Last week was a key week not only for key economic data points, but the outcome of the G20 summit  in St Petersburg which centered on the U.S.’s campaign to drum up last minute support  for imminent military action in Syria. Markets particularly in the MENA region have been on tenterhooks with volatility prevailing in MENA indices including Turkey. The Lira reached a record low at 2.0841 per dollar in the session and other EM markets around the world remaining weak. On a brighter note Chinese PMI data suggested a ‘bottoming out’ was continuing there as did stronger than expected Russian CPI numbers and respectable GDP figures from South Korea. Raghuram Rajan took the helm as Governor of the Bank of India. His initial measures included making it cheaper for Indian banks to hold U.S. Dollars while increasing its swap line with Japan for trade. This steadied the Indian Rupee from its recent record low. We remain averse to EM equity markets and EM high yield bonds for now. Stay invested in good, strong, high quality shorter duration hard currency bonds for a return.
U.S. data wasn’t bad either. Earlier in the week we got stronger than expected ISM manufacturing data. The all-important Non-Farm Payroll data before the weekend was slightly below expectations but remained healthy fanning the flames of an early Fed ‘Taper’. The U.S. 10 year Treasury bond, almost touched 3%. We continue to see current levels as a good entry point to buy. G7 Markets reacted positively overall in the week. We would say buy these markets on any pullback. Regional equity markets have seen a pullback from decent outperformance year to date and we would advise some caution until the regional situation is clearer.
In commodity markets gold reacted positively to the NFP data recouping earlier losses in the week. The outlook remains neutral but expect a retest of the US $1425 resistance level, as the Fed statement will be the next focus. A small allocation towards gold remains an investment for more aggressive accounts. Silver can be viewed the same way but with higher risk and higher return than gold. Platinum and Palladium gave up some ground during the week. Palladium looks a buying opportunity below USD $700 level. With platinum consolidating around USD $1500. Crude Oil raced higher with Brent and WTI showing healthy gains in the week on the potential for war risk premium. Crude Oil remains vulnerable to this as economic fundamentals that control the price remain negative.
German elections on 22 Sep will have a direct bearing on the future of Europe, particularly the vexed issue of whether Greece and Spain will continue to be bailed-out if needed.
US auto sales jumped to their highest levels in 6 years as consumers use cheap credit to fuel a stronger consumption binge. Job creation was a tad weaker than expected in August 2013 in the US but markets shrugged off the numbers expecting better things to come.
Japan’s winning the bid to host the 2020 Olympic Games has boosted shares of construction companies listed on the Nikkei index. This will definitely boost confidence and expectations about the future of the Japanese economic program.
We favour the US Dollar over the Euro by going short the EUR/USD pair. The fundamentals:
Arjuna Mahendran, Chief Investment Officer
Alain Marckus, Head of Fixed Income