In fact, GPIF is under political pressure and is changing its investment strategy towards higher yielding foreign assets with unhedged currency exposure. This fact puts strong selling pressure to the Yen and contributed to its fall.
However, the Yen weakness and the other measures adopted by Mr. Abe, in particular the 3% sales tax increase, are not showing the expected results. This week, the import figures for August were disappointing again and showed a very weak internal demand. Looking at next week, the main data release will be the National CPI report due on Friday. Markets participant expect a 1.2% increase in prices, down from the cyclical high of 1.5% increase in April. However, we might expect a surprise on the upside on the back of the weakening yen.

Sources: Financial Times

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