There has been a fog sir, we are now in autumn, a season of mellow fruitfulness (PG Wodehouse}

A strong end to the third quarter followed initially by a robust start to the final one. Equity investors have suffered a quarter that seemed to move from one crisis to another. The rout in equity markets that saw as much as twenty percent lost from the peak was started by the uncertainties as to what would happen with Greece and its debt burden. Although many will still argue the long-term solution remains to be resolved, the short term was settled as the Greeks accepted the bail out terms. We then moved on to the devaluation of the Chinese renimbi, and what that implied for the Chinese economy and emerging markets in general. As that event was digested focus turned to the September rate decision from the Federal Reserve, would they won’t they? In the end they bowed to pressure from the World Bank and the IMF and left rates where they were. From then came what many would call a “black swan” event as the VW emissions scandal broke. Diesel cars had over the past ten years apparently gone from being the most hideous polluters of the atmosphere to environmentally friendly. That with hindsight was a misconception, and again what looks like a Black swan is obvious after the event.

We seemed to move into period of good news being bad news for equities and bad news being bad news. Good news meant the Federal Reserve would look to raise rates and the uncertainty of that outcome; bad news was just that, bad news.

Equities in Europe started the month on a brighter note, helped by better than expected Chinese purchasing manager’s reports. China’s service sector Purchasing Managers Index (PMI) came in at 53.4 suggesting that even if the manufacturing sector is struggling the service sector is holding up. Likewise, the euro area manufacturing PMI at 52 indicates an expanding manufacturing base. The UK PMI came in line with expectations.

The earnings season will become the focus in the coming weeks assuming we get no further external shocks. Expectations are for another weak quarter; the hope will be that markets have anticipated this weakness with the 20% correction across global equities over the past quarter. The IMF has warned that they remain cautious on global growth, but see a modest acceleration next year. If this is correct, equity markets may start to anticipate a pickup in earnings in q4 and q1 2016.  One bright spot was the comments by the IMF as to the strength of the UK economy, relative to the rest of the G7 economies.

The recent raised tensions between the US and Russia over Syria appears so far to have had little impact on the oil price. One thing the world does not need now is a jump in the oil price caused by supply side shocks or concerns.

 

 

Posted on October 2, 2015 .