Recap: Week Ending January 31, 2014
Global equities once again closed lower on the week as a slew of economic and corporate earnings tug at the markets gains. For the month of January, all US major equity indices closed lower. The strongest of the bunch was the NASDAQ 100 which only fell 0.5% for the past month. The Toronto Stock Exchange, the TSX, was able to boast gains for the month of January despite losses in its American counterpart. The TSX has recently been propped up by a strong bid in gold as uncertainty in global markets continues as well as a weak Canadian dollar. In countries, including Canada, the used currency usually has an inverse relationship with equities as it is seen as a flight to safety play. Despite having climbed vigorously, it appears the USD/CAD has finally topped closing the week off with horizontal chop type trade. Friday the CAD was strong pushing the USD/CAD down 0.41% to close the week out at 1.11258.
Moves in North American markets have been driven by news from overseas markets, which have really taken a hit to the downside in the past week. News out of Europe has been negative with equity markets hitting multi 2% daily losses this past week. Some of the biggest declines for the week can be seen in the Dow Jones Euro STOXX 50 as well as the FTSE 100 and Germany DAX. The European markets closed out the week with poor economic news out of Germany which reported a 2.4% year-over-year loss in retail sales. The number was expected to come in at a gain of 1.9% for the year. The number is not good at all, however; it has a larger meaning as it comes from Germany. Germany is said to be the strongest economy in the Euro, and any weakness from the Germany economy can signal weakness for the entire union. The news out of the Euro did not get much better with a miss in the CPI reading. Results came in at a gain of 0.7% versus the expected increase of 0.9%. If poor news continues to come out of the Euro similar to last week, equities around the world will most likely continue to feel the ripple effect.
Recent news this week has been the threat of emerging markets and the domestic currencies. Emerging markets have had the worst calendar start to the year since January of 2008. The MSCI Emerging Markets Index has fallen 6.8% for the year so far. The fall comes on the heels of the IMF stating emerging markets must “improve fundamentals.” It is believed by Bloomberg that $1.8trillion has been lost in global equity markets this month. The loss can be attributed to weak economic data out of China as well as a worse than predicted growth in Russia. The woes have also spread into the currencies of emerging markets where interest rates Turkish Lira rose dramatically to prevent inflation.
This week the US also announced a reduction in their current bond buying program known as Quantitative Easing, QE. The reduction or taper as it is commonly called comes on the heels of a previous month taper. The original bond buying program has been cut from $85billion in month purchases to $65billion. News of the taper did not bode well for equity markets despite the target rate remaining between 0 and 0.25% for the upcoming month. Despite a reduction in the pace of bond buying, US treasuries caught a bid. The bid appears to come out of a flight to safety play. The bid can also be interpreted as the taper was less than expected, catching the market off guard which already price in a greater reduction.
