20 October 2014
# European stock indexes surged higher Friday to round out a turbulent week, clawing back much of the week’s losses by session end. News that the Chinese central bank are undertaking new stimulus measures and that the ECB are within days of starting their asset purchases sent the Stoxx600 to a substantial 2.79% gain. Indeed the rise was the biggest one day gain in 18 months but not enough to avoid consigning the index to a 0.91% loss on the week. The New York session developed along similar lines with a solid rally unfolding, buoyed by the European lead and a couple of bright U.S. data releases. The S&P500 ended up 1.29% Friday (Dow +1.67, Nas +0.91%) but none the less is was the 4th straight week of losses (-1.0%), an event not seen since 2011.
# On Friday it was reported that the Chinese central bank (PBOC) is planning the injection of about 200 billion yuan (US$32.7 billion) into some national and regional lenders as Premier Li Keqiang steps up stimulus to support economic growth.
# U.S. data releases proved to be a timely tonic for a rattled market that had seen the Dow trade in a wicked 900 point range for the week. U.S. September housing starts came in at 6.3%m/m (5.4% expected) however the number was somewhat distorted in its apparent strength with a weak August prior and the major ’single family’ sector barley budging.
#Meanwhile the University of Michigan consumer sentiment survey rose to its highest level in 7 years (July 2007). Consumers were more upbeat about their personal finances and the national economy despite the survey coinciding with a falling U.S. stock market and a barrage of news about the spread of Ebola. Economists had expected the sentiment index to fall, but instead it ticked two tenths of a point higher to 86.4.
# Whilst nothing of particular immediate economic importance came forth from Fed Chair Janet Yellen’s prepared speech Friday it was however very notable in painting her as a very different Fed chief. Simply the topic, “Perspectives on Inequality and Opportunity From the Survey of Consumer Finances,” was unusual by the generally cautious standards of central bankers and more in line with statements coming from a left-leaning politician or any number of professional commentators. Worth knowing her apparent biases for their potential impact on Fed policy going forward.
# The German central bank President Jens Weidmann criticised the ECB decision to undertake asset purchases saying that the measures do not address the issues affecting the Eurozone saying “The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus: it is the structural barriers that impede competition, innovation and productivity,”
# Sources in Japan say the Japanese national pension plan, the biggest in the world (US$1.2trln) , is looking to boost equity weighting’s in its portfolio from 12% to around 25%. The implications are significant for both Japanese stocks and indeed JCB’s as the story goes that the fund is being urged to cut low yielding JGB holdings and increase their equity holdings from 12% to around 25% in order to boost returns. The proposal is for the GPIF to cut bond holdings from 60% to 40%. The fund is also likely to boost holdings of foreign equities.
# Commodities were steady to better bid on Friday as risk sentiment improved, but was at least partly offset by a broadly stronger USD. The closely watched WTI Crude traded up to 84.44 at one stage before edging down to 82.75, up slightly from Thursday’s close at 82.70. Copper bounded 0.76% higher while Iron ore closed up just 0.12% at 80.60. Gold fell back marginally to 1,238. For the week Gold rose 1.14%, copper fell 1.02%, Crude fell 3.58% and iron ore closed up 0.88%.
# The U.S. 10 year bond yield, the benchmark indicator of U..S wholesale interest rates, ended the week largely where it started, at 2.20%. The similar open and closing levels belie the extraordinary activity that occurred during the week. Wednesday’s plunge to 1.86% was nothing short of a ‘flash crash’, an event that should have market regulators very worried that moves of that significance can occur in what is commonly regarded as the world’s deepest and most sane market. Whilst the move is being seen as likely a capitulation move by those who had been looking for higher U.S. rates, the degree of the move is being blamed on the HFT (high frequency trades) set and their algorithm computer programs.
Graham Parlane - BBY (NZ) Limited, a specialist advisor in Futures - FX - CFD - Options - Shares - Gold - Silver - Commodities - Managed Accounts - DIMS