Weekly Global Market Commentary – 13th October 2015

Risk Markets Bounce in Early Q4 – By Bryan Dooley, CFA

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“The last shall be first and the first shall be last”, according to a well known Biblical passage and so it was last week with the equity markets as those sectors falling the most during Q3, including energy stocks and emerging markets, were the ones leading global markets higher. So far this quarter, risk markets have continued their nascent rally, bouncing off September’s lows and ringing in positive performance for the early part of the fall season.

Markets in fact seem to be shrugging off rather mixed economic data. For example, last Monday a report showed the U.S .Services Purchasing Managers Index fell more than expected to 55.1 versus consensus estimates of 55.6 ( a release above 50 considered expansionary for the U.S. economy.) As well, the ISM Non-Manufacturing index fell more than expected to 56.9 versus consensus estimates of 57.5. This is a forward looking index and “service” accounts for the largest portion of the U.S. economy. However, looking at the 12-month moving average of the index shows its still printing at the second highest level since 2006.

Meanwhile, investors are beginning to focus on Q3 corporate earnings currently being released. As usual, aluminum-maker, Alcoa Inc. kicked off the season. However, the bell weather commodity company did miss analysts’ estimates on weak global demand and a glut of supply. Last month, Alcoa announced it would be splitting into two different companies in a bid to enhance shareholder value. Corporate splits, spins and merger are a recurrent them in this market as companies struggle to please shareholders amidst sluggish global growth.

In the “first being last” bin, health-care stocks in the S&P 500 have been noticeable laggards during the current market rally as investors sell some of the year’s biggest winners. Moreover, comments from the increasingly socialist Democratic Party led by Hillary Clinton have knocked down share prices of many pharmaceutical and biotechnology companies. Lack of a strong Republican Party offensive may be giving an upper hand to a rather scary Democratic agenda more focused on tearing down successful companies and wealthy citizens rather than building anything useful.

Later last week better news was heard on the employment front. A report on Thursday revealed that new Initial Jobless Claims fell to 263K which was stronger than expectations of 274K. This release is very close to a four decade low and indicates further strength in the job market. In addition, the Continuing Claims index release of 2,204K was essentially in line with consensus estimates to 2,200K, hovering around 15-year lows.

However, the big news stoking the market seemed to come last Thursday from minutes released by the Federal Reserve showing officials put off an interest-rate increase in September because of growing risks to their outlook for economic growth and inflation, mainly from China, even as they continued to say they were on track to raise the target later this year.

Policy makers “agreed that developments over the inter-meeting period had not materially altered the committee’s economic outlook,” according to minutes of the Sept. 16-17 session of the Federal Open Market Committee, released Thursday in Washington. Nonetheless, “the committee decided that it was prudent to wait for additional information confirming that the economic outlook had not deteriorated”.

The FOMC noted that domestic economic conditions, including data on consumer spending and housing, had continued to improve, and the labor market had reached or was close to the committee’s long-run estimates for unemployment.

Adding it all up, expectations for an imminent U.S. rate hike have been pushed off – perhaps until next year. This caused the greenback to sell off and commodities to experience a welcome rally.

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