1. Strong quarter? Not half
It’s the end of the quarter. And what a remarkable quarter it has been. Wall Street and world stocks have climbed to record high after record high, chalking up the longest streak of quarterly gains in two decades. At the same time, volatility has remained anchored at the lowest levels in decades. By some measures, the last few days have been the calmest in US stock market history. Bond markets have also been well behaved, considering many of the world’s major central banks are preparing to shrink their balance sheets. There’s been a little more volatility in FX, with the euro breaking above $1.20 and sterling recovering sharply this month. What does that mean for next week? Potentially some profit-taking and position squaring as investors lock in what they got during the quarter. If that’s the case, some weakness in stocks, bonds, and the euro.
2. On a roll
Sterling has, with a week to go to the end of the third quarter, put in its best performance against the dollar since the second quarter of 2015. The week ending Sept. 9, when the Bank of England began talking about raising interest rates in what would be its first hike in a decade, was the pound’s best in eight years. Recent days were dominated by anticipation of a major speech on Brexit from UK Prime Minister Theresa May. In the event, it did not break much new ground for markets and the pound was slightly lower on the day, raising questions over where the impetus for another move higher in sterling will come from.
3. Spare a ruble?
After B&N Bank, Russia’s 12th biggest lender, became the latest domino to tumble in the country’s banking sector, markets will be on alert for hints of more trouble. B&N’s bailout request came three weeks after the rescue of Otkritie Bank while earlier, licences were revoked at Yugra Bank and Tatfondbank. Investors reckon more banks will fail, stemming from Western sanctions and unbridled expansion before that. That means Russian financials’ shares, down 12% this year, may see little respite (Broader Russian shares have lost 8%).
Bonds of afflicted banks have fallen heavily. As a result, private banks’ shares and bonds may stay under pressure. There is also the question of expense – bailouts will be financed through a special fund but costs could be huge, with Otkritie’s capital deficit almost $7 billion and a $6 billion hole likely in B&N’s balance sheet. That’s on top of the $30 billion deposit insurance that’s already been paid to depositors of failed banks. The central bank will sell bonds and hold deposit auctions to finance the rescue. But if the sums are massive, it could fuel inflation – a setback in Russia’s battle against price growth. That would be bad news for the ruble and Russia’s local bonds, which have so far easily withstood the bank malaise.
4. For real
It used to be that when the Federal Reserve raised rates, Asia’s emerging economies would follow. With the US central bank announcing the final stage of its exit from unconventional policies, policymakers are watching for any evidence of risk aversion. For the moment, though, there are no signs of outflows from the region and there is little pressure to compete for funds with higher rates. Low inflation is a global pandemic and that keeps real interest rates in Asia attractive. In fact, India and Indonesia cut rates in August and could even have room to cut again – perhaps even joined by Thailand. The Thai central bank holds a policy meeting on Sept. 27
Equifax and bitcoin have been much on investors’ minds this month. Fallout from Equifax’s massive data breach, which compromised the social security numbers and other personal information of as many as 143 million Americans, wiped out more than one-third of the company’s market value, sending its shares to a more than 2-1/2-year low. Meanwhile, the price of a bitcoin declined to about $3,000 from a September peak of about $5,100, as Chinese authorities said they would ban trading of the cryptocurrency in their country. Bitcoin has bounced back above $4,000, but Equifax shares, which fell as low as $89.59 from $142.72 before the scandal broke, have rebounded only to about $96. If Equifax shares were priced in bitcoin, they would be worth just two cents each. So, as investors enter the final quarter of the year, will Equifax or bitcoin be at the top of managers buy-and-hold list?