A volatile week for equities caused by an increase in geopolitical tensions and continued concerns about the strength of the Chinese and European economies. Equity markets recovered some poise on Friday after the upward revision to US second quarter GDP. The FTSE 100 was hit the hardest of the major developed leading indexes, falling nearly 3% on the week. The FTSE 100 started the week close to the top end of its year-long trading range only to finish it near the bottom. Weakness in commodity markets and the events at Tesco taking its toll.
The US dollar continued its rise, keeping the lid on commodity markets, as copper fell to a 3 month low and the gold price remained close to its eighth month low. US treasury yields ended the week roughly where they started despite the GDP upward revision.
The Vix rose approximately 10% on the week but managed to close back below 15. Fund flow data continues to show investment grade bonds attracting capital, for the 40th straight week. Equities overall saw small net inflows but as was the case last week, US equities attracted the bulk of the capital as European equities again saw small out flows.
The week ahead is likely to be dominated by events in Europe as the ECB meets on Thursday for its monthly rate announcement. Mario Draghi will detail in the following press conference plans for the QE style asset purchase program announced at last month's meeting. Ahead of Thursday's meeting the eurozone releases a range of economic data, including the latest employment rate, consumer confidence, inflation and economic sentiment. There can be no doubt that Mario Draghi will continue to be questioned as to whether the ECB is considering buying government bonds in the same manner as the Federal Reserve. As well as busy week in Europe, economists will once again be focussing on the final reading of the HSBC purchasing managers manufacturing survey.
As we enter the last week of the third quarter equity markets could continue to be volatile into the start of the final quarter, as investors continue to worry about geopolitical concerns and the impact of the Federal Reserve's winding up its bond purchase program in October. Investors may well be disappointed as Mario Draghi is liable to play down the likelihood of the ECB announcing outright QE. On the positive side Merrill Lynch believe their indicators suggest that investor sentiment is not positioned where they anticipate more than a mild correction.