Oct 15, 2015

Global Market Outlook: Q3 Reflections and Q4 Expectations

As Q3 closes out and Q4 is upon us Udi Sela VP of Partner Solutions reflects on the highs and lows of the past quarter and provides an outlook for what the markets could hold in the coming weeks.

Jim Jockle, CMO discusses highlights from Bloomberg calling out how almost $11 trillion has been wiped off the value of global stocks, oil posted its worst quarter since 2009, and Asian currencies suffered multi-year losses. Udi discusses drivers behind this volatile quarter, including fears over the Fed rate hike which didn't materialize in September. He reflects on how a rate hike might bring normalcy back to the market reducing fears of a bubble. They also discuss the outlook for commodities and how less of an appetite from China will continue to impact this asset class. In conclusion, Udi and Jim discuss the return of correlation and how investors are managing this highly correlated market.

Weigh in and continue the conversation on Twitter @nxanalytics, LinkedIn, or in the comments section.

Video Transcript:

Jim Jockle (Host): Hi welcome to Numerix Video Blog, your expert source on derivatives trends and topics. I’m your host Jim Jockle. Joining me today via Frankfurt, is Udi Sela our resident FX Expert. Udi welcome.

Udi Sela (Guest): Thank you. Good morning to you, Jim.

Jim Jockle (Host): Udi. So, we just closed out a volatile Q3, and there were some great summary points on Bloomberg that I just want to read. So, almost $11 trillion has been wiped out of the value of the global stock markets. Oil has posted its worst quarter since 2009. China Shanghai Composite Index was the worst performing benchmark globally, falling 29%. Asian currencies suffered multi-year, record losses and gold continues to suffer, posting its fifth successive quarterly loss and its worst performance since 1997. So, Udi let’s start. What in the world will Q4 hold for us?

Udi Sela (Guest): Well, basically, there were a couple of drivers that brought this very volatile quarter. At the end of the day, you mention things like China, well the market has been up 150%. So, a correction of 20 to 30% is not that scary. Now, the main driver was, of course, the Federal Reserve rate policy discussions and fears of a rate hiking, which did not materialize in September. So, obviously the main thing that will drive is whether the Fed will hike rates in either October or December, right? Looking now at the perception of the market, it seems that in October there is about 5% chance (this is the market estimate) for rate hike, and in December we are looking at something like 30% chance or likelihood.

So, having also looked at the recent unemployment numbers and nonfarm payroll that were out this Friday, the numbers were disappointing. So again, it doesn’t seem that the Fed will be really determined on hiking. Now you can say that, it can be perceived that if they do not hike rates, maybe the market will continue to progress. And this is actually what happened. On Friday, at the beginning, when the numbers came out, all the global exchanges went down because the economy was perceived to be in a cool state, and then when people figured, ‘OK, the Fed will not hike rates’ maybe that was the reason, perhaps, for the correction. So, I personally think it will climb higher to answer your question.

Jockle: So, just thinking about the rate hike. Clearly, there are still concerns about inflation out there. This lack of hike is taking an arrow out of the quiver in terms of correction. Do you think we’ll see this hike at the end of this year?

Sela: I personally hope we do. Just a simple rate hike. Again 20 or 30 basis points. Just to show, that the economy needs to move toward a normal state again. This cheap funding basically has created many asset bubbles. And, what we’ve seen during Q3 is actually a lot of the air coming out of the bubble, which is not such a bad thing at the end of the day. So, yeah, I think the Fed will want to work towards a normalization of the economy, so I think they will hike slightly.

Jockle:  Moving across, obviously, with oil having its worse quarter, commodities is dominating headlines. Especially around the news around Glencore. What do you think we are going to start seeing now that Russia is getting involved in terms of oil, as well as for the broader commodities markets over the next three months?

Sela: I think that first of all, the supersonic hiking in commodities over the last five to seven years really came from China. China consuming raw materials, energy and so forth. And now we know that the Chinese economy is slowing down. So, there will be less demand (for commodities) from China. It really depends on the type of the commodity. But, I think we are finding more or less a balanced demand for energy at those levels.

I think that sale of oil from the US at these price levels is not economic, because I think the break-even level is something like $50 a barrel and now we are hovering at like $46. So, I think at the end the day that supply and demand will balance themselves. And, you mention Glencore, we saw this wild swing, etc. in the stock price. And basically now Glencore, is in a way a cheap option to buy a call option on commodity prices, if you like.

Jockle: So, one final question for you, Udi. Let’s talk a little bit about correlation. Right? Obviously, we are seeing tremendous volatility in the markets, driven by macro-economic events, which is driven by commodities. From the investor perspective, what is the thought process about correlation and how are people managing the way the markets are becoming very highly correlated again?

Sela:  This is really a fantastic question, Jim.  Because the market as expressed in the subprime crisis, we saw that everything was correlated between credit spreads to FX rates, yield curves, equity prices and so forth. So, what we do see is the emergence of volatility as an asset class. It’s a fantastic way to hedge. And, indeed if you look at the activity on the VIX and the volatility of the volatility, that’s just showing how people now use volatility-they use volatility to hedge and they use volatility to invest.  And this is what I think is the best way to go forward. We may even see people actually start taking a view on correlation. That’s something we are looking at right now.

Jockle:  And, Udi. Any closing thoughts. What’s going to keep you up at night over the next couple of weeks? Or, what’s on your personal watch list?

Sela: I think that something we haven’t discussed in the past is to look at the five-year inflation expectations, because they keep declining. And basically, the problem of almost the whole economy is that if you don’t have enough demand, there’s not enough pricing power for firms. And basically, we produce more than we consume. I think this is something that the Fed will be looking at. And, if the Fed is looking at it, we will also be looking at it.

Jockle: Well Udi, I want to thank you for taking your time from your hotel room in Frankfurt today. So, of course we want to stay in touch with you as the quarter continues to unfold and check-in with you again. And of course, here on the Numerix video blog, we want to hear what you want to talk about. Please keep the conversation going on LinkedIn or on Twitter @nxanalytics. Thank you Udi, and thank you so much for joining.


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