The MSCI Pacific Index fell 1.0% in the week ending 27 March.
Japan’s TOPIX was down 1.8%, as weak economic data weighed on sentiment. Japanese core inflation, which includes energy prices but excludes food, slowed to 0.0% year on year in February, down from 0.2% in January, due to further declines in energy prices. Household consumption declined for an eleventh consecutive month in February, while retail sales rose a lower-than-expected 0.7%. On the positive side, sentiment among Japan’s small- and medium-sized companies improved in March, with the Shoko Chukin small business confidence index rising to its highest level since March last year.
Japanese exporters came under pressure in the week from the strengthening Japanese yen. A stronger yen is negative for exporters, as it makes Japanese products less attractive in international markets and reduces the value of profits earned overseas.
Hong Kong’s Hang Seng rose 0.5%, as sentiment was boosted by a 7.2% rise in exports in February. Mainland bank and property shares listed in Hong Kong led the gains, following reports that the government is considering making it easier to purchase homes in China.
Elsewhere, Australia’s resource-heavy All Ordinaries slipped 0.8%, despite strong performance from mining stocks, which benefited from a recovery in commodity prices in the week. Singapore’s Straits Times rose 1.1%.
US stocks fell in the week to 27 March, as mixed economic data releases led to uncertainty over the timing of the first interest rate rise. The S&P 500 was down 2.2%, while the Dow Jones Industrial Average and the technology-biased Nasdaq fell 2.3% and 2.7%, respectively.
US durable goods orders—viewed as a proxy for business investment—fell 1.4% in February vs. expectations for a 0.2% rise, while January’s 2.8% gain was revised down to 2.0%. The unexpected weakness led to speculation that the timing of the Federal Reserve’s (the Fed’s) first interest rate rise—widely expected to take place this summer—could be delayed.
Meanwhile, the third estimate for fourth-quarter US economic growth came in at 2.2% as previously reported, contrary to expectations that it could be revised up to 2.4%. Consumer spending, however, was the strongest since 2006, suggesting that consumers benefited from the drop in gas prices in the quarter.
However, inflation data came in above expectations. Core inflation, which excludes food and energy prices, rose 0.2% in February, bringing the year-on-year rate to 1.7%. Headline inflation rose for the first time in four months, from -0.1% to 0.0%. Data also confirmed further improvement in the US labour market, with weekly jobless claims declining by a higher-than-expected 9,000 to 282,000 in the week ending 21 March.
While the weaker-than-expected durable goods data led to speculation that the Fed could delay its first rate rise, the week’s inflation and employment figures reinforced the view of some that a June interest rate rise could still be on the cards.
Manufacturing activity picked up in March, with the Markit flash manufacturing purchasing managers’ index (PMI) edging up to 55.3 from 55.1 in February. This confirmed that temporary factors—particularly the unusually harsh winter weather—likely weighed on activity in February. The Markit services PMI, which reflects business activity, beat expectations, increasing by 1.5 points to 58.6.
Financial and technology stocks led the declines in the week, as investors focused on the weak economic data releases and the forthcoming first-quarter corporate earnings season. Energy stocks performed well as the deepening political crisis in Yemen pushed up oil prices.
The outlook for interest rates will continue to drive sentiment in the coming months, with markets keeping a close eye on employment and inflation data in particular for any indication of the timing of the first rate rise.
European stock markets had a mixed week, as end of quarter profit taking, uncertainty over the timing of US interest rate rises and instability in the Middle East dominated trading. The MSCI Europe Index fell 1.8%.
Among the major European markets, the UK’s FTSE 100 fell 2.4% after hitting new record highs earlier in the week. The French CAC 40 was down 1.1%, while the German DAX was 1.4% lower. Italy’s FTSE MIB dropped 0.8% and Switzerland’s SPI lost 3.1%, while Spain’s IBEX 35 returned 0.1%.
