MONTHLY MARKET INSIGHT

OCTOBER 2013 KEY TOPICS TO WATCH (OCT)

Eurozone Interest Rate Decision (2nd) US Non Farm Payrolls (4th) German Factory Orders (8th) German Industrial Production (9th) September FOMC Minutes (9th) US Debt Ceiling Deadline (17th) UK BoE minutes (23rd) US FOMC meeting (29th-30th)

U.S. FUNDAMENTAL OVERVIEW

The US QE3 and tapering speculation dominated the economic agenda in September and looks likely to be a constant source of directional pressure until Q1 2014 at least. In the September Market update it was mentioned that the Federal Reserve would outline a plan or seek to postpone definitive plans until the next FOMC meeting (Nov). Our prediction of further taper delays due to poor unemployment and inflation data proved to be correct. Yet the tone was more definitive than predicted with a monthly rate of $85billion of asset purchases confirmed to continue unless confirming evidence of economic improvement is seen. After the decline in August, September created a new US index high which was firstly encouraged by a partial yet perhaps temporary resolution to the Syrian conflict. The mildly positive US economic news that followed supported the subsequent rise as the market was inflating ready for the taper confirmation- which never happened. As a result the S&P 500 and Dow Jones both reached market highs before receding due to selling pressure, US budget fears, and negative GDP / Manufacturing PMI data. At the current rate of improvement the benchmarked economic metrics are not going to meet the Fed targets for tapering (7% unemployment rate, +200k Non Farm Payroll numbers, 2% YoY inflation). Economic growth cannot match the growth projections of the QE programme (or the stock market) and there is likely to be further negative pressure applied in October due to the governmental shutdown and debt ceiling.

S&P 500 (SEP 2013)

1,740.00 1,720.00 1,700.00
1,680.00

1,660.00 1,640.00 1,620.00 1,600.00 1,580.00

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FTSE 100 (SEP 2013)

6,650.00 6,600.00

Economic data and market sentiment for October will be influenced by the governmental shutdown due to disagreements over budgets (notably for the contested Obamacare budget). This will put a strain on consumption based indicators as public sector workers go unpaid, if prolonged it will cause US equities to decline further. However, the main source of concern and upcoming debate will be the debt ceiling which presents a considerable risk of another credit downgrade due to technical insolvency. In 2011 this debate caused a global risk selloff which is likely to happen again if the can is not kicked soon enough e.g. before the Oct 17 deadline. When combined with the other distractions above, it is likely that the debt ceiling will be only lifted at the last moment with increased negative pressure on equities until that point.

6,550.00

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6,350.00

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DAX 30 (SEP 2013)

8,800.00 8,700.00 8,600.00
8,500.00

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EUROPEAN FUNDAMENTAL OVERVIEW

The rebound that has been apparent in the Eurozone over the last few months reached a plateau in September. This was lead by German figures which showed retraction for a second month; owing to lower output growth and wavering consumer confidence. This was reflected in the related Eurozone data. There are signs that sustainable growth for the Eurozone is possible into 2014 may not be as clear cut or quick as the ECB had hoped. Strangely a key sign comes from the ECB who usually apply a positive focus upon the economic situation. The repeated discussion about using negative interest rates to stimulate bank lending and further LTRO loans which offer cheap bank financing are not actions indicative of a sustainable rebound. The relative strength of the Euro compared to the Dollar at 1.35; as a result of the dollar weakening consequences of QE, also provides a headwind to Eurozone prosperity due to a loss international competitiveness for Eurozone exports. The relative strength of the Euro from Aug 01 has coincided with mixed figures from the Eurozone; with the ongoing US issues these mixed figures may become more prominent. In contrast the UK seems to be continuing to produce positive economic data. The Manufacturing and Services PMI is particularly strong with GDP growth on track at 0.7% for Q2. The continued performance has warranted the BoE to reject further QE. This article does not constitute as investment advice.

8,400.00 8,300.00 8,200.00 8,100.00 8,000.00 7,900.00

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CONTACT US
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