Equities rally to be short-lived

Economics

This week will be clearly marked by the outcome of the US elections. We expect non-farm payroll figures for October to pick up after several disappointments.

The ISM non-manufacturing index should pick up in October. In Europe we expect the PMI business surveys for October to be flat, but above 50, consistent with gradual recovery.

German factory orders should have recovered in September. The ECB and Bank of England are expected to keep monetary policy unchanged.

Foreign exchange

Euro/Dollar: The Euro broke out on the upper side of its consolidation range and is now heading higher towards the 1.2800/1.2900 area.

Dollar/Yen: The decline out of the June-October consolidation triangle points the outlook lower with 107.00 resp 105.00 as next downside objectives.

Fixed Income

Early last week, yields on the 10-year Bund fell to their lowest level since summer 2003. Over the week yield curves were quite stable as yields rose slightly during the second half of the week.

The picture in the US was similar. The spread between the US and EUR benchmark 10-year was up from its lows recorded late September. Due to renewed negative news, we have temporarily withdrawn Unilever from our bond focus list.

Equities

Easing oil prices were the most frequently mentioned reason for the strong run of the equity markets last week. In our opinion, the upswing had more to do with windowdressing towards the end of October, which is the end of the fiscal year for many funds.

Up to now, the earnings reports came in worse than in the second quarter, but still above expectations. On a sector level Materials went down after the Chinese rate hike, which increased fears about slowing demand for commodities.

We think the current rally will be short-lived as many technical indicators are oversold and the fundamental economic outlook is not encouraging either.