This week was "risk-on." Equity markets rose, credit spreads narrowed and Government Bond prices declined. The Chicago Board Options Exchange SPX Volatility Index (VIX — a market estimate of future volatility), declined from 22, the close on Oct. 17, to 16 at the end of this week. Economic releases were not robust enough to cause the capital markets to react so positively. At 15.2 times forward earnings, the S&P 500 was not undervalued, even after the prior four-weeks' sell-off. Factset reported a positive start to the earnings season with 75 percent of the companies beating earnings expectations; yet, 29 of the companies gave negative forward guidance but only eight companies gave positive guidance. Nonetheless, Bloomberg reported that, after a four-week slide, the S&P generated the best weekly gain since January 2013. One positive on the week was the softer U.S. releases, which followed the previous week's suggestion by St. Louis Fed President James Bullard that he would consider continuing the bond buying program (QE) after October. The U.S. dollar rose against the Yen, Pound and Euro and commodity energy and metals prices declined on the week.

Perspective:

Fundamental market drivers were not compelling reasons for this week's rally nor were they compelling reasons for the equity markets' declines in the previous four weeks. Sometimes market movements defy logical explanations, but that does not deter the talking heads from offering them.

What makes markets interesting is that different participants view data from different perspectives and with varying degrees of emphasis. I experienced that on Saturday when a friend, a skilled fly-fisherman, took me fishing at the east outlet of Moosehead Lake in northern Maine. In the past few years I have been learning to fly-fish, but most of my experiences were with a professional guide in a float-boat. I was not sure how I was going to do fishing on my own and wading in new boots in 50 degrees water temperature and 40 degrees air temperature. All turned out well; I remained warm and dry in my gear, wading in depths from my knees to just below my chest. For eight hours I worked on my casting using "streamers" and practiced my skills at nymphing. I had a great time, but my friend was concerned that the fish were not biting. He had landed only a salmon and had a couple more in his line, but all I had were a couple of strikes; he wanted me to have caught some fish. I was just glad for the adventure.

Economic Releases:

The week of Oct. 18 Initial Claims for Unemployment rose to 283,000, but the four-week average of Claims (blue in the chart) slipped to 281,000. Continuous Claims (red in the chart) dropped 38,000 to 2.351 million. The chart shows that both Claims numbers were well below the pre-Great Recession period in 2007. By these measures, the U.S. employment situation has recovered.

Home Sales were little changed in September. Existing Home Sales (green in the chart) inched higher to 5.17 million, a little better than consensus, but well in the range of expectations; Existing Home Sales were -1.7% below the level a year ago. September Home prices fell -4% from the prices a month ago. New Home Sales (blue in the chart) appeared to be little changed at 467,000 in September, but only because August Sales were revised down from 504,000 to 466,000. In contrast to employment, U.S. housing has yet to fully recovery.

Other Economic Releases

The Markit flash Purchasing Managers' Index for Manufacturing for October slipped over a point to 56.2, but remained well into the expansion zone, above 50. Inflationary pressures remained well contained in the September CPI report; CPI increased only +0.1%, a 1.7% increase year-over-year; even without the move volatile food and energy components, Core CPI matched the headline numbers for the month and YOY.

The Bank of Canada met this week and, as expected, made no changes in interest rates; yet, the statement releases implied a more dovish bias on monetary policy.

The European Union Flash PMI numbers for October were little changed from September; Composite, Manufacturing, and Services, at 52.2, 50.7, and 52.4, respectively all remained in the expansion zone. Similarly, Germany's Flash report, at 54.2, 51.8, and 54.8, also remained in expansion. On the other hand France's Flash PMI's for October, at 48,0, 47,3, and 48.1, all declined further into the contraction zone. In the UK, 3rd quarter GDP increased +0.7% from the previous quarter and 3.0% from a year ago. September Retail Sales in the UK fell -0.3%.

The Japanese Flash PMI report for October Manufacturing increased a point to 52.8. China's Flash PMI for Manufacturing slipped a tick to 50.4 for October. China's 3rd quarter GDP increased 1.9% from the previous quarter and 7.3% from the previous year. China's Industrial Production increased +0.91% in September, an 8.0% increase from a year ago.

Equities Markets:

This week equity markets rebounded across the globe, but, with the exception of the Hang Seng, none rebounded enough to post positive returns for the quarter-to-date. Factset reported that with 208 companies in the S&P 500 having reported, 75% beat the mean earnings estimates and 60% beat the mean Sales estimates. On forward earnings guidance, eight issued positive guidance and 29 issued negative guidance. Narrowing credit spreads in the riskiest credit sectors were sufficient to overcome the rising interest rates to generate positive returns for those sectors.

Bond Markets:

Government Bond yields were mostly higher on the week, but remained below the prior quarter end numbers in most cases. Credit spreads narrowed, especially in the riskier asset classes.

Currencies & Commodities:

The U.S. dollar gained against the Yen, Pound, and Euro on the week. The natural resource rich Canadian dollar (Looney) rose despite of the decline in energy and metals prices.