The start of the European Central Bank’s EUR 1.1 trillion quantitative easing programme took its toll on bond markets, with German Bund yields hovering close to their record low, while the euro fell to a 12-year low against the US dollar at USD 1.0456.
The weaker euro does appear to be having some positive influence on eurozone exports, with manufacturing activity in the region on the up. The services sector also seems to be in recovery mode. The preliminary eurozone composite purchasing managers’ index, which measures activity in both the manufacturing and services sector, rose to 54.1 in March—its highest reading since May 2011. A reading above 50 indicates expansion.
Worries over deflation hit sentiment, as the annual rate of UK consumer price inflation fell to 0.0% in February—the lowest rate since records began in 1988. Many commentators now expect the UK to follow the eurozone into deflation in the coming months.
Oil price weakness has been a major factor behind the drop in inflation globally. However, oil prices surged in the week following Saudi-led air strikes against Iranian-backed rebels in Yemen, while a rally in metal prices may also help to lift inflation if sustained. Bank of England policy maker Ben Broadbent also played down the threat of deflation, while central bank governor Mark Carney warned that UK interest rates were still likely to move higher.
Meanwhile, the weakness of the euro—which is boosting import prices—and the nascent recovery in industrial activity suggests that deflation pressures are also likely to lift soon in the eurozone.
European share prices remain attractive compared to ultra-low bond yields. Although risks remain (Greece, for example, continues to negotiate another bailout with its creditors), the economic backdrop does now look to be finally improving and this should help European companies to grow their profits, providing further support to European markets.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.6% in the week to 27 March, as worries over the escalating conflict in Yemen, where Saudi Arabia has carried out air strikes against Iranian-backed rebels, weighed on sentiment.
The MSCI China slipped 0.6%. Data indicated a slowdown in Chinese manufacturing activity, with the preliminary HSBC manufacturing purchasing managers’ index falling to an 11-month low of 49.2 in March from 50.7 in February—below the 50 mark that separates contraction from expansion. The lower-than-expected reading has raised hopes for further stimulus measures from the Chinese government.
Elsewhere in emerging Asia, Taiwan’s Taiex was down 2.5%. The central bank kept policy rates on hold at its quarterly monetary policy meeting, as expected, despite recent negative inflation readings. South Korea’s Kospi dropped 0.9%. According to a Bank of Korea survey, consumer sentiment unexpectedly softened in March. India’s Sensex, meanwhile, fell 2.8%.
In Latin America, Mexico’s IPC returned -0.8%. A lower-than-expected rise in consumer prices in early March led the Bank of Mexico to leave its overnight interest rate target unchanged at 3%, as expected. The central bank is likely to keep rates unchanged until the US Federal Reserve begins raising rates. Brazil’s Bovespa was down 3.6% in the week, while Argentina’s Merval fell 6.3%.
Russia’s RTS slipped 0.7% in the week, as sentiment was hit by an announcement from the country’s economy minister stating that Russia’s economy contracted by 1.5% in the first two months of 2015.
Elsewhere in emerging Europe, the Czech PX-50 was down 2.1%, Poland’s WIG fell 1.6% and Hungary’s BUX rose 3.8%. Hungary’s central bank cut its main interest rate for the first time in eight months on Tuesday.
Bonds & Currency
US Treasury yields rose in the week, as mixed economic data led to speculation that a June rate rise by the Federal Reserve could still be on the cards. The yield on the 10-year Treasury was up 3 basis points at 1.96%.
In the eurozone, the start of the European Central Bank’s (ECB’s) EUR 1.1 trillion quantitative easing programme took its toll on bond markets, with German Bund yields hovering close to their record low
Credit spreads narrowed across the board. In the US, spreads tightened in response to modestly higher Treasury yields and firming energy prices on the deepening conflict in Yemen. In the eurozone, the ECB’s quantitative easing programme continued to boost demand for credit.
*Source: J.P. Morgan Asset Management
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