The volatility and nervousness that have characterized the markets the last few months accelerated in October. The Chicago Board Volatility Index (VIX) almost doubled intra month. The markets calmed down in the latter half, and S&P 500 in the US ended the month up 2.3% after being down as much as 5.6% by the 15th of October. The Eurostoxx 50 ended the month down 3.5% after a fall of 10.9% in the middle of the month. Oslo Børs also ended the month in negative territory by falling 3.95%. However, the index was down 12.70% at closing 16th of October. The backdrop of the high volatility was expectations of weaker economic activity and fear of 3rd quarter corporate results. Thus there was real joy in the middle of the month when corporate results proved better than feared.
In the US economic activity held up better than expected in the third quarter following the sharp jump of 4.6% annualized in the second quarter (though the first quarter was very slow due to a harsh winter). The 3.5% was solid ahead of the 3.0% consensus expectation. The market seems to believe in a sustainable growth in the US. The economic and monetary policy divergence between Europe and the US has long been expected, but reactions in foreign exchange markets have lagged behind. However, this has changed substantially of late, and since June the USD has appreciated approximately 14% and 9.60% against the NOK and EUR respectively. If the US continues on its current growth route, Europe can hope this will help drive its own economic upturn later this year or early next 2015 – with the weaker EUR giving European exports a good push in the right direction.
Investors in Europe are also hoping for further monetary stimulus in the form of bond purchases by the European Central Bank (ECB). In fact the ECB started to buy covered bonds in October, and there were also speculations that they would start buying corporate bonds. Though it is uncertain whether the ECB can actually accept taking higher risks to achieve the target of enlarging its balance sheet by EUR 1 tr to EUR 3 tr. We also got the results from the ECB’s stress test of 130 euro zone banks. 25, mainly smaller southern European ones, did not pass. However, 12 out of the 25 banks that did not pass had already raised enough capital by September 30st. Thus the shortfall of EUR 25 bn at the end of 2013, has shrunk to EUR 10 bn. This was less than the markets expected.
By the end of the month most equity markets had regained most of the territory lost earlier in the month. One exception was Norway and Oslo Børs. The main reason behind this is the steep fall in the oil price which has fallen by 25% since beginning of July. There are several factors leading to the fall, but the biggest impact is caused by unconventional production in US. This in addition to, new energy sources and more fuel efficiency have led to fundamental changes in the market. Consensus is lowering their oil estimates for 2015 and 2016. This will have impact on earnings growth on oil and oil service heavy Oslo Børs. How big the impact will be remains to be seen.
Due to weak momentum in the Japanese economy, which had slowed sharply after the consumption tax was raised in April, the Bank of Japan decided to expand its bond purchase programme, boosting its monetary base target growth from JPY 60-70 tr to JPY 80 tr pr year. Japan’s national pension fund also received a mandate to increase its allocation to equities, which lifted the Japanese stock market at the end of October.
In Brazil’s presidential run-off, incumbent President Dilma Rousseff beat financial market favored Aèciv Neves in a close race. Russia and Ukraine reached an agreement to ensure Russian natural gas supplies this winter. The parliamentary election in Ukraine ended as expected with a land slide in favor of the pro-western parties.
We expect solid global macro numbers for Q4 and going into 2015. This will eventually lead to increased optimism, and better corporate earnings. In Europe we see signs of increased demand for loans and a banking sector more willing to provide loans. This will help the euro zone slowly, but surely to move towards recovery.
By Hans Kristian Hals, Head of Investment Strategy