Equity markets in Asia and Europe posted gains Friday morning as investors appear increasingly confident that accommodative monetary policy will remain the order of the day throughout the developed world. China, in particular, has seen a resurgence for risk assets with the Shanghai Composite Index finishing the week with a 6.5 percent gain, marking the best performance since June. This macro optimism offsets an earnings season in the U.S. that, to date, has been relatively lackluster, with market bellwether General Electric Co. topping analyst earnings estimates despite lower-than-forecast revenues in its third-quarter release Friday morning.
More deflationary signals from the Eurozone. Consumer-price-index data issued by Eurostat on Friday registered in line with consensus forecasts. September saw a contraction of 0.1 percent versus the same month last year for the common currency region, or a gain of 0.9 percent when excluding volatile energy and food segments. This marks the first negative year-over-year reading for the measure since March and underscores the ongoing debate over the possibility for further stimulus from the European Central Bank.
Alibaba makes a play for Internet video company. On Friday media reports surfaced that China’s Alibaba Group Holdings is preparing to announce a $4 billion cash offer for the portion of streaming-video operator Youku Tudou that it does not yet own. Youku Tudou, which is publicly traded in the U.S. but based in Beijing, provides Western content for Chinese Internet users.
LSE launches new derivatives platform. On Friday the London Stock Exchange confirmed that it has joined a consortium of banks and the Chicago Board Options Exchange to launch a derivatives trading initiative called CurveGlobal. The new venue will compete with offerings from Deutsche Boerse and ICE for trading of futures and options on government-issued debt securities.
Nestlé wrestles with strong Swiss franc. On Friday Nestlé, headquartered in Vevey, SWitzerland, reported a 2 percent contraction in sales during the first nine months of the year and lowered forward guidance for organic growth. While the firm’s top line suffered from a strong Swiss franc, organic figures, which exclude currency swings, were dampened by the Maggi noodles contamination scandal in India.
Outflows in China. Data released today by the People’s Bank of China indicated that the flight of capital continued in September despite efforts by Beijing to solidify confidence in the yuan. Foreign-currency denominated assets tracked by the bank fell by 761.3 billion yuan for the month following a large drop in August, although the pace of declines appears to be moderating at primary commercial lenders.
Portfolio Perspective: Bond Market Shows No Sign of Debt Ceiling Jitters
We maintain our views of shorting 5s and 10s30s Treasury curve flatteners because, in our opinion, too much pessimism is priced into the path of monetary policy, even as the current low probability of a hike by year-end is reflecting recent weakness in data and dovish “Fedspeak.” Separately, the Treasury expects the extraordinary measures to be exhausted no later than November 3 with less than $30bn in cash on hand. We expect the debt limit to be raised in time, and investors do not appear too worried, though “affected” securities have cheapened somewhat on the curve.
Rajiv Setia is a fixed-income strategist for Barclays in New York.
