Market commentary: Strong equity rally takes a breather

It’s Columbus Day in the US today, therefore bond markets in the US are closed. Markets this morning are off to a slow start, with most equity markets flat, bar the DAX which is up 0.70%.

In fixed income, investment grade bonds are up, with ITRX MAIN indicating a positive momentum, with the materials segment leading and financials trailing. In high yield there is also positive momentum with the ITRX XOVER tighter by 4 bps to a spread of 327, with consumer staples leading 9.3 bps tighter and financials lagging marginally wider 0.2 bps.

As September came and went, the third quarter earnings reports are due to start being reported, with investors keen to keep an eye out for tell-tale signs of a pick up or slowdown in global trade and growth.

In particular banks are due to report results, which in my opinion are always an important factor when analysing the current economic climate. Other significant data reporting due are the CPI figures of various countries and China trade data as US retail sales on Wednesday.

 Over the weekend the spotlight was on the annual IMF meeting which was held in Peru. Of particular note were the comments from Fed Vice-Chair Fischer who acknowledged that he was in the camp in September expecting a Fed rate hike this year, but signalled that ‘both the timing of the first rate increase and any subsequent adjustments to the federal funds rate target will depend critically on future developments in the economy’.

Fischer highlighted that there are ‘considerable uncertainties’ around the US economic outlook, while noting also that the recent US jobs report was ‘disappointing’. Fischer went on to say that the Fed has to ‘remain cognisant of the risks ahead’.

In comments, Mario Draghi reminded the world that the euro area has a trillion-euro comfort blanket. While some major central banks feel the chill of a global emerging-market slowdown over their plans to tighten policy, the European Central Bank president has at least 700 billion euros out of a slated 1.1 trillion euros still to spend in his quantitative-easing program.

Draghi said that while he is so far satisfied with the ECB’s QE program, he highlighted that it presently appears that it will take somewhat longer than previously anticipated for inflation to come back, and stabilise around, levels sufficiently close to 2%. Commenting on China, Draghi was noted as saying that the Chinese authorities were reassuring on the growth outlook for the economy.

Of note is that energy, materials and transportation shares surged an average of 12% in the last two weeks, beating the Standard & Poor’s 500 Index by 4.8 percentage points month-to- date, the most since October 2011. 

The jump, which included gains in companies from Chesapeake Energy Corp. to Freeport- McMoRan Inc., followed nine months when these groups lagged behind the benchmark gauge by 14 percentage points. The change is a sign to some investors that stock buyers are getting over their paranoia about the Federal Reserve and looking for bargains instead of simply buying the dip.

The S&P 500 has gained 4.9 percent since the start of October, including a 3.3 percent advance last week that was the largest of 2015. Over the span energy stocks have advanced 12 percent, materials stocks almost 11 percent and transportation shares 7.1 percent, in each case exceeding the S&P 500’s 6.8 percent rally from Aug. 25 to Sept. 16.

This article was issued by Simon Psaila, Treasury Officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.