Market Recap 03-10-2015

BSIC Weekly Market Brief

United States

The major benchmarks were mixed as worries over China’s waning commodity demand and the potential for new rules on drug pricing gave way to a late-week rally. Stocks fell sharply at the start of the week, reaching back toward the lows that they had established at the end of August. They regained some traction at midweek, with the S&P 500 regaining most of its Monday decline. All of the major benchmarks ended the week in the red for the year to date, but with a small positive change on a weekly basis.

The September employment report from the Bureau of Labor Statistics showed that employers added only 142,000 jobs to nonfarm payrolls during the month, well below consensus expectations of 203,000 new jobs. The disappointing growth in employment accelerated the move into Treasuries that had been driving yields lower for most of the week. The yield on the 10-year U.S. Treasury note decreased to 1.94% after the release of September employment data.

USD closed the week at 1.1210 against the EUR. USD/JPY set at 119.9, while US Dollar Index ended at 96.04.

Moving to next week, the most important release is the Fed’s September meeting minutes on Thursday. Investors will also be watching the trade balance figures on Tuesday.

European Union

The yields on European government bonds continued the drop this week. Investors preferred less risky assets, thus demand for bonds was stronger. The yield on 10-year German bunds reached 0.57%, which is 8bps lower than the previous week.

The rally of European stock indices from the end of the last week did not continue in the beginning of this week. Data released showed that industrial profits in China fell in August at their fastest YoY pace for almost four years, raising more questions about the health of its national economy. When the European market closed on Tuesday, the drop was 2-3% compared to the previous week.

However, European shares rose on Wednesday, also with automakers boosted by a Chinese tax cut on small cars.

Moving to data releases, EU unemployment rate and consumer price index were published during the week. The former stayed at 11%, while inflation set at 0.1% (the forecast was 0%). However, the core inflation (measurement that eliminates products that can have temporary price shocks) remained 0.9%. Moreover, PMI data released on Thursday showed manufacturing activity slowed in September (52.0 from 52.3 in August).

Markit composite PMI, services PMI for September, and August retail sales will be published next week.

United Kingdom

This week became thoroughly clear that the pace of UK economic growth is strong and has not been significantly influenced by weak macroeconomic data in other areas of the world. Despite that, it is worth mentioning Glencore poor performance, as a result of the general turmoil in mining and commodity industrial sector. On Tuesday, BoE governor Mark Carney gave a speech about the potential losses climate change could trigger in the long-term, emphasising that 19% of FTSE 100 components are highly exposed to natural resources and extraction.

On the FX side, GBP has slightly depreciated versus USD and JPY this week, and closed flat with respect to EUR. The FX markets have not been characterised by big moves this week.

FTSE 100 opened at 6,078 at the beginning of the week and, after a decline of some 270 bps between Monday and Tuesday (dragged by mining and extraction companies), recovered to near flat on Wednesday. The trend inverted on Thursday, when the index gained 1.5% thanks to positive manufacturing PMI (51.5, above expectations of 51.3). On Friday, construction PMI, which was 59.9, was way over expectations of 57.5.

Mortgages and credit showed better than expected improvements from the last figures, indicating that lending is still increasing. On Wednesday, GDP figures were roughly aligned with expectations: +0.7% (as expected) in Q3 2015, +2.4% YoY (against expectations of +2.7% YoY).

Next week, BoE will announce the main interest rate, which is expected unchanged. Moreover, services PMI, trade balance and manufacturing production will be out.

Japan

This week has been long awaited for the Tankan Survey, released on Thursday. It is an economic survey of the Japanese businesses, issued quarterly by BoJ, and gives a clear indication of the central bank’s monetary policy.

The effectiveness of Abenomics has often been unclear, and the overall policy has never been questioned as after the latest print of headline inflation on September 25^th: -0.1% YoY. Although core prices were still up (+0.8%), it was the first negative number since April 2013, and clearly in contrast with the purpose of the policy launched by the Prime Minister Shinzo Abe. Even Etsuro Honda, his closest advisor, recognized that the Japanese economy is still in a static situation, and deemed as “urgent” the extension of the budget assigned to the ongoing fiscal and monetary stimuli. The Tankan Survey confirmed such gloomy picture: corporate sentiment worsened, with the key figures down from the levels seen in the second quarter, mainly due to concerns over the global economy. This will lead to a clear push from the government for an extension of the current programs. In particular, the BoJ is widely expected to step up its QQE program on October 30^th, currently involving purchases of government bonds up to ¥ 80tn per year.

The markets were in a clear “good news is bad news” mood: Nikkei touched 17,800 on Thursday, while USD/JPY held around the 120.00 mark. Finally, unemployment data, although signalling an increase in job availability, did not have a material impact on the markets. No big indicator coming out next week.

Elsewhere in the world

The Indian central bank cut interest rates more than expected to 6.75% on Tuesday (expectations pointed towards a 25bps cut to 7%).

After that, China published a series of data that confirmed the slowdown, although some came in above expectations. For example, manufacturing PMI set at 49.8, above expectations (49.6), but still below the 50 threshold.

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