Money Matters April 15th, 2016

Asia Pacific:
The MSCI Pacific Index fell 1.0% in the week to 8 April.
Japan’s Topix (-1.1%) remained under pressure from a strengthening currency. The yen hit its highest level against the dollar in 18 months as demand was boosted by a retreat from riskier assets around the globe. A warning from Bank of Japan (BoJ) governor Haruhiko Kuroda that the central bank was monitoring currency markets failed to stem the rise.
 
Renewed yen strength is being viewed as the latest sign that monetary policy may be reaching the limits of its powers. The BoJ might reasonably have expected that negative interest rates and a huge quantitative easing programme would weaken the currency, boosting profits at the country’s exporters and kickstarting inflation. Instead, the yen has been the best-performing major currency this year as investors have lost faith in Abenomics and global uncertainty has sparked safe-haven buying.
Australia’s All Ordinaries also slid 1.1% as further losses in the banking sector offset gains for energy and mining stocks. The country’s lenders are under pressure from concerns about the health of the global economy, as well as worries over bad loans and the potential for tighter regulation.
Hong Kong’s Hang Seng lost 0.6% as investors took a wait-and-see approach ahead of the release of a large batch of Chinese economic data. Singapore’s Straits Times was down 0.4%.
The MSCI Europe Index was little changed in the week to 8 April as major markets outside the eurozone gained, while eurozone markets were hit by a new wave of Greek debt worries.
The UK’s FTSE 100 was up 0.9% and the Swiss SPI returned 1.5%. In the eurozone, Spain’s IBEX lost 2.0%, the German DAX fell 1.8%, Italy’s FTSE MIB was down 1.5% and the French CAC 40 slipped 0.4%.
Greece was back in the headlines after leaked remarks between International Monetary Fund (IMF) officials involved in the country’s latest bailout gave rise to renewed concerns over its finances. Greek and other peripheral eurozone sovereign bond yields spiked, while 10-year German Bund yields moved close to their lows as nervous investors sought shelter.
According to a transcript published by WikiLeaks, the officials expressed frustration about the slow progress in talks between Athens and its lenders on reforms Greece has agreed to carry out in exchange for the bailout, and appeared to suggest a “crisis event” may be needed for a decision to be made.
The two officials also discussed the potential for the IMF to threaten not to participate in the bailout as a way of forcing Germany and other European Union (EU) creditors to reach a deal on debt relief, and raised concerns that the UK’s June referendum on leaving the EU could become a complicating factor if an agreement is not reached soon.
Although the comments largely reflected frustration with the EU’s decision-making process, Athens reacted in anger, saying the IMF was seeking to push Greece towards default—a claim vehemently denied by Christine Lagarde, the head of the IMF.
The resulting uncertainty coincided with some disappointing regional economic data. The eurozone service sector expanded at the slowest pace in 15 months in March, according to the Markit purchasing managers’ index, while German factory orders fell sharply in February amid weak overseas demand.
On the markets, eurozone banks had another challenging week, and auto-related stocks also struggled following weak US sales numbers. However, healthcare stocks jumped as their US peers rallied on hopes of consolidation in the sector, while a stronger oil price lifted energy stocks as hopes of an output freeze grew and US crude inventories unexpectedly fell.
United States:
Wall Street moved lower in the week ended 8 April amid uncertainty over the outlook for global growth and US monetary policy. The S&P 500 and Dow Jones both fell 1.2%.
The minutes from the latest meeting of the Federal Reserve’s (the Fed’s) interest rate setting committee were much less aggressive than had been expected, with policymakers expressing concerns about the risks to the US economy from weakness overseas.
With uncertainty also gathering over the US presidential election in November and the “Brexit” referendum in June, market expectations for the next US interest rate increase have moved further into the future, with many investors now not anticipating another rate rise until the Fed’s December meeting.
Investors also continue to factor weaker domestic economic conditions into lower corporate profit expectations. Last week several forecasters cut their US growth estimates for this year, mainly due to concerns over waning consumer sentiment despite the stronger labour market.
Evidence of weaker consumer spending was found in the March auto sales report, which showed that total car sales fell by 1 million to 16.9 million last month. The drop in car sales comes on top of downward revisions to monthly retail sales figures and a recent fall in consumer confidence readings.
There were encouraging signs, however, from the latest service sector surveys, with the Institute for Supply Management’s non-manufacturing index and the Markit services purchasing managers’ index both showing a robust increase in activity in March.
The data suggests that US service industries remain relatively strong despite recent weakness in manufacturing surveys. The services and manufacturing sectors tend not to diverge for substantial periods of time, so the continued strength of services activity suggests that the current divergence will be closed by a bounce in the manufacturing sector rather than a slowdown in the services sector.
On the market, autos struggled as sentiment towards carmakers was hit by last month’s poor car sales report. Banks also underperformed as receding interest rate expectations continued to hit prospects for a rebound in profit margins.
Healthcare outperformed as investors speculated over further consolidation in the sector following news that drug maker Pfizer had cancelled its USD 150 billion merger with Ireland’s Allergen. Energy stocks also outperformed as the oil price continued to bounce back from the multi-year lows reached earlier in the year.
Global Emerging Markets:
The MSCI Emerging Markets Index fell 0.8% in the week ended 8 April.
Argentina’s Merval (-7.3%) was among the weakest markets, hit by concerns over the ability of the country’s new government to push through vital economic reforms in the face of popular protests over rising utility prices and questions over President Mauricio Macri’s tax affairs, as leaked documents revealed that he had been the director of an offshore company.
India’s Sensex fell 2.4% amid cautious trading ahead of the latest quarterly corporate earnings season. An interest rate cut from the Reserve Bank of India, taking rates down to a five-year low of just 6.5%, was largely already priced into the market. Instead, investors focused on the deteriorating outlook for corporate profits, with earnings reported by Sensex-listed companies having declined in four of the last five quarters.
Taiwan’s Taiex was down 1.3% to a one-month low, as the government announced that it would suspend the National Stabilisation Fund, which has been actively supporting the stock market since last August.
The MSCI China Index fell 0.4%. Initial economic reports for March were positive, including the latest services purchasing managers’ index, which rose at a faster pace than expected. However, a better picture of the state of the Chinese economy should emerge this week when the bulk of last month’s data is released.
Brazil’s Bovespa was 0.5% lower as moves in the country’s congress to impeach President Dilma Rousseff continued to fuel market volatility.
Russia’s RTS was among the stronger emerging markets, rising 2.2% in the week as higher oil prices helped boost energy producers.
Bonds & Currency:
Bonds extended their rally, as mixed economic data and weaker risk-asset prices providing support. 10-year yields in the US, eurozone and the UK finished the week around 4-6 basis points lower.
For the US, Treasuries rallied as economic growth forecasts were trimmed in the face of a wider-than-expected trade deficit, weaker factory goods and durables data, and weaker
wholesale trade data.