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Week in Review: Markets Rally on Extended Low Rates

For the week ended 9 October 2015

  • US trade gap widens on weak exports
  • US weekly jobless claims near 42-year low
  • German exports, factory orders fall
  • UK trade gap larger than expected
  • BP to pay $20.8 billion fine for oil rig disaster

Global markets rebounded this week, relieved that September’s disappointing US payrolls report could mean an extended period of low US interest rates. Weak US, UK and German export data underscored the need for more supportive central bank policies to counter global economic weakness.

Amid a general rally in commodities, crude oil prices rose on expectations of a cutback in US production, trading on Friday around $50 and $53 per barrel for US West Texas International and Brent, respectively. The yield on the US 10-year Treasury note moved back above 2.10%. The Chicago Board Options Volatility Index (VIX) fell below 18, reflecting improved investor confidence and ending its first month-long stretch above 20 since 2012.

US and global economic news

Fed concerned about global weakness, low inflation
US Federal Reserve officials held back from raising short-term interest rates at their September policy meeting because of concerns that global weakness could weigh on the US economy, according to minutes released Thursday. The officials were also apprehensive about persistently low inflation. However, a tighter labor market later this year could still be a catalyst for raising rates.

US trade deficit grows as exports fall
US exports fell 2% in August while imports rose 1.2%, resulting in the US trade deficit widening 15.6% to $48.3 billion. The strong US dollar and weak demand in foreign markets contributed to the growing trade gap. This report suggests that third-quarter US economic growth was weaker than expected. The advance estimate of US GDP will be released on 29 October.

US import prices fall less than expected
US import prices fell 0.1% in September, less than the expected 0.5% decrease. Prices for imported oil rose 1.1% while nonoil import prices declined 0.2%, half the pace of contraction in July and August. Export prices fell 0.7%.

US services growth slows
The Institute for Supply Management’s nonmanufacturing index fell from 59.0 in August to 56.9 in September. The business activity index, a gauge of services production, declined from 63.9 in August to 60.2 in September. Both measures indicate continued growth, but at a slower pace than in the previous month.

Weekly US jobless claims fall to 263,000
Initial jobless claims fell 13,000 to 263,000 for the week ended 3 October, near a 42-year low. The four-week moving average fell 3,000 to 267,500. Continuing claims rose 9,000 to 2.2 million for the week ended 26 September.

Pacific Rim trade deal reached
The United States and 11 other Pacific Rim countries agreed to the Trans-Pacific Partnership, a sweeping trade deal covering 40% of the world’s economy, after round-the-clock negotiations last weekend. Countries bordering the Pacific Ocean, from Vietnam to Canada but excluding China, agreed to set common standards and to reduce or eliminate tariffs on close to 18,000 categories of goods. The deal may face some opposition in the US Congress.

Eurozone gauge shows slower growth
Markit’s composite purchasing managers’ index for the eurozone fell from 54.3 in August to 53.6 in September, down from a preliminary reading of 53.9. Markit estimated that the region’s economy expanded 0.4% in the third quarter. Of the eurozone’s four largest economies, Spain saw the fastest growth at 0.8%, compared with 0.4%, 0.3% and 0.2% for Germany, Italy and France, respectively.

German exports, factory orders fall
German exports fell 5.2% in August, much more than anticipated. Imports declined 3.1%, leaving the country's trade surplus at €15.3 billion ($17.2 billion). Germany is coping with the slowdown in China, its third-largest trading partner. The country’s factory orders unexpectedly fell a seasonally and inflation-adjusted 1.8% in August after a 2.2% decline in July.

UK trade deficit grows higher than forecast
The UK posted a larger trade deficit than expected in August, while construction activity fell 4.3%, the fastest pace of contraction since 2012. The strong British pound and slowing global growth may raise the likelihood that the Bank of England will maintain low interest rates longer.

US and global corporate news

BP settles Horizon oil spill for $20.8 billion
BP has agreed to pay $20.8 billion to resolve all legal claims arising from its devastating 2010 oil spill in the Gulf of Mexico. The largest settlement of its kind in US history, the deal adds to $43.8 billion that BP had previously set aside for criminal and civil penalties and cleanup costs. BP’s shares rose 3% after the news, as investors were relieved that the legal cost wasn’t higher.

SAB Miller rejects repeated AB InBev offers
SABMiller, the world’s second-largest brewer, rejected two followup offers from larger rival AB InBev as insufficient. The latest offer of £42.15 in cash per SABMiller share is valued at £68 billion ($104 billion). Analysts expect an eventual agreement after the 14 October deadline is extended.

Strong sales, weak currency boost Samsung profits
South Korea’s Samsung Electronics pre-announced positive third-quarter results, causing shares to jump. Stronger sales and a weaker Korean won created higher profit margins on chip sales, leading to profits of more than $6 billion.

Alcoa earnings disappoint
Aluminum giant Alcoa’s quarterly earnings fell short of Wall Street expectations, as sales declined 11% overall from last year. High-growth aerospace and automotive materials businesses helped soften the impact of low commodity prices. The weak report led to a 4% drop in the stock price in extended trading.

The week ahead

  • China’s consumer and producer price indices are reported on Tuesday, 13 October.
  • J.P. Morgan, Intel and Johnson & Johnson report quarterly earnings on Tuesday, 13 October.
  • The UK Labour Market Report is released on Wednesday, 14 October.
  • Bank of America, Google and Wells Fargo report earnings on Wednesday, 14 October.
  • The US Consumer Price Index is reported on Thursday, 15 October.

Stay focused and diversified
In any market environment, we strongly believe that investors should stay diversified across a variety of asset classes. By working closely with your financial advisor, you can help ensure that your portfolio is properly diversified and that your financial plan supports your long-term goals, time horizon and tolerance for risk. Diversification does not guarantee a profit or protect against loss.

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Sources: MFS research; The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; Financial Times;;;

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