Markets Struggle To Advance In An Unstable Economy
Markets started the week with more of the negative sentiment we’ve grown accustomed to in recent weeks. In Japan and Europe, notably, this later took a turn on market participants attributing a larger likelihood for more QE(s) taking place soon. On Tuesday, the JPY weakened substantially amid comments made by Etsuro Honda, one of the Japanese Prime Minister’s close advisors, by which Japan needs more economic stimulus to overcome volatility originating from China. These comments were augmented by a weak Japanese preliminary August Industrial Production print, seeing a 0.5% Month over Month contraction, falling below the analyst consensus which expected a 1% expansion, rather. Expectations that the ECB is soon to increase its own monetary easing also grew, on Wednesday, as the European Consumer Price Index dipped to indicate a 0.1% annual contraction in September, after pointing at an expansion, thus far.
The possibility of more stimulus has benefitted global equity markets. Equity indices in Europe opened Wednesday’s session deep within green territory – The Spanish IBEX 35 kicked off the day with a 2% surge, which later moderated to +1.76%. Similarly, the DAX added 2.22% during the day, the CAC 40 increased 2.57% and the FTSE added 2.74%. Naturally, the positive momentum further tricked into U.S markets seeing the S&P500 start the day with approx. a 1.5% gain, later picking up steam to conclude with more than a 2% increase.
March is the new December
Expectations for Friday’s Nonfarm Payrolls stagnated markets toward the end of the week. Evidently, with the Fed proving its reluctance to hike rates it made sense that it wouldn't take much to clear a rate hike in October and perhaps even December off the table. So, obviously, when the data indicated that just 142K jobs were added to the U.S. economy vs. expectations for 201K and August’s print was revised downwards from 173K to 136K, that had some effect on the expectations for the Fed’s lift-off. Yields in the U.S. sovereign bond market plummeted, reflecting this lowered chance for a rate hike. The probability derived from these yields, that the Fed will hike rates in its upcoming October decision fell from 18% to just 8% and December’s derived likelihood for a hike dropped from 47.5% to just 28.2%.
Alarmingly, equity market continued to respond negatively to the hardships faced by the U.S. labor market, and its inherit promise for a prolonged period of low rates, preferring rather to focus on the weakening of the economy per se. Futures on the S&P 500 lost more than 2% on the news, which led to a similar decrease of the S&P itself, when it commenced trading shortly after. In addition to the above, the price of gold surged more than 2%, averaging close to USD 1140 per ounce, signaling elevated concerns by many market participants.
The rest of the day saw some considerable recovery of the U.S. markets. From the aforementioned negative territory, the S&P 500 concluded the day at a 1.43% gain, which added up to a smaller 1.04% increase in a weekly perspective. With the Dow concluding the week at a more modest 0.97% increase and the NASDAQ adding less than 0.5%, however, the marked increase in the market's expectations for more dovish Fed monetary policy did little to boost U.S. markets. In this sense, convincing markets that the risk/reward is still lucrative should prove rather cumbersome going forward.
■ E.U. annual inflation slides to negative territory
■ Euro and Japanese markets gain on more QE prospects
■ Sept Nonfarm at 142K vs. 201K consensus, Aug print also revised downwards
■ Markets continue to respond negatively to weak U.S. macro data
Disclosure: None.