Friday’s close marked the end of the week, month, and third quarter. The week ended on a marginally positive note with stock, bond, and commodity markets posting marginal gains. U.S. equity markets rallied on Friday, pushing themselves into the black while interest rates drifted lower throughout the week only to move higher during the ‘risk on’ rally Friday. Rates fell approximately 0.02% across most maturities resulting in a relative parallel shift downward in yields across the yield curve. Meanwhile, oil prices marched steadily higher throughout the week (up 8%) on news of possible OPEC production cuts designed to put a floor under pricing. Primary market drivers last week included ongoing developments surrounding the Department of Justice settlement talks with Deutsche Bank, re-evaluation of central bank policy announcements from the prior week, and political handicapping surrounding the U.S. election and EU/UK negotiations.
Financial stocks around the world have been under severe pressure ever since the DOJ announcement earlier this month of a proposed $14b settlement, pertaining to the Deutsche Bank’s residential mortgage practices leading up to the global financial crisis of 2007-2009. Concerns surrounding the bank’s capitalization, global financial market interconnectedness, and the German government’s apparent unwillingness to step in and provide relief had markets very much on edge. Market participants were concerned that we may see a ‘death spiral’ similar to what we saw several times during the GFC which consisted of lower stock prices leading to capital worries leading to even lower stock prices leading to challenged capital raise options leading to ever lower stock prices… Markets were relieved on Friday with an announcement that the bank and the DOJ were nearing an agreement closer to a $5.4b figure, which was deemed more manageable.
Central banks continued to influence the global financial markets with headlines this week including dovish narratives from FOMC members, calls for governments to ramp up fiscal spending, Yellen testimony over bank regulation, and more policy guidance from the Bank of Japan. The BOJ disclosed a new bond buying policy this week which effectively changed their bond buying program from targeting a specific ‘amount’ of buying, previously targeted at ¥80 trillion per year, to a more dynamic approach targeting a 0% interest rate on the 10-year JGB. This implies there is now both a ceiling and a floor for the 10 year JGB and that rate will determine the amount and type of QE transactions from the BOJ. Meanwhile, Fed funds futures market odds for a December rate hike dipped below the 50% mark for the first time in several weeks.
Politics also played a part this week as markets digested the first U.S. Presidential debate and the U.K. / European Union divorce dialog took on a bit more of an acrimonious tone. The U.S. election narrative seemed to reflect Clinton as the ‘more of the same’ establishment option, while Trump introduced uncertainty, specifically regarding the Fed, trade, and foreign policy. In typical election year fashion, both candidates are (likely) vastly over promising fiscal spending initiatives in an attempt to win over voters.
