Weekly Global Market Commentary – 28th September 2015

Markets Flounder on Automaker Woes – By Bryan Dooley, CFA

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Last week, global risk markets continued their sloppy trading pattern on mixed economic data and on news of a developing emissions scandal at Volkswagen AG which rocked European bourses. Equity markets did however, catch a bid towards the end of the week in reaction to largely constructive comments by Fed Chairperson Janet Yellen and an upwards revision in second quarter U.S. GDP.

Early last week equities sold off with commodities on a mixed bag of economic data and a perceived lack of direction from the U.S. Federal Reserve. Meanwhile, a 30% drop on German automaker, Volkswagen hurt European stock market performance. The widening Volkswagen AG emissions scandal dragged down automotive shares globally on speculation it may lead to tougher regulations. Demand for safety assets bolstered Treasury bond prices over the week.

In the U.S., sales of previously owned homes fell more than forecasted in August as lean inventories slowed this year’s momentum. Closings, which usually take place a month or two after a contract is signed, declined 4.8 percent to a 5.31 million annual rate from a revised 5.58 million pace that was the strongest since 2007, the National Association of Realtors reported Monday. Prices climbed and the number of homes on the market decreased from the same time a year ago.

Limited availability of homes on the market is making it difficult for some Americans to take advantage of low interest rates and relocate after a recovery in property values. While home sales have improved this year, Federal Reserve Chair Janet Yellen said last week that the pace of improvement has been inconsistent with a firmer labor market and demographics that should provide a bigger boost. However, compared with a year earlier, purchases increased 5.4% in August before adjusting for seasonal variations.

By the end of the week, markets reversed course as economic releases were reported stronger than expected. Second quarter Gross Domestic Product (GDP) index rose at a 3.9% annualized rate, higher than consensus estimates of 3.7%. This is the second revision to last month’s GDP release and it shows larger gains in consumer spending. The economy is demonstrating that it has sufficient strength to counteract a strong dollar.

Also, personal consumption month-over-month rose by 3.6% noticeably stronger than expectations of 3.2%. Focusing on Personal Consumption on a year-over-year basis, this is the fourth quarter in a row that it has been 3% or higher consecutively. That has not occurred since 2005. As well, PCE Core rose 1.9%, higher than expectations of 1.8%. The PCE index tracks the overall price changes for goods and services purchased by consumers. This is approaching the 2% mark that the FOMC seems to focus.

And finally, the University of Michigan Consumer Sentiment index rose to 87.2, higher than consensus expectations of 86.5. This indicates that consumers attitudes toward personal finance, business and market conditions has strengthen from last month. Consumer expectations have withstood the recent market volatility. Lastly, Fed Chair Janet Yellen spoke last night and confirmed a 2015 Federal Funds lift off.

In the week ahead, important data points to watch include the ISM manufacturing report scheduled to be released on Thursday and Friday’s U.S. employment report.

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