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Financial Markets Analysis and Outlook:
Stock market volatility picked up significantly at the end of the quarter, with the Dow Industrials experiencing triple-digit moves each day during the final week of September. U.S. stocks ended the quarter up small, but selling was more intense in Canada particularly in small cap stocks where the TSX Small Cap index was down over 9%. International markets also demonstrated similar volatility; for example Japanese and Chinese stocks were up 6.7%, and 15.4% in the third quarter, while German and Emerging Markets were down over 4%. The economic data this quarter has been somewhat mixed but on average positive.
The U.S. economy continues to strengthen, while the European data remains weak. China’s data has been muted but the economy is still growing around 7.5%.
The larger story in the quarter was the strength of the U.S. dollar as the trade-weighted value of the greenback rose 7.8%. The key reason for the gain was simple; interest rates are expected to rise in the U.S. while they continue to fall in the rest of the world. Since capital is highly mobile, funds can be shifted quickly and most of the money has been moving to the safe haven of the U.S. While the 2.5% yield on 10-year U.S. Treasury Bonds is extremely low by historical standards, it still compares very favourably to the 0.95% rate on German 10-year bonds and the 0.5% rate on 10-year Japanese bonds.
The chart below from Bloomberg shows how the U.S. dollar has shot higher in the past quarter, breaking out of a long-term trading range.
