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Daily Agenda: Ugly Third Quarter Comes to an End

Investors wrap up a quarter that saw valuations slashed by trillions; a U.S. government shutdown looks unlikely; China helps first-time homebuyers to support property markets.

Today marks the end of a difficult three months for many investors. The MSCI all-country world index suffered the worst quarterly performance since 2011 as part of a global sell-off that analysts estimate has reduced worldwide stock capitalization by over $10 trillion. Meanwhile, in the wake of China’s surprise loosening of the yuan band, Asian currencies tumbled more than any quarter since the credit crises, with Malaysia’s ringgit dropping by 14 percent since July 1 and currencies of developed markets such as Taiwan and South Korea down roughly 6 percent, respectively, over the same period. Likewise, commodity investors suffered through the end of summer with spot oil prices locking in the worst relative performance in almost six years during Q3 despite recent rally attempts. With the final stretch for 2015 about to begin, portfolio managers must now take stock of the carnage and decide whether market dynamics have permanently shifted in response to changing macro forces, or if long-term trends are set to extend beyond this recent volatility.

Government shutdown to be averted. In an interview late yesterday, Senate Majority Leader Mitch McConnell expressed confidence that a bill to allow funding of federal government operations will pass Wednesday morning. The short-term bill would extend operating budgets until December 11, leaving the door open for conservative GOP members of the House and Senate to renew partisan demands for defunding programs.

China lowers mortgage requirements, cracks down on traders. The People’s Bank of China reduced down payment requirements for first-time homebuyers today, lowering the initial amount to 25 percent from 30 as Beijing continues to prop up housing markets. Separately, the China Securities Regulatory Commission today announced it levied a record amount of fines in September, with the total exceeding $350 million as a crackdown on equity market trading practices continues.

Euro-zone data disappoints. September headline consumer price index data contracted by 0.1 percent year-over-year according to Eurostat, with prices excluding fuel and food expanding by 0.9 percent versus the same month in 2014. The setback illustrates the ongoing struggle faced by the European Central Bank as it purchases assets in an attempt to spur inflation. Meanwhile, the ECB was dealt another blow as headline unemployment for the common currency region inched up in August to 11 percent.

WTO trade forecasts cut. In a report issued today, the World Trade Organization reduced estimates for global trade levels after setbacks in the first two quarters. The new estimates are for 2.8 percent growth in 2015 and 3.9 percent in 2016 versus prior 3.3 and 4 percent targets respectively.

Japanese data softer than forecast; Abe pledged greater accountability. Japanese retail sales and industrial production data for August released this morning registered lower than consensus forecasts, with factory output down by 0.5 percent for the month versus an anticipated 1 percent rebound. Separately, during a speech in New York yesterday, Japanese Prime Minister Shinzo Abe said his administration will push for improvements in corporate governance standards in Japan as part of his economic reform package.

Portfolio Perspective: Near-Term Noise Distorts Positive Bigger Picture — Tom Stringfellow, Frost Investment Advisors

The good news is that despite the market unrest, recent economic reports continue to be positive. A case in point would be the third revision of the second quarter’s GDP growth rate, rising from the lackluster initially reported 0.6 percent for the first quarter to last week’s final tally of an annualized 3.9 percent. Embedded in this final print were improving construction numbers, consumer spending, wage growth and housing. While the Fed will ultimately bring rates to a more normal level of rates, the current interest-rate environment is (and more importantly, will still be) a boon to investors, the housing markets, family balance sheets and ultimately, for savers. And yet, despite the positive aspects of this recent report, and the firming foundation underlying today’s domestic economy, we have to anticipate more noise on the horizon given the quarter’s end rapidly approaching.

Tom Stringfellow is president and chief investment officer of Frost Investment Advisors in San Antonio, Texas.

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