Interest Rates
Doubts about the strength of the world economy have set back attempts to raise interest rates on both sides of the Atlantic as fears of global contraction have increased.
UK: Bank of England policymakers have warned that the slowdown affecting many countries has come just as the UK is also showing signs of softer growth. A UK rate hike looks like it has now been pushed back to 2017.
US: Minutes of the Federal Reserve’s September meeting showed that US rate setters held similar growing doubts about the strength of the Chinese economy. Most members of the Federal Open Market Committee (FOMC) believe that the Fed’s rates will increase by the end of the year, but investors are not convinced. They do not expect the Fed to raise rates from its close to zero levels until next March.
Since the Fed’s ‘no change in interest rates’ decision US non-farm payroll data was released showing the US created only 142,000 new jobs in September, which was a weaker than expected number, and confirms the current view that US economic growth may be softening.
Equities
August saw global stock markets thrown into turmoil after China’s central bank took the surprise decision to devalue its currency, a decision which many interpreted as a signal of the country’s economic struggles. The revaluation set off a wave of panic selling in emerging market currencies and stock markets, as the latter are big producers and exporters of a whole range of commodities which China, in turn, has historically had huge demand for. This demand is now in question leading to sharp falls in equity markets around the world.
European and US stock markets were down between 10 and 15% in the 3rd quarter making it their worst quarterly performance since 2011.The Chinese Shanghai index was itself down 25% over the quarter. However, the first week of October has seen commodities and stock markets recoup some of these losses.
Foreign Exchange Outlook
The US dollar has been strong over the past year supported by the prospect of both rising interest rates and a sell-off in Emerging Market currencies. With the prospect of a US rate rise being pushed further into the horizon US Dollar strength may not now be as clear cut. However, with there being little prospect of interest rate rises elsewhere in the world right now the underlying the strong US Dollar tone should continue.
Fixed Income
With global equities in relative distress and interest rates not rising any time soon, global bond markets remain very well supported and close to multi-year low yields. This includes China’s 10yr government bond yielding 3.2% – a 5 year low. See benchmark yields below.
Corporate News
AB Inbev continues its pursuit of SAB Miller hoping to create the world’s largest brewer. However SAB recently rejected the AB Inbev’s third bid of £42.15 per share.
The UK government announced it is going to sell its remaining 12% stake in Lloyds Bank. The UK Treasury took a 43% stake during the 2008 financial crisis but has already disposed of approximately three quarters of this stake.
Sainsbury’s reported strong results estimating that pre-tax profits will be modestly ahead of expectations at £545 Million for the year. It has been a while since the large supermarkets reported good news.
Deutsche Bank made a surprise announcement ahead of its 29th October earnings release saying it would make a EUR 6 Billion loss in the third quarter as big investment banks continue to cope with the increasing regulation resulting from the financial crisis. Similarly, expectations are that Credit Suisse will have to conduct a large capital raising exercise as a result of write-downs.
Equities
S&P 500: 2010
Nasdaq: 4800
FTSE 100: 6350
Bonds – 10 Year Government Yields
US 2.10%
EU 0.60%
GB 1.80%
Foreign Exchange
USD/EUR 1.1300 (1 euro buys 1.1300 dollars)
GBP/USD 1.5300 (1 pound buys 1.5300 dollars)
Commodities
OIL: Brent: 52.00 (dollars per barrel)
GOLD: 1160 (dollars per ounce)
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Paul McCormick
