Finance Friday 16.10.2015

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Finance friday 16.10Di Nikola Kedhi

October is usually a bad month for markets. The so-called October effect — an expectation that markets all over the world decline that month — has haunted stocks for several years now, although analysts agree that it is more of a psychological occurrence rather than a true financial phenomenon. Unfortunately, markets stayed true to this prediction in the beginning of this October as well.

Last week stocks gained 3.28% in China amongst speculation that the People’s Bank of China might cut interest rates. The S&P 500 reached the highest levels in seven weeks. This was partly instigated by earnings’ results that exceeded expectations for some of the S&P’s companies. All this enthusiasm was cut short this Monday, when stocks declined not only in European, but also in US markets. The volume of Stoxx 600 shares that were traded this week was 21% lower than the 30-day average. Markets continued their decline throughout the week, which was caused in part by continuing reduction of the demand in China.

The notable good news is the constant decrease in volatility these past two weeks. VIX, which is the volatility index that measures market turbulence, fell 5.3 % last Monday. Although stocks have been alternating between gains and losses, the frenzy and turmoil that as characteristic in the markets at the end of summer seems to have disappeared. China’s situation remains a cause for concern, but investors are adjusting to the idea that the state of things there will be shaky for some time. Even though expectations are low, there have been small increases in market indexes in the last week of September and the first days of October. Furthermore, the declines that took place last week are mostly blamed on the October effect. It is viewed by many as a usual yearly occurrence and does not cause excessive concerns with investors.

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Not quite unexpectedly, Brazil is the new source of anxiety for market participants. Unemployment has soared to 7.6% compared to 4.3% at the end of 2014, reaching the highest level since 2009 when it was around 9%. Inflation is close to 10% while the budget deficit has reached the highest levels in 20 years. For this reason, the government’s credit rating was decreased to junk. Analysts and experts believe this is just the beginning and things are about to get worse. As if the situation was not bad enough, the political actors are adding more fuel to the fire. The opposition is seeking to impeach President Dilma Rousseff on the grounds that she broke tax laws during her mandate. Brazilian banks are currently in a panic, which is likely to extend beyond Brazil’s borders.

After the Volkswagen scandal some brighter news come from the automotive industry. Ferrari — the Italian luxury carmaker — is going public. Fiat Chrysler Automobiles, who own the car brand, are going to offer approximately 10% (or 17.2 million) of Ferrari’s shares to new investors. Its initial IPO price is reported to be between $48 and $52. Meanwhile, the market is already excited about this. Investors are waiting impatiently for the possibility to own a part of the famous carmaker, even though the recent troubles concerning Volkswagen hit the automakers’ very hard, also affecting Ferrari’s parent company Fiat Chrysler. In the wake of the scandal, Volkswagen’s shares lost nearly 30%, Fiat’s declined by around 6%, and GM’s stock fell 4.32% while Toyota’s suffered a temporary drop of 3%. It has not yet been announced when Ferrari will make its initial public offering, but there is already a huge interest in how the stock will fare in the market over the long term.

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