That was not a week of good cheer and goodwill to all equity investors, more a collection of Christmas humbug. Equity markets across the globe took a battering as fears over China and Europe reared its head again. The move on Friday, particularly late on in the day, felt like the effect of risk managers dashing round dealing floors urging caution into the final days of the year. The initial catalyst for the fall in equity markets was the continuing demise of the oil price; followed by concerns once again that Chinese growth will not meet expectations in 2015. Finally something we highlighted last week as having the potential to cause headlines, the failure of Greece to get out of the grips of the Troika leading to a sharp rise in Greek ten-year bond yields.
Aside from Greece, yields fell, particularly in the US as the rise in economic uncertainties led once again a flight to “safety”. Equity funds saw the largest outflows for 7 weeks. The oil price fall has brought the focus right back onto the possibilities of deflation, particularly in the eurozone. We still stick firmly to the view that this fall in the oil price will take time to feed through into the economy, but in the long term will boost economic growth and the deflationary fears will be unfounded.
The vix rose sharply during the week, having started the week close to the bottom end of the trading range it closed the week above 20, nearer the top end of the trading range. It rather feels like the year will end with the opposing view to last year, where fear was in bonds and greed in equities.
As we enter the last full week before Christmas, let’s hope for a more cheerful one than last week. The main event of the week is likely to be Wednesday when the Federal Reserve announces the latest rate decision. The focus will be less on the announcement itself as no change is expected, but more on the accompanying statement. After what has been a strong few weeks for economic data in the US, will the Fed be looking to bring forward interest rate rise expectations? During the day on Wednesday the US release their latest inflation data.
China may be in focus again the week as HSBC release its first estimates for manufacturing for December on Tuesday. A number below 50 may again throw some questions up as to the strength of the Chinese economy. Tuesday and Wednesday will be the focus in Europe, on Tuesday a selection of purchasing managers data, and on Wednesday, as with the US the latest inflation data. To complete a busy week Mark Carney releases the latest financial stability report on Tuesday, and Wednesday sees the release of the minutes from the last rate setting meeting.