Weekly Market Update – 9th October 2015

• The past week has seen a rebound in share markets, commodities and commodity related currencies like the $A gather pace. US and Australian shares have closed above the range they have been in since their sharp fall in August which is a very positive sign. The major driver has been diminishing concerns regarding both China and the Fed. The rebound in share markets has been reinforced by stronger commodity prices, which has helped energy and mining shares. Over the week US shares gained 3.3%, European shares rose 5%, Japanese shares rose 4%, Chinese shares gained 4.3% and the Australian share market rose 4.5%. Reflecting the “risk on” trade, bond yields have increased.

– While global economic data releases over the past week were pretty mixed, a number of developments have come together to drive the rebound in growth assets like shares and commodities. At their late September lows, shares had become ripe for a rebound as valuations had improved significantly and were technically oversold. Investor sentiment had become so negative that it only needed a bit of good, or less bad news, to spark buying;

– The minutes from the last Fed meeting have reinforced the impression that the Fed is waiting to get comfortable regarding global growth and US inflation and that with September payrolls disappointing the first hike is likely to be delayed into 2016. The key point is not that the Fed is not going to raise interest rates per se, but rather that it won’t do so until the threat to US growth and inflation from global uncertainties has receded.

– A slowing fall in China’s foreign exchange reserves in September (down $US44 billion on an adjusted basis from down $US129 billion in August) suggests that capital outflows from China have slowed, as fears of a sharp depreciation in the renminbi have subsided (thanks partly to its stability of late and assurances from the Chinese Government that a sharp depreciation is not on the cards). This in turn provides scope for the PBOC to undertake further monetary easing in the months ahead.

– More broadly, the ongoing flow of easing measures in China is adding to confidence that the risks from China’s share market and economy are coming under control.

• With US shares breaking out of the range they have been in since their August falls and this dragging other markets (including the Australian share market) higher, more upside is likely ahead as we come into traditional seasonal strength into year-end, albeit with a few bumps along the way. The cyclical bull market in shares looks to be resuming.

• The latest downward revisions to the IMF’s global growth forecasts to 3.1% for 2015 (from 3.3%) and to 3.6% for 2016 (from 3.8%) is nothing new or alarming. For the last five years or so, the IMF’s global growth forecasts for the year ahead have started near 4% only to end nearer 3%.

• News that 13 Asia-Pacific nations including the US, Japan and Australia have finally agreed to the Trans Pacific Partnership free trade deal is to be welcomed, but don’t get too excited. Free trade is great but watching for the impact of new trade deals on overall economic growth or share markets is like watching grass grow. And of course, the TPP has to be passed into law in each country and there are some uncertainties on this front in the US.

Major global economic events and implications