BSIC Weekly Market Brief

United States

Last week decision by the FED to keep the cost of money unchanged was still affecting the stock market, pushing the S&P500 down during the first part of this week. On the other hand, the yield on the 10-year Treasury Notes has floated quite a bit, closing the negotiations higher at 2.166%.

The FED has still been the central character of the week, with Yellen’s speech in Massachusetts. The chair said that while FOMC is monitoring the risk that an overseas slowdown hits US growth, it does not currently expect this to have a “significant” effect on the path of US monetary policy. Ms. Yellen argued that some slack remains in the labour market, and that this coupled with low energy prices and a 15% rise of the USD have been important drags on inflation. Anyway, the FOMC still expects to raise interest rates once already in 2015.

After that, GDP forecasts published by the Bureau of Economic Analysis on Friday offered some evidence of the optimism that we have seen in the FED speech. The economy grew at an annualised rate of 3.9%, up from a second estimate of 3.7%. Consequently, USD strengthened against all the major currencies, closing the week at 1.1195 against the EUR. USD/JPY set at 120.49, while US Dollar Index ended at 96.35.

US stocks turned the weekly gains into losses by the conclusion of Friday session, due to a sharp selloff in biotech and health-care stocks that spread to the broader market.

Moving to next week, analysts are going to focus on the US job report for September, with the US economy expected to add 200,000 new jobs. Furthermore, several members of the FOMC will hold speeches during the week; one of those is Ms. Yellen, who is scheduled to deliver opening remarks at the St. Louis Fed community banking conference on Wednesday.

European Union

The week began with Greek elections results. As expected, Syriza won by receiving roughly 35% of all valid votes. The government is created by Syriza-Anel coalition and it should be more stable than the previous one.

Moody’s has lowered France’s government bond rating to Aa2 (its third-highest grade). However, this did not have any significant effect on the French government bonds.

Due to an eventual tightening in U.S. monetary policy and slower growth in China, investors were more wary of stocks (among them, automotive stocks were damaged by the VW scandal), and less risky bonds were more attractive. Therefore, the yield on 10-year German bunds touched 0.57% on Thursday (the lowest since August 24th).  Yet, following Yellen’s speech, Germany 10-year yield rose to 0.65% at 5 p.m. close in London.

Throughout the week, all major European stock indices experienced a drop of 4-5% with respect to the previous week. However, equity markets bounced back from losses and closed at about 1-2% lower level than the previous five days.

On the FX side, EUR is weaker versus USD, slipping 1.3% to 1.1160. Since a hike by the Fed became even more likely to happen this year and ECB might extend QE programme (Mario Draghi did not exclude the chance of modifying some features of the plan), single currency may depreciate against USD in the next period.

European markets will be closely monitored next week, as indicators like EU unemployment rate and German PMI, CPI and retail sales will be released.

United Kingdom

On Monday, BOE deputy chief J. Cunliffe opened to the possibility of “small and gradual” rate hike given the relative strength of the economy. Meanwhile, public sector borrowing for August came in higher than expected at GBP 12.1bn.

Looking at FX market, GBP hit the lowest levels of the month, falling below USD1.52 as markets priced in a divergence in US and UK hike timing.

On the stock market side, after hitting a one-month low at 5,947 last week due to the FED, FTSE 100 showed some signs of recovery only to fall once more below 6,000 on Thursday amid fears about the global economy.

Among next week’s data releases, August consumer credit and mortgage data (both expected to increase) are due on Tuesday, while GDP data will be published on Wednesday (expected at +0.7% QoQ).

Elsewhere in the world

Looking outside the three areas analysed above, Chinese data continue to disappoint investors. On Wednesday night, preliminary Chinese Caixin-Markit PMI came in below expectations (47.0 vs. 47.5 expected), reaching the lowest level since April 2008.

Many Asian markets, among which Japan, remained closed due to national holidays for a couple of days. Nonetheless, Japan still had the time to show something interesting: CPI figures, published on Thursday evening, reported the first drop in core consumer price index since the start of the massive QQE (i.e. Quantitative and Qualitative Easing) carried out by BoJ.

Finally, commodity currencies are still suffering, with AUD, BRL and ZAR volatile and under pressure for another five days.

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