Global equities (in euro terms) saw further weakness on Monday and Tuesday but managed to rally towards the end of the week as markets appeared to be oversold on a technical basis. Investors continue to focus on China as well as the timing of US interest rate rises. There is now only a 30% chance of lift-off of US rates in December 2015 with a 50% chance in March 2016. Equities remain well valued on a yield basis compared to cash and bonds whilst price/earnings multiples have contracted somewhat.

The global index (in euro terms) rose marginally last week and has given a total return year-to-date of plus 2.1%. Technically, the Index remains well below the critical 200-day moving average but is over 4% higher than the recent low on 24th August. There was a mixed bag of returns from the major equity markets in local currency terms last week ranging from plus 1.5% in Hong Kong to minus 3.4% in Ireland. The influential US market was up 1.0% on the week.

What Lies ahead?

When reconciling the economic data with the volatility of US equity indices of late, the movement appears to represent an index price correction and does not reflect expectations for an economic recession in the US. However, fears remain over the risk of contagion from slowing growth in emerging markets. Domestically macro data doesn’t show any material sign of deterioration, with unemployment remaining low and expectations for this Friday’s non Farm payroll not overly pessimistic. The housing market is recovering steadily and consumers are benefitting from low gas prices coupled with some wage inflation as labor force slack erodes. A housing recovery is vital to continued economic strength and demand, supply, affordability & credit figures all point towards a rejuvenation of the housing cycle. Residential investment still languishes at 3% of GDP vs. the longer term average near ~5%.

The ECB recently revised their outlook for real GDP growth for 2015, 16 and 17; primarily due to lower external demand owing to weaker growth in emerging markets. The Eurozone is one of the most exposed DM regions to EM’s, given its export-driven growth mode and the ECB is therefore more sensitive to inflation and currency dynamics. With this in mind the ECB highlighted that risks to Euro Area growth remain on the downside. Although exports up to June 2015 have been robust, the recent devaluation of the Chinese Renminbi (CNY) and strengthening of the Euro is a meaningful headwind. Commodity prices, the emerging market slowdown and exchange rate developments will shape the inflation outlook for the region.