Weekly Global Market Commentary – 26th October 2015

Central Bank Announcements Stoke Risk Markets – By Bryan Dooley, CFA

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Last week global equity markets continued the October rally, this time buoyed by central bank actions including the European Central Bank (ECB) signaling further monetary stimulus and the People’s Bank of China (PBOC) cutting interest rates on Friday. After what amounted to a 2.09% gain on the S&P 500 and a 1.37% increase in the MSCI World Stock Index last week, developed global equity markets are now essentially flat for the year, having rallied over ten percent since hitting bottom in late September.

Last Thursday the ECB signaled that it is ready to add stimulus – a welcome announcement which jolted stocks globally back into their pre-correction trading range, tumbled the euro and sparked demand for risk assets in general. On the day, the Standard & Poor’s 500 Index surged 1.2 percent, bringing its gain from an August low past 10 percent. European stocks surged to two-month highs and bonds in the region jumped after ECB President Mario Draghi said the bank will consider adding to its bond-buying program this year. The euro tumbled to a three-week low.

The ECB became the latest central bank to signal a willingness to loosen policy if slowing international growth and tepid inflation continue. Draghi said officials will reexamine the scope of their quantitative-easing plan in December. The bond purchases, originally due to end next September, will continue until the ECB sees a sustained increase in the inflation outlook, he told reporters. Policy makers left key interest rates unchanged.

Also fueling the rally has been corporate earnings which have been coming out better than expected, though the expectations were very low, and that has contributed to a more risk-on environment. Expectations that China will probably stabilize because they are aggressively providing fiscal and monetary policy has also been contributing.

As the ECB considers raising stimulus, the Federal Reserve is scrutinizing economic data ahead of its policy meeting this week. A strong housing report last week provided the latest sign that the recovery in residential real estate will support growth. Data also showed jobless claims last week hovered near the lowest level in four decades in a fresh indication the labor market continues to firm.

On Friday, China’s central bank cut its benchmark lending rate and reserve requirements for banks, stepping up efforts to cushion their economic slowdown. The one-year lending rate will drop to 4.35 percent from 4.6 percent the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were cut by 50 basis points, with an extra 50 basis point reduction for some institutions. The PBOC also scrapped a deposit-rate ceiling, a further step in the liberalization of interest rates.

The expanded monetary easing underscores the government’s determination to meet its 2015 growth target of about 7 percent in the face of deflationary pressures, overcapacity and tepid global demand. China’s sixth rate cut since November comes as the European Central Bank President signals more policy easing and amid expectations for additional stimulus from the Bank of Japan.

Looking ahead, we see markets range-bound at these higher levels with near term catalysts being the ongoing Q3 earnings reports, America’s durable goods orders reported on Tuesday and the Fed minutes scheduled to be released on Thursday.

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