US

US equities experienced a significant correction in their value during the week just past us. The S&P 500 went down by 3.14%, the Nasdaq Composite by 4.45% and the DJIA by 2.74%. No significant pieces of economic news were released during the week apart the minutes of the FOMC September meeting on Wednesday; these were more dovish than expected, with Fed officials reportedly erring on the side of caution when deciding future monetary policy and being surprised by the strengthening of the dollar. Indeed, all three indices rallied significantly on the day, only to come down again from Thursday. The S&P 500 is now just above the 1900 level, more than 100 points short of the record highs touched last month.
The US yield curve bull steepened accordingly; the front-end was anchored again at near-zero levels while the tenors from 2 to 30 years yielded 10 bps less than last week, with a peak in the 5-year sector where rates came down by 19 bps. It is very likely that last week’s dryness in terms of economic data supporting the US economy prompted some profit-taking in equities, breaking the positive momentum already dented last week, and sent investors fleeing for bonds, especially after the release of the FOMC minutes that clearly supported them. The new levels in US rates can be seen below:
PIC
This week saw a stop in the surge of the dollar, as the divergence of US monetary policy from the one of the rest of the world looks to be postponed further. The USD lost value against all major currencies, and especially so against the Japanese Yen, falling 1.91% to a level of 107.65.
Next week will be just slightly richer in terms of economic news than the last; eyes are set on the data for retail sales on Wednesday, as well as industrial production and housing starts at the end of the week. Should the data not prove convincing on the strength of the US economy expect further losses down the road in equities.

UK
This week saw UK markets following the general risk-off mood, with equities approaching year-to-date lows and the 10y gilt rising substantially with yield at 2.20%.
On Tuesday, the manufacturing production and the industrial production came both below expectation (+0.1 vs +0.02 exp, +0.0 vs +0.2 exp respectively) highlighting the fact that the economy was affected by the uncertainties around the Scottish referendum, the possible Eurozone slowdown and the tension over the Ukraine territories. Such risks were noticed by the Bank of England on Thursday. In fact, they decided to maintain the interest rate on hold pushing the expectation of a rate rise later in 2015.
The pound hedged up in the middle of the week mainly because of a dovish FED minutes that weakened the dollar but then it rebounded back just above 1.60 after the BOE rate statement.

Europe
This week was a nightmare for European market and in particular for Germany. In fact, while German economic performance were always decent during the last European crisis, this week Germany was by far the worst performing nation in the EU and scary economic data came out this week that suggest Germany will officially enter into recession with two consecutive negative quarter of GDP growth.
In fact, factory orders, industrial production and export data came all well below expectation (-5.7% vs -2.4%, -4% vs -1.4%, 17.5bn vs 18.4 bn respectively). As expected, equities were hit very badly during this week, with all major indexes down 5%, and the 10y Bund was firmer with yield at 0.90% on Friday.
We believe that the next week the focus will remain on Germany with the ZEW economic sentiment, a measure of the business confidence, coming out on Monday. It will be very interesting to see if it will be more affected by the recent ECB monetary stimulus or by the bad economic data. This index plummeted from 59 to 6.2 in just 6 month and market participant expect it to be at 0.2. we believe that a record below 0 will give momentum to the downward trend in equities.
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Japan
This week was particularly interesting regarding the yen. The yen started the week at 109.7 per $, but ended the week at 107.5 (-1.91% change).
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The Nikkei225 started the week at 15,913, but closed at 15,300 on Friday, which is 6.56% below its 52-week high of 16,374 (on September 25th, 2014). The stock market in Japan continues to be sensitive to yen changes, as companies are extremely exposed to the level of the yen for their export.
The biggest fear regarding the inflation target is that inflation is higher due to higher import prices – primarily due to oil and gas prices which are highly demanded now that Japan has enormous energy needs- and not due to increased demand for domestic goods. In fact, domestic prices are far behind, with nominal wages at having negative growth. The net trade balance is also not expected to become better for some time. The weaker yen is not reflecting itself into a more competitive real exchange rate due to many large firms having production plants in countries where they market the products, which leads to products being priced by market.
Additionally, there seems to be political infighting between Prime Minister Abe and BoJ governor Kuroda. Kuroda has welcomed the recent decline in the yen and has often said that he sees nothing wrong with it, whereas Abe has often said that the extremely-weak yen is hurting households by increasing import prices. Abe is shifting from a revitalization-policy to an income-redistribution policy in order to regain popularity which has been quite volatile lately.

Sources: Financial Times, Bloomberg, Businessweek, WDJ

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