The first week of Q4 has been a good week for investors with major indices posing rebounds. The S&P 500 rose 3% in the week; the Shanghai Composite Index jumped 4% despite the short trading week; and the Hang Seng Index pose a 5% rally. Tommy Ong, Managing Director, Treasury and Markets at DBS (HK), is optimistic for Q4 and believes recovery will be seen in major markets.
One of the most important factors is the expectation of a delayed rate hike from the Fed. After the release of the September employment data, the market immediately shifted the odds of a Fed rate hike to next year. Ong agrees that the job data is not supporting a rate hike decision as the prerequisite for the Fed to take action is 20,000 new jobs per month, but the US has been missing the target for two consecutive months. In addition, wage growth was halted on a month-on-month basis and the participation rate was at a 38-year-low.The low unemployment rate may only be reflecting the fact that people choose to drop out from job seeking.
He estimates that the Fed would at least have to wait until March to raise rates given the weak labour market and the tightened financial condition. According to a Goldman Sachs estimate, with the effect of the plunge in stock markets, widening of bond credit spreads and the strong dollar is equivalent to the Fed raising rates by 75 basis points.
Ong expects looser credit in the market in Q4 as the stock markets recover and that volatility would be lower than in the previous months.
“China also adds in to support the market,” he says. “The Chinese government is rolling out a lot of supportive measures in different industries and impacts would be seen before year end, especially after mid-November when October economic data is out.” Ong believes the Chinese government would keep the economic growth at 7%-8% to avoid instability from unemployment and the market will increase its risk appetite. BM