RECAP: for the week ending October 21, 2016

October 23, 2016

Companies representing nearly a quarter of the market capitalization of the Standard & Poor’s 500 Index reported third-quarter results during the week. This was met, surprisingly, with minimal volatility at stocks eked out a modest gain. The technology-heavy Nasdaq Composite Index outperformed the other benchmarks, helped by solid gains in both Netflix and Microsoft following earnings reports. Indeed, Microsoft stock managed finally to break through the record high it established in 1999. Conviction appeared to grow that the Federal Reserve would raise interest rates by the end of the year. On Wednesday, New York Fed President William Dudley told a gathering that a quarter-point increase by the end of the year “is not really that big of a deal.” With other central banks still on hold, expectations of a rate hike helped the U.S. dollar reach its highest level in eight months by the end of the week.

In Europe, stocks ended the week higher supported partly by better-than-expected earnings updates from some eurozone companies, including SAP, the region’s largest software firm. The risk of a “hard Brexit”—or the severing of most trade ties between the UK and EU—means that the likelihood for extended support from the Bank of England via lower interest rates and an extension of the current quantitative easing program have increased.

In Asia, Japan’s low rate environment has sparked a decline in equity financing in favour of bond issuance. The Nikkei reported Japan’s listed companies bought back a record ¥4.35 trillion ($41.8 billion) of their own shares from January to September. The move was driven by a push to improve capital efficiency and corporate governance. According to the report, this buying represents an increase of about 40% from a year earlier, and the full-year tally could surpass last year’s record ¥4.8 trillion. Japanese stocks rallied for the week on the back of strong corporate earnings and a weaker yen, but suffered a modest setback on Friday after an earthquake rocked Western Japan. On the week, the Nikkei 225 gained 1.9% and closed at 17,184.59. China’s economy grew 6.7% in this year’s third quarter from a year ago, reassuring analysts worried about a steep slowdown that could hurt global demand. The latest quarter’s growth matched China’s economic expansion rate in the first and second quarters and puts China on track to meet its official 2016 growth target of 6.5% to 7.0%.

Other big news for the week included The Kingdom of Saudi Arabia raising $17.5 billion in a sovereign debt deal, breaking Argentina’s record from earlier this year for the largest-ever sovereign bond issue from a non-developed market. Demand was overwhelming as the deal reportedly received almost $70 billion in orders. Investors apparently were willing to take the risk that Saudi Arabia will be able to address the fiscal challenges presented by the steep decline in oil prices over the last couple of years. The new Saudi debt offered an attractive yield relative to government bonds from developed markets.

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