Hot Features
Premium
Register for Free to get streaming real-time quotes, interactive charts, live options flow, and more.
Good morning,
Europe came back with a strong bounce on Friday with the STOXX50 up 3.11% to 3,113 while in the US the S&P 500 closed out the week flat at 1,931. The unexpected upward revision to US second quarter GDP boosted sentiment across the bourses, although it also made US investors reconsider the prospects for an earlier rate rise. We seem to be in a Catch 22 where the markets are damned if the Fed does and damned if it doesn’t.
Federal Reserve chairwoman Janet Yellen stated on Thursday that the US economy is strengthening and a rate hike is likely later this year. This is despite inflationary pressures building gradually and likely to dominate the economy next year.
In Asia the prospect of US rate hikes helped push the Shanghai composite down by 1.6% to 3,092 and the ASX 200 fell by 0.58% to 5,042. However, the Nikkei rallied by 1.76% to 17,880 and the Hang Seng was up 0.43% to 21,186.
The spotlight for growth is back on the US after second quarter GDP growth was revised upwards to an annualized pace of 3.9% from the initial estimate of 3.7%. This compares to first quarter growth at only 0.6% as a number of headwinds hit the economy.
US consumer confidence in September also saw an improvement to 87.2 from 85.7 earlier in the month. The gain in confidence suggests that consumers are shrugging off the market volatility and the stock market correction that has dominated headlines for the past few months.
The confidence index is still down on the reading of 91.9 seen in August but has improved during the month of September. The feeling appears to be that the US economy should remain largely insulated from the ongoing slowdown in China.
In Japan deflation seems to be returning with core prices falling a moderate 0.1% in August on a year ago. I think much of this is commodity related. Lower prices will also keep the pressure on Bank of Japan to maintain their Quantitative easing programme (which will be positive for the Nikkei). However core inflation is still positive after stripping out energy and fresh food prices, and this economic data actually beat forecasts to register a 0.8% increase – the highest since summer 2014.
I think the issue of deflation globally is really a story of commodity price weakness and US dollar strength. This dynamic really only has so much bandwidth and the US dollar, while likely to rise against other currencies in the year ahead, can only push commodity prices down by so much. In other words, supply and demand will react at some point to bring the commodity markets back into equilibrium and this will eventually exert upward pressure on prices. So I don’t see the deflationary spectrum lasting forever.
Register today to receive our special report Bargain Hunting, and a no obligation free trial to our popular email service
