The MSCI Pacific Index fell 1.0% in the week to 4 December.
Japan’s TOPIX was down 1.3%, as sentiment was dampened by concerns over the outlook for China’s economy. However, data released in the week pointed to early signs of recovery for Japan’s economy, which slipped into recession in the third quarter. October’s final manufacturing purchasing managers’ index remained firm at 52.6, above the 50 level that separates expansion from contraction, while consumer sentiment picked up solidly in November, according to the Cabinet Office’s consumer sentiment index.
Hong Kong’s Hang Seng rose 0.8%, as investors reacted positively to news that the International Monetary Fund would include the Chinese currency in its special drawing rights basket, therefore giving it global reserve currency status. The decision may make Chinese assets more attractive to foreign investors.
Australia’s resource-heavy All Ordinaries slipped 1.0%, due to weakness in mining stocks amid volatile commodity prices. Worries over Chinese economic growth further weighed on returns, as China is Australia’s largest export market and the world’s biggest consumer of iron ore.
Singapore’s Straits Times rose 0.7%.
Wall Street ended the week with modest gains, as a solid November employment report paved the way for the Federal Reserve (Fed) to raise interest rates later this month. The headline Dow Jones and technology-biased NASDAQ both gained 0.3%, while the broad S&P 500 was up 0.1%.
Investors continued to closely scrutinise the latest economic reports ahead of the next Fed interest rate-setting meeting on 15-16 December, with the strength of economic data likely to be a key influence on the decision to raise rates for the first time since 2006.
The Institute for Supply Management’s manufacturing and services reports both disappointed for November, with the manufacturing index dropping below the 50 level that separates contraction in activity from growth.
However, the November employment report was stronger than expected, with non-farm payrolls increasing by 211,000 from a month earlier. October’s report was also revised up to a gain in jobs of nearly 300,000. With a labour market recovery central to the Fed’s interest rate calculations, the strong employment news was seen as giving a green light for a rate increase this month.
For now, investors seem relatively sanguine about the move. Given the slack in the labour market and weak wage growth, interest rates are only expected to rise very modestly over the next 12 months, so the economic impact is expected to be contained as policy normalises.
Fed chair Janet Yellen said in the week that the US economy was strong enough to tolerate higher interest rates and reassured markets that the central bank would be cautious in its approach.
However, given the current level of job creation, capacity in the labour market could disappear faster than anticipated, sparking a rise in wage inflation and a quicker pace to policy normalisation than is currently priced into markets.
On the markets, banks and other financial stocks outperformed on expectations for a rate increase, which will boost interest margins, while a further drop in crude oil prices hit the energy sector.
Disappointment at the scale of additional monetary policy support from the European Central Bank (ECB) weighed on European markets in the week to 4 December. The MSCI Europe Index lost 2.9%.
Germany’s DAX (-4.8%) was the worst performer among the major eurozone markets, followed by the French CAC 40 (-4.4%), Italy’s FTSE MIB (-2.5%) and Spain’s IBEX (-2.3%). Outside the eurozone, the UK’s FTSE 100 fell 2.1%, while the Swiss SPI was down 1.9%.
Following its meeting on Thursday, the ECB announced a 0.1% reduction in the deposit rate—the rate it pays to commercial banks when they deposit funds with the central bank—from -0.2% to -0.3%. A negative rate means the ECB is charging banks to look after their cash deposits in an effort to encourage them to lend.
The ECB’s president, Mario Draghi, also announced a six-month extension in the minimum length of the current quantitative easing (QE) programme. Policymakers had previously committed to buy EUR 60 billion a month of sovereign bonds until at least September 2016. This pledge has now been extended to March 2017 “or beyond”, implying at least an additional EUR 360 billion in bond purchases, or the equivalent of around 3.5% of eurozone GDP.
The ECB will also now reinvest maturing principal payments on purchased debt, to prevent any future drag on the size of its balance sheet. Finally, the range of securities eligible for purchase under QE has been expanded to include regional and local government bonds.
There were two key areas of disappointment for investors: the size of the reduction in the deposit rate, which was at the lower end of expectations, and the lack of a change in the size of monthly bond purchases, despite previous hints from Draghi that the ECB could consider spending more on a monthly basis.
However, Draghi said the ECB is confident that the measures announced will be enough to strengthen the resiliency of the eurozone economy, given that a gradual recovery is underway, driven by rising consumption. He also emphasised that the ECB could and would do more in the future, if necessary.
On markets, energy stocks had a particularly tough week after speculation that Opec might lift its production ceiling sent oil prices plummeting. Brent crude fell 4.1% over the week to USD 43 a barrel.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.6% in the week ending 4 December, underperforming the MSCI World Index, which slipped 0.9%.
The MSCI China was up 0.5%, as lacklustre manufacturing data prompted hopes for further stimulus from the People’s Bank of China. The official purchasing managers’ index (PMI) fell to 49.6 in November from 49.8 in October, remaining below the 50 level that separates expansion from contraction.
Elsewhere in emerging Asia, India’s Sensex was down 1.9%. Bank stocks fell amid worries over a potential change in methodology for calculating lending rates for commercial banks, which have recently received criticism for not passing on interest rate cuts by the Reserve Bank of India.
South Korea’s Kospi fell 2.7% on the back of mixed economic data releases. The manufacturing PMI remained at 49.1 in November, while the current account surplus fell in October. However, according to the business survey by the Federation of Korea Industry, business sentiment improved in November to the highest level since July 2011.
In Latin America, Mexico’s IPC dropped 2.8% after comments from Federal Reserve chair Janet Yellen boosted expectations that US interest rates would rise in mid December. Higher interest rates in the US make investments in US dollars more attractive and investments in emerging markets less attractive.
In Brazil, the Bovespa slipped 1.1% as sentiment was hit by news that the Brazilian economy contracted by a larger-than-expected 1.7% in the third quarter, marking the sharpest recession in 25 years.
In emerging Europe, Russia’s RTS fell 5.2% amid ongoing geopolitical tensions, following Turkey’s shooting down of a Russian fighter jet along the Syrian border in the previous week.
The Polish WIG and Czech PX-50 were down 3.0% and 2.8%, respectively, while Hungary’s BUX slipped 0.4%.
Bonds & Currency
Bonds sold off sharply over the week, with the German 10-year yield rising 23 basis points (bps) and the 10-year Treasury yield up 5bps. Eurozone bonds came under pressure after the package of measures announced by the European Central Bank fell short of market expectations.
*Source: J.P. Morgan Asset Management
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