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Daily Insights - October 25, 2014

Solid week for markets as growth fears ease

  • In Asia, Korea GDP growth accelerated to 0.9% q/q sa in Q3 from 0.5% in Q2, in line with consensus but below our forecast of 1.2%. Given better growth prospects and high household debt, we think the BoK will raise rates by 25bp in March 2015 and in early Q3.
  • There are several important events for markets next week starting with the results of the comprehensive assessment of European banks (loosely referred to as the Asset Quality Review). The ECB and the EBA will release detailed results at 12pm (CET) on Sunday 26 October. We believe the number of banks that would need to raise additional capital will be limited. As a result, the assessment should boost confidence and support banks equity valuations.
  • Other important events next week include Brazil’s presidential election (Sun) and various central bank meetings including the FOMC (Wed) and the BoJ (Fri). Brazil’s election remains a very tight race, but we see further weakness in the BRL. The FOMC meeting will be closely watched for the potential end of QE. The BoJ meeting will include the semi-annual economic assessment with revisions to GDP and inflation forecasts. Today, we forecast a 6.8% m/m decline in new home sales, to 470k, in line with consensus.
  • Asset price movements and correlations can provide insights into growth and inflation in a volatile market looking for direction, particularly given the collapse in oil and forward inflation expectations. We see the outperformance of copper versus oil as an indicator that global growth is likely not as bad as feared and is poised to pick up, setting the basis for a continued recovery in equities. Correlations suggest that global factors are fuelling the decline in 5y5y inflation expectations, with the dollar, oil and non-US growth playing a leading role.
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