Money Matters 2015 January 29th

Asia Paclfic
The MSCI Pacific Index rose 3.1% in the week to 23 January, as sentiment was boosted by the European Central Bank’s announcement of its bold asset-purchase plan.
Japan’s TOPIX was up 2.9%. The Bank of Japan left its policy stance unchanged at its meeting on Wednesday, but cut its inflation forecasts for this year as a result of the recent sharp decline in oil prices.
Hong Kong’s Hang Seng rose 3.1%, helped by better-than-expected Chinese economic data. Property developers performed well in particular, amid speculation that the central government may lower the minimum down payment on house purchases.
Elsewhere, Australia’s resource-heavy All Ordinaries rose 3.6%, led higher by the energy sector, which surged on the stabilising oil price. Singapore’s Straits Times returned 3.4%.
United States
US stocks delivered positive returns in the week to 23 January, boosted by the European Central Bank’s (ECB’s) announcement of a larger-than-expected stimulus package. The S&P 500 was up 1.6%, the Dow Jones Industrial Average rose 0.9%, and the technology-biased Nasdaq ended the week 2.7% higher.
On Thursday, the ECB announced that it would buy EUR 60 billion of bonds a month through to September 2016 in an attempt to revive the eurozone economy. US stocks rose amid optimism that the stimulus measures would boost global economic growth. Financials, technology and consumer discretionary stocks led the gains, while a rise in oil prices helped lift the energy sector.
Investors also remained focused on the fourth-quarter corporate earnings season, where results have been lacklustre. With 90 companies having reported so far, S&P 500 fourth-quarter earnings are on track to be in line with last year, marking a sharp slowdown from the third quarter.
Data released in the week painted a mixed picture of the US housing market. Existing home sales rose by 2.4% in December, but fell 3.1% in 2014—the first annual drop in four years. Homebuilder sentiment was down in January, with the NAHB Housing Market Index declining to 57 from 58 in December, below expectations.
Manufacturing activity, meanwhile, has weakened following a strong summer, due to the drop in oil prices and a decline in foreign demand. The Markit Flash US manufacturing purchasing managers’ index declined from 53.9 in December to 53.7 in January, vs. expectations for a slight increase.
With the ECB announcement out of the way, investors will now turn their attention to the first Federal Open Market Committee meeting of 2015, scheduled for 27/28 January. In particular, the focus will be on any change in language around the timing of the first interest rate rise, currently expected to take place in the middle of this year.
Europe
European equity markets had a very strong week, with the MSCI Europe Index rallying 4.7%.
European Central Bank (ECB) president Mario Draghi announced a programme of government bond purchases that exceeded the expectations of most market participants in terms of scale. Sentiment was also supported by the results of the ECB’s January 2015 bank lending survey (BLS), which showed a further easing in credit conditions. However, sentiment was tempered by concerns about the outcome of the weekend’s Greek elections, with the anti-austerity Syriza party ahead in the polls.
Eurozone markets registered some of the biggest gains in the week. Italy’s FTSE MIB was up 6.6%, the French CAC 40 rose 6.0%, Spain’s IBEX 35 gained 5.4% and Germany’s DAX was 4.7% higher. Sweden’s OMX Stockholm 30 and the UK’s FTSE 100 advanced 4.6% and 4.3%, respectively. Although the Swiss SPI was up 3.0%, the market is down 9.2% year to date, due primarily to the Swiss National Bank’s recent decision to remove the Swiss franc’s peg against the euro, which has sent the currency sharply higher and dampened prospects for domestic exporters.
Investor focus in the week was squarely on the January meeting of the ECB’s governing council. Expectations were high for ECB president Draghi to announce a quantitative easing (QE) programme of government bond purchases to help boost the eurozone economy. Draghi, on most accounts, met if not exceed these expectations.
From March 2015 through to at least September 2016, the ECB will invest EUR 60 billion each month in the eurozone fixed income markets (including sovereign and private euro-denominated debt). The purchases should amount to around EUR 1.1 trillion, and expand the ECB’s balance sheet back to around EUR 3 trillion—the level at which it was in 2012.
Although the decision to launch sovereign QE was not unanimous, there was a unanimous agreement—including from the German member of the governing council—that ECB purchases of eurozone government bonds were a legitimate tool in combating deflationary pressures across the region and seeking to boost regional economic growth.
There is, however, an absence of full risk sharing among eurozone central banks in the event of default on any of the bonds purchased. Only 20% of overall purchases will be subject to risk sharing, and these will be limited to purchases of securities issued by European institutions and purchases conducted by the ECB.
The market response to the ECB’s announcement was pronounced. Yields on peripheral eurozone bonds plunged, while the euro fell to an 11-year low against the US dollar. European equities, meanwhile, registered the strongest gains this year.
By lowering the value of the euro, the mere expectation of eurozone QE has helped support the eurozone economic recovery and the European corporate sector. However, as emphasised by German chancellor Angela Merkel, eurozone member states should be wary of viewing the ECB’s new monetary support measures as an impetus to reduce their commitment to undertaking structural reforms at the domestic level.
Global Emerging Markets
Emerging markets registered strong gains in the week ending 23 January, as sentiment was boosted by the European Central Bank’s (ECB’s) stimulus announcement. The MSCI EM Index was up 3.1%.
Investors believe that some of the cheap euros created by the ECB’s sovereign debt purchases will find there way into higher yielding emerging market assets. The ECB’s action also puts further pressure on emerging market central banks to cut interest rates—particularly in central and eastern Europe.
Last week, Turkey’s central bank cut its benchmark interest rate by a larger-than-expected half a percentage point to 7.75%, under pressure from the Turkish government. The ISE 100 rose 3.8%. Expectations for further reductions in Polish and Hungarian interest rates in reaction to ECB easing helped boost both markets—Poland’s WIG gained 2.7% while Hungary’s BUX was up 6.4%.
Russia’s RTS jumped 6.6%, lifted by signs of a stabilisation in oil prices and by hopes that the ECB’s liquidity boost may help to support the rouble.
In emerging Asia, India’s Sensex rose 4.1%, lifted by hopes for further interest rate cuts following the surprise move by the Reserve Bank of India to cut its benchmark rate earlier in the month The MSCI China Index, meanwhile, gained 2.7% as the HSBC/Markit purchasing managers’ index (a measure of Chinese manufacturing output) beat expectations in January.
South Korea’s Kospi rose 2.5%. Korean economic growth slowed in the final three months of 2014 to an annual rate of 2.7%, raising expectations for further interest rate cuts.
In Latin America, Mexico’s IPC was 3.0% higher. However, Brazil’s Bovespa fell 0.5%, hit by worries over a potential energy crisis following a drop in hydroelectric power output due to a prolonged drought.
Bonds & Currency
Eurozone bond yields fell after the European Central Bank announced its programme of sovereign bond purchases. The 10-year German Bund yield was down 10 basis points on the week at just 0.36%. Even Greek 10-year yields were down more than a percentage point ahead of the weekend’s election.
US Treasury yields were broadly unchanged on the week at 1.83%.
*Source: J.P. Morgan Asset Management