The MSCI Pacific Index returned 0.6% in the week to 28 November.
Hong Kong’s Hang Seng was the region’s best performer, rising 2.3%, as sentiment was boosted by the unexpected cut in Chinese interest rates.
Japan’s TOPIX rose 0.7%, as export-focused stocks benefited from a weaker Japanese yen. A weaker yen makes Japanese exports more attractive in international markets and increases the value of profits earned overseas.
Economic data out of Japan was mixed. On the positive side, industrial output rose a higher-than-expected 0.2% in October from the previous month, while retail sales rose 1.4% in the year to October. However, Japan’s annual core inflation (consumer prices excluding fresh food) slowed for a third straight month in October due to falling oil prices, raising doubt over whether the Bank of Japan’s 2% inflation target will be met next year.
Australia’s resource-heavy All Ordinaries rose 0.1%, despite the negative impact from the slump in oil prices, while Singapore’s Straits Times was up 0.2%.
The broad US equity market advanced modestly in the week ending 28 November—a holiday-shortened week due to Thanksgiving—with the S&P 500 Index gaining 0.2% and the Dow Jones Industrial Average up 0.1%. The technology-heavy NASDAQ fared better, returning 1.7%.
Investor focus towards the end of the week was squarely on the meeting of the Organisation of the Petroleum Exporting Countries (OPEC). Market volatility ensued after OPEC’s announcement that production quotas would not be cut to halt the rapid decline in the oil price, which has fallen by around 30% over just a few months. The cartel has decided to let market supply and demand dynamics dictate price levels, for now.
Global oil supply growth has outpaced demand, resulting from the expansion in US production from unconventional sources, as well Libya ramping up its output.
The declining oil price has continued to exert downward pressure on inflation globally. Sluggish inflation expectations may lead to the Federal Reserve pushing back the timing of the first increase in the federal funds rate later into 2015. Falling energy prices are positive for US consumers, boosting their purchasing power and supporting growth in the broader economy. Nevertheless, retail sales on Black Friday, the shopping day that follows Thanksgiving, disappointed.
The broader US economy continued to show further underlying strength, with GDP growth revised up to an annual rate of 3.9%, from an advance estimate of 3.5%. According to the US Department of Commerce’s Bureau of Economic Analysis, business investment rose in the three months to the end of September, as did consumer spending on both goods and services.
In the US labour market, initial jobless claims rose by 21,000 to 313,000 in the week ending 22 November—although this is the highest level of claims since early September, it may be in part due to the recent spell of extremely cold weather in parts of the country and holiday-related volatility.
Data on the housing market was mixed, while consumer confidence appeared to have waned slightly in November, according to the Conference Board.
Most investors retain confidence in US economic growth, the rate of which remains ahead of other developed economies. Although US equity valuations are showing some signs of becoming stretched, stronger growth should boost corporate profits and provide support for US share prices.
European equities rose in the week ending 28 November, with the MSCI Europe Index returning 0.7%. Sentiment was boosted by lingering prospects for further stimulus measures from the European Central Bank (ECB) and encouraging economic data out of Germany.
Germany was the region’s strongest performer, with the DAX rising 2.6%. Spain’s IBEX 35 was up 2.4%, while the French CAC 40 and Italian FTSE MIB delivered respective returns of 1.0% and 0.3%. The UK’s FTSE 100 delivered a negative return, down 0.4%.
Sentiment remained buoyed by expectations that the ECB will expand its bond-buying programme from asset-backed securities to corporate and sovereign bonds, following comments from the central bank’s president, Mario Draghi, at the end of the previous week. However, a speech by ECB vice president Vitor Constancio on Thursday suggested that the ECB will wait until the start of 2015 before deciding whether to expand its stimulus.
Meanwhile, positive economic data out of Germany suggested that the outlook for the eurozone economy could be improving. The Ifo index of business confidence, based on a survey of 7,000 executives, climbed to 104.7 in November from 103.2 in October, marking the first rise in seven months.
Furthermore, Jean-Claude Juncker, the president of the European Commission, unveiled a new EUR 315 billion infrastructure investment programme, designed to stimulate demand within the eurozone by funding new infrastructure projects.
Energy stocks came under pressure in the week as oil prices fell sharply amid uncertainty over the outcome of an Organisation of the Petroleum Exporting Countries (OPEC) meeting on Friday, which resulted in the decision to not cut production in the face of increased global supply. In the UK, in particular, shares in energy groups BP, Shell and BG Group were the biggest drag on the FTSE 100. However, on the positive side, European airline stocks were lifted by the prospects of lower fuel costs.
Global Emerging Markets
Emerging market equities delivered a positive return in the week ending 28 November, with the MSCI Emerging Markets Index rising 0.7%.
The decision by the Organisation of the Petroleum Exporting Countries (OPEC) to continue production at current levels—despite oversupply exerting significant downward pressure on global oil prices—had a varied impact across the emerging markets.
Several emerging market countries are net importers of oil, and therefore benefit from lower oil prices. India’s Sensex gained 1.3%, while the MSCI Thailand Index and MSCI Indonesia Index delivered respective returns of 1.0% and 0.8%.
China was among the stronger emerging markets, with the MSCI China Index rising 4.0%. Chinese equities have made gains following the People’s Bank of China’s surprise interest rate cut on 21 November, the first reduction in its deposit rate since 2012. This has boosted expectations of further monetary easing measures to come.
Meanwhile, oil exporters suffered in an environment of commodity price volatility. In Latin America, Brazil’s Bovespa fell 2.5%, while Mexico’s IPC was down 1.0%.
However, Russia’s RTS was once again the laggard, down 8.0% on the week, while the rouble continued to plummet. The Russian economy is suffering as a result of the plunging oil price and the continued impact of US and European Union sanctions.
Bonds & Currency
Bonds rallied in the week, as investors speculated that the sharp fall in oil prices would delay rate rises from the Federal Reserve and Bank of England, and make it more likely that the European Central Bank (ECB) would need to extend its asset purchases to include government bonds.
Speculation over ECB quantitative easing helped drive several eurozone bond yields to record lows, with German 10-year Bunds below 0.7%. Demand for US Treasuries was also strong, with the 10-year yield down 14 basis points on the week at 2.17%.
*Source: J.P. Morgan Asset Management
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