Friday October 9

Stocks rise to finish off a strong week. The S&P added 0.1% to 2,014 and the Dow Jones gained 0.2% to 17,084. The S&P500 gained 3.3% this week as investors continue speculate that the Fed will wait until 2016 to raise interest rates. Oil prices have rallied this week on hopes that supply will begin to slow in the near future and that falling demand from China will not be as bad as previously thought. Emerging market currencies have found support in the idea that the Fed won’t tighten this year. The Indonesian rupiah rose another 3.3% today as the dollar also fell against the euro to $1.1353. The dollar has fallen against the euro in spite of expectations that the ECB will expand it’s quantitative easing program. This could be a sign that investors are continuing to price down the Fed and that 2015 tightening was definitively priced in at previous levels. The ten year yield fell marginally from 2.108% to 2.099% to finish the week.

Monetary policy around the world is set to diverge further over the coming months. Foreign central banks such as the ECB and the BoJ hope that the Fed raises rates sooner rather than later. By holding off in September and possibly into the next calendar year the Fed puts pressure on these countries in the near term. The euro and the yen are both driven lower by higher US interest rates which is supportive of those respective domestic economies. Recent dollar losses against these currencies and recent signs of diminishing inflation have put pressure on these central banks to act. Many investors are wondering what further tools the ECB has to ease policy. The overnight rate is already -0.2% however these negative rates seem to have not spurred lending activity in a material way that has led to inflation. The euro fell along with bond yields. Similarly with the ECB on the verge of easing further it leaves the possibility of a currency war between Switzerland and the euro. Analysts don’t appear to be expecting further low rates, but an indefinite pledge to the current easing program.
Commodities experience a rebound this week as WTI oil rose 9% to $49.63. Primary drivers of this turnaround are hopes that China’s situation isn’t as bad as expected and the expectation that the Fed won’t raise rates in 2015. In spite of recent gains in risky assets such as commodities and emerging market currencies many are skeptical of recent progress. Many of the headwinds that previously plagued prices still exist over the intermediate term. Many emerging market currencies including the Indonesian rupiah, Brazilian real, Russian ruble, and Mexican peso all made progress this week. If retail sales data next week show upside surprises these gains will largely be reversed as 2015 gets called back into question.
Colombia’s finance minister believes that the weak peso will be a strong help to the economy. Half of the country’s exports are oil related and around 20% of government revenues come from oil. However exchange rate conditions are encouraging companies to produce more and export to the market as a result of increased competitiveness. Mauricio Cardenas is seeing the bright side of the commodity plunge by saying that what was once an overvalued currency now will allow the country to become more competitive on a global scale. While the effects remain to be seen and many analysts are skeptical, investors still have appetite as Colombia was able to issue $1.5bn 10 year bonds last month on good terms.
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Friday October 9

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