For interview – you simply must have a basic awareness of current financial market trends.
October was a difficult month for global financial markets and, for some inexplicable reason, it often is.
Equities
Equity markets lost their nerve and initially traded sharply down (circa 8-10%).The bad news included increasing concerns about slowing global growth, particularly in the eurozone but also Asia, disinflationary pressures from falling oil prices and the end of the quantitative easing (QE) programme in the US. (Note: QE is the monthly bond buying programme by the US Federal Reserve that essentially pumps money into the economy to stimulate growth). The spread of the Ebola crisis added fuel to the equity fire. The markets fell by significantly more than the bad news justified, as is often the case, as investor confidence faltered.
Bonds
The volatility wasn’t restricted to equities, with the yield on the 10-year US Treasury Bond dipping to a low of 1.83% before ending the month at 2.31%.(Note: as investors flee from equities they seek less risky or ‘safe haven’ assets such as bonds and gold which is why the yield fell as low as 1.83% as equities tumbled; equities and bonds have an inverse performance relationship).
On the last day of October, a shock announcement by the Bank of Japan (BoJ) on the extension of its own QE programme caused a late surge in global equity markets so ending the month in the black. Developed market equities gained 1.2% over the month, bettered slightly by emerging markets, which gained 1.4%. Meanwhile, the Barclays Global Bond Index was flat over the month.
Gold
Gold continued to perform poorly, as per previous months, as investors prepare for U.S. monetary policy to grow less accommodative i.e. higher interest rates.(Note: if US interest rates rise then gold becomes less attractive since gold pays no interest/ income).
Foreign Exchange (FX)
The US Dollar continued to be strong and reach yearly highs versus other currencies on strong US economic data and again an expectation therefore of higher US interest rates in 2015 and beyond. (Note: global investors will purchase US Dollars and therefore sell other currencies if interest rates in the US rise relative to other countries/ currencies.)
The International Monetary Fund downgraded its forecast for global economic growth for this year by 0.1 percentage points to 3.3% and noted that there was a 40% chance than the eurozone could fall into recession.
The European Central Bank (ECB) announced the results of its year-long Asset Quality Review (AQR) and the results were largely welcomed by investors. The results showed that 25 out of the 130 European banks tested failed the assessment with a total capital shortfall of €25 billion.( Note: this means that the European banking system is far from safe and therefore its equity markets remain relatively risky and perhaps unattractive compared to US/UK/Asia).
Outlook:Volatility here to stay
The low volatility that dominated markets for most of 2014 and lulled investors into a false sense of security has ended on the back of last month’s global growth scare. It’s likely investors will have to stomach far more volatility moving forward. Add to that generally low commodity prices and growing fear about the potential spread of Ebola, along with geopolitical hotspots, volatility may not reduce any time soon.
Now that the US Federal Reserve has ended its QE programme, the debate will centre on the timing of the first interest rate hike.
November has started with equity markets and the US dollar continuing to do well and recover from October lows.
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