Market and Economic Review
Similar to earlier this year, the third quarter featured further evidence of a multi-speed economic recovery across the globe. Central banks reacted in a less-than-coordinated fashion compared to years prior, with the European Central Bank (ECB) and the Bank of Japan (BOJ) loosening monetary policy while the U.S. Federal Reserve (the Fed) retained more of its status quo as detailed further below. The ECB caught markets off guard by cutting interest rates and announcing new stimulus plans. ECB President Mario Draghi stated that a combination of factors led to the decision to implement these new measures including a downward movement in all indicators of inflation expectations along with disappointing data on GDP within the Euro Zone.
Meanwhile, the BOJ noted that the Japanese economy continued to recover moderately, while also acknowledging that a well-publicized sales tax hike in April hindered GDP. Japanese Prime Minister Shinzo Abe continues to look to strike the delicate balance of addressing his country’s debt problems while looking to stimulate economic growth. As for China, expectations are that growth will continue to fall. Early in the fourth quarter, the World Bank released projections for China for 2014 and 2015 that showed growth easing to 7.4% for this year and down modestly from there to 7.2% in 2015.
During the third quarter, the relative strength of the U.S. economy, compared to other developed markets, drove the U.S. Dollar to rally sharply against a basket of global currencies including both the Euro and the Yen. Meanwhile, geopolitical risks continued to dominate headlines. While the unresolved Ukrainian crisis fell from the front pages, the world turned its attention to the growing threat of ISIS in the Middle East and the potential of another extended military campaign ensnaring some of the world’s biggest economies. Also of note during the third quarter was the sharp fall in oil prices driven by a combination of factors including a strengthening U.S. Dollar, increasing supply and diminished demand driven by slowing growth in China.
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