In America, a large number of Fed officials spoke during the week but largely stuck to the party line. Numerous economic statistics were released as well, the most notable being revised Q2 GDP (+1.4% vs call +1.3%), Conference Board September Consumer Confidence (104.1 vs call 99.0) and August Durable Goods (Flat vs call -1.5%). The real wild card for traders was last Monday's first presidential debate between Donald Trump and Hillary Clinton. This encounter was both highly anticipated and widely watched – reportedly 94 million-plus viewers. It isn't clear which candidate is really preferred by Mr. Market, although Ms Clinton appears favoured. Overseas in Japan, following the monetary policy review released in mid-September by the Bank of Japan, events were relatively subdued. JPY did fall somewhat on higher oil prices, the reasoning being that costlier crude would be inflationary and thus reduce the need for further QE or stimulus spending. In the UK a lack of any breaking news saw GBP trade marginally stronger on the week. The really interesting news last week emerged from the Eurozone, part of the ongoing banking crisis. Not surprisingly, three of the zone's major banks were in the spotlight, one Dutch and two German, no less. ING Bank of the Netherlands will be announcing this week major layoffs, while Commerzbank last week fired almost 20,000 employees and announced a major restructuring. Threatening to eclipse all these developments – Eurozone politics, OPEC, US election race etc. – is the suddenly obvious fragility of Deutsche Bank, Germany's leading bank. As mentioned in last week's newsletter, DB had recently been assessed a 14 bln USD fine for mortgage irregularities and, as we noted, the bank is beset on many fronts. Its creditworthiness as a trading counterparty is now in question, as well as its ability to raise fresh capital. Chancellor Angela Merkel has ruled out any state aid for the bank and, given that the German government has harshly lectured Italy and Greece about bank bailouts in these member countries, Frau Merkel may find herself trapped by her own rhetoric. It is rather difficult to foresee this ending well, and events may move quickly. 
Lastly, a number of hedge fund managers recently interviewed expressed frustration with the fact that, as central banks globally have moved rates down to near-zero and beyond and, in the case of the European Central Bank, are buying virtually any credit offered for sale, the need for hedging is diminishing. There simply isn't the risk in the marketplace against which to hedge. In other words, assessing risk and managing it is an essential part of price discovery and was long the basic function of markets. Central banks, by bidding on everything to fulfil their QE quotas and maintaining ultra-low rates, have essentially arrogated this function to themselves. At some point markets will have to reclaim this function, but it isn't clear when. |
