Monday, 15 September 2014

Rally in stocks ends as Fed prepares to meet

After rallying for the past few weeks, stock markets finally fell last week.

The Standard & Poor’s 500 Index fell 1.1 percent to 1,985.54 last week, the STOXX Europe 600 Index fell 0.9 percent and the MSCI Asia Pacific Index fell 1.8 percent.

After last week's moves, the S&P 500 now trades at 16.6 times estimated earnings, the STOXX Europe 600 at 15.5 and the MSCI Asia Pacific at 13.7.

While stock market valuations may not look unduly stretched at the moment, a rise in interest rates could still put additional pressure on stock prices.

The Federal Reserve meets to decide on monetary policy on 16-17 September. While it will almost certainly not increase interest rates at this meeting, the probability that the Federal Reserve will tighten monetary policy soon was raised just a little last week after some positive data for the United States economy.

A report on Friday showed that US retail sales rose 0.6 percent in August while another report showed that the Thomson Reuters/University of Michigan consumer sentiment index rose to 84.6 in September from 82.5 in August.

The euro area also saw positive economic data last week. Reports on Friday showed that industrial production rose 1.0 percent in July while employment rose 0.2 percent in the second quarter.

Data from the two major economies in Asia last week were mixed though.

In China, reports last week showed that bank lending nearly doubled in August from the previous month but imports fell and export growth slowed while inflation eased to 2.0 percent in August from 2.3 percent in July.

Japan last week revised its second quarter GDP report to show a larger contraction of 1.8 percent compared to the initial estimate of a 1.7 percent contraction. Adding to the negatives, the consumer confidence index fell to 41.2 in August from 41.5 in July while the diffusion indices from the economy watchers survey showed deterioration in service sector sentiment last month as well.

More positively for Japan, other reports last week showed that core machinery orders rose 3.5 percent in July and the business outlook survey showed large improvements in business leaders' assessment of the economy in the third quarter compared to the previous quarter.

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