Pacific equities rebounded at the end of a volatile week, but failed to break into positive territory, with the MSCI Pacific Index losing 1.6% vs. a 1.2% gain for the MSCI World.
Global growth concerns and worries about the implications of the strong yen for corporate earnings pushed Japan’s Topix down 2.0%. Following indications from the European Central Bank that it may introduce further stimulus at its next meeting, investors will be looking for similar signals from the Bank of Japan when it meets this week.
Hong Kong’s Hang Seng slid 2.3%, amid worries over the implications of China’s slowdown for the city’s economy. Hong Kong’s secretary for financial services and the treasury, KC Chan, warned that an expensive currency, export weakness and lower spending by tourists would hit growth in 2016. Singapore’s Straits Times fell 2.0%.
Australia’s mining-heavy All Ordinaries crept into positive territory, returning 0.4% as better sentiment as the end of the week drove a rally in base metal prices. Encouraging corporate earnings releases also provided support, but economic data was disappointing, with new home sales sliding for a third successive month in November.
US stocks rose in the week ending 22 January, as sentiment was boosted by positive manufacturing and housing data, and a rise in oil prices at the end of the week. The S&P 500 rose 1.4%, while the Dow Jones Industrial Average was up 0.7% and the technology-biased Nasdaq ended 2.3% higher.
Manufacturing data came in ahead of expectations, with the January flash reading for the Markit manufacturing purchasing managers’ index moving up 1.5 points to 52.7, remaining well above the 50 level that separates contraction from expansion.
Meanwhile, data released in the week pointed towards a strengthening housing market. US existing home sales rebounded by 14.7% in December, according to the National Association of Realtors, boosted by the unusually warm weather as well as the anticipation of higher mortgage rates over the year ahead. Homebuilder sentiment remained unchanged in January, according to the NAHB Housing Market Index, which remained at 60.
The fourth-quarter earnings season continued, with results coming in better than feared. The most encouraging results so far have come from the big diversified banks.
Inflation remained mixed. The consumer price index edged down 0.1% in December, in line with expectations, due to falling energy and food prices. The index is up 0.7% over a year ago.
Oil remained the key driver of sentiment in the week, as the lifting of trade sanctions on Iran fuelled fresh concerns about oversupply in the oil markets. In the middle of the week, US West Texas Intermediate crude tumbled 7% to USD 26.45 a barrel, the lowest since 2003, while Brent crude oil weakened by 4.4% to a 12-year low of USD 27.50. However, oil prices pushed back above USD 30 per barrel at the end of the week, leading to a rally in energy shares.
The market currently expects the Federal Reserve’s second interest rate rise to take place in June, rather than March, but any further rate rises will remain data dependent.
In another week of extreme volatility, European equities managed to recover a small amount of the ground they have lost so far this year after the oil price rose and the European Central Bank (ECB) suggested additional policy support was imminent. The MSCI Europe Index returned 2.2%.
On Wednesday, a global sell-off driven by broadening growth fears pushed the UK’s FTSE 100 and French CAC 40 to more than 20% below their recent highs—the definition of a bear market. Both markets later rebounded to deliver gains of 1.7% and 3.0% for the week, respectively.
The German DAX gained 2.3%, while Spain’s IBEX was up 2.1%. Portugal’s PSI was broadly unchanged for the week, lagging the rebound in other markets, as a decision by the new socialist government to restructure one of the country’s biggest banks added to worries about interference in the private sector. Italy’s FTSE MIB also underperformed, falling 0.9%.
Markets rallied after Thursday’s ECB policy-setting meeting, when Mario Draghi signalled that a further round of monetary stimulus may come as early as March. The ECB president said policymakers would “review and possibly reconsider” their current position at the next meeting in six weeks, and had “the power, the willingness [and] the determination to act” to bring inflation back to the target of just below 2%.
Meanwhile, Bank of England governor Mark Carney pushed back the timescale for a rise in UK interest rates. In July 2015, Carney suggested the decision about whether to raise rates would come into “sharp relief” around the turn of the year. Last week, he said that the choice was now “straightforward”, with the oil price slump, China-driven volatility and a slowdown in wage growth in the UK meaning the economy is not yet strong enough to contemplate an end to current ultra-accommodative policy.
The UK unemployment rate fell from 5.2% to 5.1% in the three months to November, the lowest since 2006, but annual pay growth slowed from 2.4% to 2.0%.
In France, where unemployment is stuck stubbornly above 10%, President Francois Hollande last week outlined plans to fuel job creation, including the establishment of 500,000 vocational training schemes, subsidies for small companies and a programme to boost apprenticeships. France returned to growth in 2015 after three years of stagnation, but companies remain reluctant to hire new workers despite recovering earnings.
Global Emerging Markets
The MSCI Emerging Markets Index slipped 0.1% in the week to 22 January, underperforming the MSCI World, which was up 1.2%.
The MSCI China dropped 0.7%. Data confirmed that China’s economy grew at an inflation-adjusted pace of 6.9% in 2015, marking the slowest annual growth rate since 1990 but close to the government’s growth target of “about 7%”. The contribution of consumption to GDP growth reached 66.4%, the highest level since 2001, confirming that China is moving away from a manufacturing based economy and towards a consumption-driven economy.
In India, the Sensex was down 0.1%, as weak exports data weighed on sentiment. India’s merchandise exports fell 14.75% from a year earlier in December, marking the thirteenth consecutive monthly decline, due to weak demand in the key global markets of the US and Europe.
Elsewhere in emerging Asia, Taiwan’s Taiex slipped 0.1%. December’s export orders disappointed, falling 3% month on month, led by the technology sector. Uncertainty over Taiwan’s export markets will likely linger in the near term, especially considering the outlook for muted end-demand growth for the technology sector.
In Latin America, Mexico’s IPC rose 1.9%, as sentiment was boosted by hopes of further support from the world’s major central banks. The National Statistics Agency confirmed that annual inflation accelerated to 2.48% from 2.13% at the end of December, but remained below the Bank of Mexico’s 3% target. Brazil’s Bovespa fell 1.4%, led lower by Petrobras. Shares of the state oil company fell sharply following news that the price of a barrel of oil had reached its lowest level since 2003 after international sanctions against Iran were lifted.
In emerging Europe, Russia’s RTS rose 5.9%. Data released showed that Russia’s current account surplus rose to a bigger than-expected USD 66 billion in 2015, up from 59 billion in 2014. However, continued weakness for oil prices helped drive the Russian rouble to a record low against the US dollar.
Bonds & Currency
Bonds were mixed overall in the week, with US and UK yields largely mirroring movements in risk assets and oil prices, while German bonds outperformed as the European Central Bank signalled a greater sense of urgency and committed to review and reconsider its policy stance in the March meeting.
*Source: J.P. Morgan Asset Management
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