Stock markets had the best week in three years on hopes that an agreement on the new governance framework of the euro area is imminent. Another catalyst for a rebound was the decision among 6 central banks, including the ECB and the Fed, to extend existing cheaper USD swap lines for banks to boost liquidity and ease strains in financial markets. Intra-euro bond spreads narrowed and were less volatile. The situation is however in a flux with developed markets in search of catalysts and emerging markets trying to decouple. Regional markets have been somewhat more resilient of late, with the expectations of an MSCI upgrade for the UAE and Qatar into emerging market status the most expected news in the coming two weeks. The euro had a positive week, rising against the dollar, while both oil and gold prices increased from a week ago.
Last week, ending with US Thanksgiving turned out to be a disastrous one for equity markets globally – Wall Street and Asian markets recorded their the worst weekly performance since Sep, Nikkei 225 hit the lowest level since Apr 09, Dubai stocks hit a 7-year low and the Egyptian bourse closed at its lowest in more than two and a half years. Sterling fell to a seven-week low while the Indian rupee continued to be one of the worst-performing emerging market currencies against the dollar. The worsening global outlook led commodity prices down, with aluminium prices falling below $2k a tonne for the first time since 15 months.
A dismal week for markets despite positive data from the US, as Eurozone’s political tensions continue to hurt investor sentiment and Spanish elections take centre stage. This was reflected in regional markets as well with most indices down almost 1% from a week ago. Dollar strengthened (dollar index up +1.5%) and the euro came under pressure while haven demand helped the pound; Indian rupee fell to a 32-month low sliding to 51.20 against the dollar. Commodity prices were mostly lower last week, with gold down by almost 4%.
The markets continued to be volatile in the backdrop of the dramas in Greece and Italy, with Italy’s 10-year debt soaring dangerously close to and above 7% last week - also driving euro to its lowest level against the dollar in a month. Risk appetite gradually improved on Friday with indications of political change suggesting greater likelihood of reforms, including austerity packages, leading to a market rally as Eurozone debt fears eased. Regional markets were mostly down last week, but the positive sentiment in Saudi market yesterday is likely to reflect in its regional counterparts’ behaviour today. The euro was down almost 0.3% compared to a week ago, while gold and oil prices were helped by the softer dollar.
Agreement to avoid a Greek default & boost the EFSF was hailed by stock markets all over the world. The Standard & Poor’s 500 Index jumped extending the biggest monthly rally on record since 1974 pushed also by encouraging US GDP figures. On Friday, however, concern that the post-EU euphoria went too far, drove indices down. When details of the agreement are clear, enthusiasm will give rise to a more nuanced assessment. Regional markets followed the global trend and recorded gains as progress in the EU boosted risk appetite. Major currencies gained against the USD with yen reaching a record high of JPY 75.64. Oil price was positively affected, with WTI picking up faster than Brent and gold prices were up 6.0% on a lower dollar.
Stock markets received a German cold shower by Angela Merkel who expressed skepticism on a quick recapitalization of the banking system in Europe and another round of downgrade for Spain and Italian banks shook further the precarious situation. The gains recorded in the last two weeks were eroded across the globe with emerging markets being somewhat more resilient. All eyes are on the EU Summit for further direction. Regional markets however were mostly on the defensive, despite the resilience of oil prices. Currency markets were marking time while the yen hit new highs.
The markets were mostly positive last week, in spite of Spain’s downgrade by S&P, given the support of Trichet’s call for quick and coordinated action on bank recapitalization decided in principle between Merkel and Sarkozy (due to be finalized at the EU summit next week) and Wall Street closing on a high, boosted by optimistic data and financial results. Regional markets painted a mixed picture - with all eyes on Q3 financial results. Currencies strengthened against the dollar - the euro rallied while the yen was the weaker performer among major currencies. Oil prices jumped to a month’s high on tight supply and the weaker dollar as gold prices were up 2.6% from a week ago.
After a week spent in an upbeat mood, the release of labour market data in the US had stock markets was about to seal the week on a positive note till Fitch’s downgrade of Italy and Spain spoiled the sentiment for global equities and debt markets. In the region, markets were down with the Eurozone debt crisis weighing in on investor sentiment. Dollar dropped after the jobs data release giving the GBP a boost - up 2.1% compared to a week ago. In the commodities market, the biggest gainer was copper - which surged off 14 month lows while oil also recovered (Brent recovered from below $100 gaining almost 3%).
The weekly stock market oscillatory pattern has displayed a remarkable regularity since August and last week recorded the expected global upswing. Investors were mesmerized by the prospect of a “Mother of All Quantitative Easing” Euro 3 trillion fund, although short on details and long on rumours. Some real respite came from the approval by the Bundestag of the EFSF which eliminates some uncertainty over the most immediate future. However, regional markets did not follow the global picture with most markets except Saudi down compared to a week ago. The euro strengthened while the dollar continued to witness high demand and oil recovered sharply. Gold on the contrary is being sold to fund some liquidity which continues to be at premium.
It is becoming a pattern: a week of mayhem followed by a weak rebound and then another weekly plunge. Last week was a bad one. Stock markets were falling across the board due to the usual combination of concerns over fiscal sustainability, downgrading of sovereign and bank debt, and ineffective political measures on both sides of the (North) Atlantic, with regional markets following the declines globally. Risk aversion in equity markets led to a higher dollar, with the Indian rupee one of the worst performing Asian currencies, dropping almost 5% from a week ago. Oil price dropped following most commodity prices while gold also lost its shine.