Financial Markets Preview – Week of September 20, 2015

Major Events of Last Week

The pivotal event of last week was unquestionably the eagerly awaited announcement of the US Federal Reserve about whether it would finally instigate its first interest rate hike since 2006. This vitally important decision has now dominated investor attention throughout this year as an increase would mark the end of an extensive period of monetary easing. Investors had previously adopted a cautious stance, generating a more tranquil trading environment, prior to the Fed verdict. At the end of another turbulent week, the foremost US indices produced a mixed response last Friday typified by the Dow Jones Industrial Average crashing by almost 290 points; the S&P500 edging higher by slightly over 25 points and the NASDAQ dropping by nearly 67 points.

Although expectations had fluctuated dramatically before its declaration, the Fed in the end decided to keep its benchmark interest rates unchanged citing concerns about recent geopolitical instabilities and inflationary considerations as the primary reasons for doing so. Although the US Central Bank subsequently strived hard to convince the markets that an interest rate hike was still a distinct possibility before the end of 2015; its lack of conviction and confidence prompted global equities to plunge sharply amid escalating anxiety about global economic growth.

Specifically, the Fed refrained from hiking because it had been rattled by the high levels of volatility experienced during recent weeks emulating from a looming Chinese economic slowdown and the sudden devaluation of the Yuan. In addition, the release of a spate of weaker-than-expected inflationary data by the USA had further muddied the waters. Although Janet Yellen, the Fed Chairperson, stressed in a subsequent press conference that the US economy was still acquiring traction, she emphasized that inflation was struggling to attain the Fed’s 2% target.

So, the next burning question is will the US Central Bank take any positive actions before the end of 2015 by increasing rates and introducing a new age of monetary tightening? After the Fed’s lackluster performance last week, many economists have concluded that such an eventuality is now most unlikely. In fact, only 21% of economists favor a hike in October while just over 47% opt for one in December.

As such, the markets could now be exposed to significant volatility as each major global economic indicator published over the course of the coming weeks will be intently assessed in order to determine its impact on Fed deliberations.  Other major factors will also keep investors on edge. For example, the US Government is on the verge of another shutdown amid federal and ‘planned parenthood’ funding worries. In addition, further slumps in Chinese equities are also on the cards.

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What to Expect This Week

The USA will commence proceedings by issuing its Existing Home Sales for August on Monday. Expert consensus is favoring a print of 5.5 million.

No global economic data will be presented on Tuesday.

On Wednesday, China will provide the first sight of its Manufacturing PMI for this month. Investors will monitor this event very carefully following the turmoil caused by similar information released of late. Nevertheless, an improvement is expected this time around with this index rebounding from 47.3 to 47.6. Later, France will publish its own Manufacturing PMI for September, which is forecasted to extend recent monthly declines. Germany will then post the same parameter which should remain steady within expansionary territory if the anticipated 54.5 figure is confirmed. New Zealand will complete the session by disclosing its Trade Balance for August. Despite the implementation of new monetary easing policies; exports, in particular, are expected to slump from 4.2billion to 3.5billion.

Germany will reveal a prominent Business Climate Index for September on Thursday, which should dip from a three month high of 108.3 to 107.9. Next, the USA will release its Unemployment Claims figure for the preceding week and Durable Goods Orders for last month. The former should confirm that the US labor market continues to strengthen while the latter is forecasted to register a 2.2% decline. Japan will then announce its Consumer Price Index (CPI) for August. Although the annual result should verify a slight increase of 0.1%, the core value is forecasted to descend into a deflationary territory.

On Friday, the USA will terminate the week by declaring the final revision of its Gross Domestic Product (GDP) for the second quarter of 2015. Analysts are currently supporting growth of 3.7% on a quarterly basis.