Wrap up – last week   

Spain delays bailout and US unemployment rate falls unexpectedly

European and US stock markets ended the week firmer. Investors took comfort in European Central Bank (ECB) President Mario Draghi’s statement that it has a “fully effective backstop mechanism in place” to purchase the bonds of troubled nations in the region and bring borrowing costs down. The results of the Spanish bank stress tests were in line with expectations with an estimate of €60 billion needed to recapitalise its banks. This helped Spanish borrowing costs to improve, with 10-year government bond yields falling to 5.73% at the end of the week. As expected, both the ECB and the Bank of England made no changes to interest rates or monetary policy.

In the US, markets were cheered by the unexpected strength in economic data. The ISM (Institute for Supply Management) manufacturing index registered an expansion for the first time since May, with a better-than-expected reading of 51.5 in September, compared with 49.6 in August. The ISM services index also showed resilience, rising from 53.7 in August to 55.1 in September. A total of 114,000 jobs were created in September and the unemployment rate unexpectedly fell to 7.8%, driven by an increase in part-time employment. China’s official services PMI (purchasing managers’ index) remained in expansion territory but fell from 56.3 to 53.7 in September, a two-year low. In Japan, economic news flow was less positive with the Tankan Index for large manufacturers falling again in Q3.

Elsewhere, in a surprise move, the Reserve Bank of Australia cut its official interest rate by 0.25% to 3.25%. The strength of the Australian dollar and weak export prices for commodities were the reasons for the decision.

Shaping the markets — this week

European finance leaders meet to discuss Greece, Portugal and Spain

The week begins with August German industrial output data. After posting a strong 1.3% rise month-on-month (m-o-m) in July, recent surveys are pointing to a fall in manufacturing output as new order levels have fallen compared to output. European finance leaders meet in Luxembourg early this week. Among others, the eurozone agenda includes the continuing Greek austerity talks where Greek Prime Minister Samaras is likely to request a two-year extension on austerity measures. Portugal is also awaiting confirmation of its next support package while it seems less likely that Spain will request a bailout for now. In the UK, despite the 3.2% bounce in July, the consensus is for August manufacturing production to contract by 0.6% m-o-m given weak underlying demand. Mid-week, French industrial production in August is likely to be flat m-o-m; business surveys are pointing to a contraction in manufacturing output while energy output looks to increase sharply. On Thursday, a 0.5% m-o-m fall in eurozone industrial production is forecast as manufacturing data is likely to weaken.

In the US, the Beige Book survey is released on Wednesday, and will probably show a modest expansion in economic activity across the twelve Federal Reserve Districts. Meanwhile, Friday’s September PPI (producer price index) is forecast to register a 1.7% rise y-o-y, given rising wholesale energy costs.

Finally, China’s September trade balance is expected to show that both internal and external demand are stabilising. The consensus is for exports and imports growth of 5.1% and 2.5% year-on-year respectively.

Markets in numbers

World equities

Index

% 1W

% YTD

S&P 500 Composite

1460.93

1.4

16.2

Dow Jones Industrials

13610.15

1.3

11.4

NASDAQ Composite

3136.19

0.6

20.4

FTSE 100

5871.02

2.3

5.4

Euro STOXX 600

274.11

2.1

12.1

Nikkei 225

8863.30

-0.1

4.8

Hang Seng

21012.38

0.8

14.0

Benchmark government bonds

Yield

1W /bp

YTD /bp

US Treasury – 10 year

1.73

9.5

-14.3

UK Gilt – 10 year

1.60

6.5

-38.1

German Bund – 10 year

1.51

10.1

-32.2

Japanese JGB – 10 year

0.78

0.5

-20.7

Credit indices

Yield

1W /bp

YTD /bp

IBOXX £ Non-gilts All maturities

4.01

1.1

-95.5

ITRAXX Crossover 5 Year (MID)*

471.75

-24.1

NA

Volatility index

Index

% 1W

% YTD

CBOE PX Volatility – VIX index

14.33

-8.9

-38.8

Commodities

Index

% 1W

% YTD

Brent Oil ($/Barrel)

111.69

-0.8

3.2

Gold Bullion $/ Troy Oz

1785.47

0.6

13.4

Currencies

vs $

vs £

 

¥

78.69

127.4

$

1.62

Euro

1.306

1.238

Source: Datastream. * Spread in basis points. Past performance is not a guide to future performance.

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