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    Investment themes: ‘Goldilocks’ data helps markets to stabilize

    Following intense turmoil during August and September, financial markets seemed to have stabilized since the end of September. Since a low on September 29, the US stock index benchmark, the S&P 500, has rallied 8.4% by October 20th – an impressive rally. Emerging markets and other risk assets have also managed to post substantial gains.

    This environment has also led to less demand for safe havens such as the Japanese yen, which stayed very close to the 119 handle against the US dollar during this period. An advance in euro / dollar to 1.15 was stopped and the single currency stayed within certain ranges. The pound, which was recently seen as sensitive to gyrations in global markets due to the country’s big international financial sector, also made a comeback and stopped short attempts to drive it out of it recent ranges.

    What were the reasons behind this performance? It appears that incoming economic data as well as speeches by Federal Reserve officials were ambiguous enough so as not point to either an imminent economic improvement and subsequent Fed rate hike nor a quickly deteriorating global economy. For example there were some soft data out of the United States (employment report, retail sales) but also some positive reports such as University of Michigan consumer sentiment and core consumer prices. Fed officials appeared split as to whether interest rates need to go up relatively soon or whether it is best to delay such a move.

    Concerning China there is also a feeling that fears have been overblown and the announcement of third quarter growth numbers and related economic indicators has addressed some worries. Yes China is slowing down, but at the moment the authorities seem to have a handle on the situation. More worryingly perhaps, there are analysts that predict that the Chinese yuan will need to be devalued further – thereby causing further volatility in currency markets, but this will likely take place gradually and over the next year. Of course it will be interesting to see if this process can be managed smoothly but China has the reserves to make sure that the yuan behaves itself.

    To sum up, recent data and speeches have restored some sense of stability to markets as the global economy is not getting worse but the Fed looks to be on hold regarding zero rates. A number of analysts are also predicting that a positive ‘risk-on’ environment will remain until Christmas – a seasonably favorable period of the year for stocks. The dollar however will also have to wait for more clarity on interest rates before moving out of its recent ranges. The main casualty of the Fed’s indecision could be the dollar rally, as the dollar index remains well off its March highs.

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