Equity rally not based on fundamentals

Economics

This week we expect September US retail sales to have grown after a weak August.Industrial production for September is also expected to rise.

We expect French industrial production to show a moderate rise in August while the German ZEW business sentiment should move sideways. The Bank of Japan is set to leave monetary policy unchanged as deflationary pressures are still lingering.

Foreign exchange

Euro/dollar: The euro broke out of its June-September consolidation triangle.

Dollar/yen: Consolidation between a long term downtrend line at 112.00 and the June-September support line which currently lies at 109.75

Fixed Income

As we expected, yields were quite stable over the past week. At first, longer maturities witnessed a slight rise in yields in expectation of a strong employment report.

Negative news regarding this report brought them down again, however. A similar trend was observed in Europe.

Economic figures published this week such as retail sales and industrial production are expected to be somewhat more positive, but yields are not expected to rise due to the renewed uncertainty around the Fed policy.

Equities

Markets continued their strong rise at the beginning of the week, but ran out of steam on Thursday.

New oil price records, a lot of turbulence in the health care sector, mixed same-store sales and the first third-quarter earnings reports that weren't thrilling either were the reasons why the rebound didn't go any further.

We don't believe that the increase was based on fundamental improvement and therefore stick to our cautious stance on the equity markets and still prefer the more defensive sectors like energy and telecom.