October seems like September

Craig Ebert
Craig Ebert
October looks likely to emulate September for investors as the global market volatility that sent United States stocks to their lowest quarter in four years shows no signs of letting up.

Investors are bracing themselves for another fall in the Standards & Poor's 500 index, despite its positive showing last week, by increasing cash and other defensive positions in their portfolios.

As New Zealand enters the annual meeting season for its companies, the United States is readying for third reporting which usually starts with Alcoa, expected after market close on Thursday.

Overall, corporate earnings are expected to fall by 4.1%, according to Thomson Reuters data.

The figure us skewed by an expected 65% fall in energy sector results.

BNZ senior economist Craig Ebert said September was clearly a month of two halves, centred on the September 17-18 Federal Reserve open market committee decision on interest rates.

''After a rather traumatising August for investors - equities in particular - risk assets took some comfort in the view the Fed would not raise rates in such uncertain times for global growth.''

Equities gained while bonds fell, he said.

After the no-change decision, investors clearly became nervous about whatever the Fed was worried about offshore.

Equities headed towards their August lows, while bonds gained as investors sought refuge.

The US dollar gained overall, helped by chronic weakness in emerging market currencies.

Perhaps the most striking feature of September was the return or RORO - a phrase used to describe the phenomenon where assets were favoured or loathed based on their riskiness or perceptions, Mr Ebert said.

The term, which stands for risk-on, risk-off, became popular in the crisis-heavy days of 2010 and 2011 but receded in low volatility times as investors focused on idiosyncratic differences with asset classes.

RORO struck back with a vengeance in September as emerging market currencies, commodity prices and bond yields moved in tandem with equity indices, he said.

Brokers quoted by Reuters yesterday, said the US market was going to narrow but ruled out a bear market.

However, they ruled out any continuation of a ''raging bull market''.

A weaker than expected US employment report for September on Friday diminished inflation expectations.

The prospects for a dim US corporate earnings season were fanning worries the US economic recovery could be derailed.

Concerns about the global economy had fuelled a series of deep declines and snap-back rallies in September, as investors looked for surer footing.

The S&P index had fallen more than 10% from the record high it reached on May 20.

Investors pulled $US22billion ($NZ34.1billion) out of US equity funds in the three months ending September while putting a record $US17billion into US treasury bonds.

Those investors had few places to hide.

Of the 21 major financial asset benchmarks tracked by Reuters, only two - the US dollar and 10-year treasury bonds - had posted returns so far this year, leaving investors with the worst financial market returns since the financial crisis in 2008.

Mr Ebert said part of global investors' concern was from signs of slowing demand and production, globally.

That had most eye-catchingly been expressed in the slide in China's Markit, the privately run manufacturing survey.

But the slowing down was evident in other major economies.

The US, United Kingdom and Japanese equivalents of the survey were all much lower than their 2014 heights and barely above the break-even 50 mark.

Part of that was ascribed to a secular slowing down in world trade volumes which had shrunk on a quarterly basis in both the first two quarters of this year, the worst performance since the global financial crisis, he said.

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