Global investors remain on edge after consecutive days of heavy selling, increased volatility, and renewed talk of a correction has scared investors away from the market and into the safety of safer assets such as cash and the U.S. 10 year Treasury which has rallied in recent days, pushing the yield to its lowest level since the spring of 2013.
Concerns about slowing global growth and less monetary stimulus to support the markets are the main catalysts driving the recent selloff over the past several days in October which comes at a pivotal time when the U.S. central bank is winding down its quantitative easing program this month that has supported the surge in the stock market while the U.S. dollar rallied to a 4 year high in October as other central banks in Great Britain, China, and Japan have all showed no willingness to provide any additional monetary stimulus for their economies.
Against this less accommodative backdrop towards monetary stimulus, their are signs that Europe’s strongest economic engine, Germany, is cooling off .
Earlier this week, Germany’s finance minister cut Germany’s growth forecast this year to 1.2 percent from an earlier forecast of 1.8 percent while also lowering its growth forecast for 2015.
Weak investor confidence in Germany compounded the problems for Germany following a weak mixture of economic data that recently surfaced with German factory orders and exports falling.
The European Central Bank has acted decisively to jumpstart the euro area economies by keeping interest rates at historic lows, providing cheap loans to banks, and will soon start purchasing private sector assets in an attempt to ward off the risk of deflation in the 18 member currency bloc.
In recent days, Greek bond yields have jumped higher over new reports indicating that Greece is seeking to quit its EU/IMF economic bailout in 2015 and Greece’s leftist anti-euro party Syriza is surging higher in polls.
However, the ECB is expected to be meeting today to discuss loosening collateral rules for Greek banks to provide additional funding.
China appears to be struggling in its effort to reach its annualized 7.5 percent growth target this year and will more likely to move closer to a more sustainable growth rate of 7 percent.
Japan industrial production has recently fallen over 3 percent compared to a year ago which comes at a time when the Bank of Japan is refraining from increasing its quantitative easing program.
In the U.S. the unemployment level has dropped to below 6 percent and the U.S. Federal Reserve has withheld from giving any clear dates about when the U.S. Central Bank will raise short-term interest rates which remain locked at historic lows.
Yesterday the U.S. dollar saw one of its biggest decline in a year and oil dropped close to $80 a barrel after a wave of weak U.S. economic data gave currency traders a reason to sell the dollar. Retail sales for September disappointed consensus estimates and fell for the first time since January.
Despite the negative headlines, the U.S. consumer still has reason to cheer with oil prices tumbling and mortgage rates dropping due to the 10 year Treasury yield falling to the lowest level since May of 2013 as investors flee to the safety of the 10 year Treasury.
Earning season is officially underway and investors remain cautiously optimistic despite companies facing some economic headwinds.
-Johnathan Schweitzer – schweitz31@gmail