A quick review of the issues and events driving the markets this past week... and what's on tap for the week ahead.

Weekly Market Snapshot

October 27, 2014

"I hear complaints about less liquidity, [but] remember – there is such a thing as too much liquidity"

— Former Fed Chairman Paul Volcker, on concerns about reduced liquidity in the bond market in the wake of recent volatility (Bloomberg BusinessWeek, October 20, 2014)

The week in review...


Market volatility: Not just for stocks anymore For a few minutes on Oct 16, the ten-year US Treasury yields hit 1.8622% – down nearly 39% from its Jan high of 3.05%. That same day, the MOVE index, a measure of bond market volatility, spiked to 101.28 – vs. a year-to-date average of 60.48 The selloff was widely attributed todisappointing US retail sales for Sept., triggering a "growth scare" about the global economy. Why the severity of the reaction? One popular theory was a liquidity shortage, caused by post-crisis US regulations which led banks to reduce their inventories of bonds. However, some remain unconvinced, including the Bank of England's Jon Cunliffe, who suggested market movements constitute a "more accurate representation of risk" than before the 2008 crisis, when there was ample liquidity for securities with demonstrably greater risk than US Treasuries and corporates.


Growth: Bubbling into earnings With 179 of the companies in the S&P 500 reporting so far, there were upside surprises in sales growth (+4.63%); and earnings growth (+10.19%). Overall 145 companies reported upside surprises and only 29 reported disappointments. Lower energy costs may have helped the quarter; Brent crude oil is still trading near 2014 lows ($86.12) vs the year's average of $105.03. Meanwhile, the hiring picture continues to improve: initial unemployment claims have dropped to 283k for the most recent week, and the less volatile four-week average is now at 281k, a 14-year low. Home prices for August rose 0.5% from July, beating estimates; year-on-year, the rise was 4.8%. Consumer prices for Sept. rose 1.7% year-on-year, suggesting inflationary pressure hasn't grown significantly.


European Central Bank: Leaping into action After a year's worth of debate, during which growth sagged and disinflation surfaced, the ECB began the next stage of its monetary easing plan, buying "covered", or asset-backed, bonds – reportedly from banks in Italy, Germany and elsewhere—with total buying for the week to be announced on October 27. The covered bond market is estimated to be €2.6 trillion ($3.3 trillion) in total bonds outstanding. The goal is to improve consumer access to financing by supporting banks. There are no plans to buy corporate bonds, where demand has already driven yields to historic lows.


Growth: Pausing for breath GDP growth slowed to 7.3% in 3Q2014, according to official sources – raising the possibility that the annual growth target of 7.5% could be missed for the first time since 1998. But officials have been downplaying that target, possibly to avoid the need to embark on a broad-based stimulus program that could make ongoing financial reforms more difficult to achieve. The IMF lent support to this approach in a press conference, stating that the slowdown is a "price worthwhile for a more sustainable growth and higher income in the future."

Signs of the times:

US Mortgage Rates Drop To New 16-Month Low – Barron's

Spanish Unemployment Lowest Since 2011 as Economy Grows – Bloomberg

Russia Rating Cut by Moody's on Sluggish Economic Growth – Bloomberg

Japan Sep Store Sales Dip for 6th Month But Tax Drag Easing – Market News Int'l

Sources: Bloomberg, Wall Street Journal, Financial Times, New York Times, Deutsche Welle, Xinhua, China Daily, Barron's, International Financial Review


The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

Gross Domestic Product (GDP) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The European Union (EU) is an economic and political union established in 1993 after the ratification of the Maastricht Treaty by members of the European Community and since expanded to include numerous Central and Eastern European nations. Current membership includes 28 countries.

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