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Global Markets Rally on Friday

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PantagesGlobal stock markets rallied on Friday on news that China had cut interest rates and the ECB reiterated its pledge to do more to jump start the Eurozone economy. The S&P 500 closed the week at 2,064 – up 1.1% while the Dow closed at 17,810 – also up 1.1%. Both indices are at record highs. Germany’s DAX index gained over 5% (in euros) during the week on slightly better economic news.

Economic data out for the week in the US was generally good with leading indicators and home sales strong. Consumer price inflation came in unchanged in October versus the previous month. Inflation was up 1.7% from a year earlier. The core numbers (ex food and energy) were also well behaved YoY.

ISI noted that S&P earnings for Q3 came in at + 9.6% YoY versus an expectation of just +4.1% at the beginning of the earnings season.

It’s not just stocks rising. The WSJ reports  “Since Nov. 4, collectors have flocked to the world’s chief auction houses in New York to buy more than $2 billion of art, a historic high in which 23 works sold for more than $20 million apiece.”

The ten year Treasury bond ended the week yielding 2.31%. It has been treading water around these levels since the beginning of the month.

FOMC minutes out on Wednesday: Of course the Fed ended QE and noted inflation has stagnated despite a strengthening of several labor-market indicators. It continued with its pledge to keep rates low for a “considerable period” but most analysts expect that to go by the wayside soon and for short rates to begin rising next summer. Members also observed, but seemed to shrug off, weakness abroad:

“Participants pointed to a somewhat weaker economic outlook and increased downside risks in Europe, China, and Japan, as well as to the strengthening of the dollar.”

“However, many participants saw the effects of recent developments on the domestic economy as likely to be quite limited.”

Gasoline futures are down 35% since the year’s high on June 20. Wells Fargo notes “if gasoline prices stay at these levels over the next year, households will have an extra $700 in their pockets that can be used on more discretionary purchases.”

Wells Fargo reports that household investment flows into investment grade bond funds are at $3.2 billion on a 12 week moving average basis which represents nearly a record high for this economic expansion. Net assets in equity funds are now at $8.1 trillion and are significantly above the peak prior to the 2008-2009 recession.

Japan’s real GDP in Q3 shrank -1.6% on an annualized basis as firms cut inventories and held back on capital investment. The median forecast was for a 2.2% expansion! It looks like the sales-tax hike in Q2 pushed Japan’s economy into a recession.  Prime Minister Shinzo Abe will probably postpone a second increase in the tax scheduled for early next year. He called a snap election for December which will serve as a referendum on “Abenomics”.

FT reports: “China’s central bank cut interest rates in an unexpected move following months of weakening economic activity. The People’s Bank of China said it cut its benchmark one-year loan rate by 0.4% and its one-year deposit rate by 0.25%. It also gave banks greater flexibility in setting deposit rates, allowing them to offer interest of 1.2 times the benchmark rate.”

Click here for Caroline Baum’s terrific essay on the first Thanksgiving.

The EYE is going to take next week off. I’m heading down to Austin, Texas chasing the sun. Have a wonderful Thanksgiving everyone!

Jeff Pantages
Chief Investment Officer

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