Stock Markets in October
Stocks started off October in a better mark from what was a downer September. Equities bounced on Friday, the first trading day of the month after falling 5% in September. Fears of debt defaults from Chinese corporations and slowing economic activity sparked the selloff. The next few days can bring a decent “relief rally” to make up some of the September losses but we would use the opportunity to sell into the strength. We anticipate this month to be more volatile and expect lower markets as we go through October.
Firstly, we continue to see risks to the overall global economy. With energy supply issues in Europe and China, both require large quantities of oil and natural gas supplies to tackle the winter months. Currently an energy supply crunch is gripping the U.K. and many eastern nations of the EU. In China, the country is a heavy user of metallurgical and coking coal, both are in short supply. Adding to the frustration is the global supply chain/logistics with shipping rates at all time highs across many major ports in Asia and North America. If the EU and China suffer energy supply issues we will certainly see curtailments in industrial production which will lead to lower Gross Domestic Product.
Secondly, the US Federal Reserve is slowing its asset purchase program (open market bond buying). This action reduces liquidity and repatriates US dollars. Thus, the decrease of M1/M2 money supply and US dollars is less which makes the demand for $USD go higher. This will cause the $USD to go higher, which should help bring down commodity prices. This would also help cool off inflationary pressures on key commodities. Lastly we also expect to see an uncertain Q3 earnings season, beginning October 10th, with downgrades to forward looking guidance.