The MSCI Pacific Index returned 1.5% in the week to 5 December.
Japan’s TOPIX was the region’s best performer, rising 2.5%. Polls by Japanese news organisations suggested prime minister Shinzo Abe’s ruling Liberal Democratic Party is positioned for a landslide victory in the elections on 14 December, boosting expectations that the government will be able to fully implement its programme of economic reforms.
In Hong Kong, the Hang Seng returned 0.1%. Retail sales growth eased in October, but the magnitude of the drop was not as big as anticipated, due to strong sales in electrical goods.
Elsewhere, Australia’s All Ordinaries rose 0.3%, as sentiment was boosted by strong domestic data releases. Retail sales rose 0.4% in October, while the trade deficit figure came in much lower than forecast.
Singapore’s Straits Times slipped 0.8%, dragged down by oil and gas stocks, which came under pressure from the fall in global oil prices to a five-year low.
Strong economic data helped propel US stocks higher in the week ended 5 December. The broad S&P 500 Index rose 0.4% to a new record high, while the Dow Jones gained 0.7%.
Economic news was dominated by the release of the latest monthly employment report at the end of week. Non-farm payrolls rose by 321,000 in November, which represents the strongest monthly jobs growth for three years and rounds off the best six months’ job creation seen in the US since 2000.
Other economic news reported in the week was also strong, suggesting that the US recovery was gaining momentum. The Institute for Supply Management’s manufacturing and non-manufacturing (services) surveys beat expectations in November, while construction spending increased faster than predicted in October.
The stronger economic data led to renewed speculation over when the Federal Reserve (the Fed) would start to raise US interest rates. Current market expectations continue to suggest that the Fed will act in the third quarter of 2015, but the odds of an earlier move are increasing.
One closely watched indicator is wage growth, which so far has been modest despite the pickup in employment. A faster rise in wages could contribute to growing inflationary pressures in the economy, possibly forcing the Fed to take action earlier, and more aggressively, than is currently expected. Last month, average hourly earnings rose by 0.4%—the fastest rate since November 2008. However, year-on-year earnings growth remained modest, at 2.1%.
Falling oil prices and a stronger US dollar, which dampens the cost of imports, are also acting to keep inflation in check. Many investors believe that these disinflationary pressures will keep the Fed on hold into the second half of 2015. However, cheaper oil could also boost US economic growth, putting more pressure on the Fed to act.
Fed vice chairman Stanley Fischer and New York Fed president William Dudley both stressed last week that the timing of interest rate increases and the pace of the subsequent tightening of monetary policy would be dependent on economic data and financial market conditions.
Fischer suggested that the Fed’s commitment to hold interest rates at their record low for a “considerable time” could be replaced with guidance that rate increases will depend on the performance of the economy. Investors will watch closely for any signs of a change in emphasis from the Fed when its interest rate setting board, the Federal Open Market Committee, meets on 17 December.
European equities delivered a positive return in the week to 5 December, with the MSCI Europe Index returning 0.7% amid hopes for further stimulus measures from the European Central Bank (ECB).
Germany’s DAX and Spain’s IBEX 35 delivered respective returns of 1.1% and 1.2%, while the French CAC 40 rose 0.7% and the Italian FTSE MIB was up 0.4%. The UK’s FTSE 100 ended the week 0.3% higher.
Sentiment remained buoyed by speculation that the ECB would announce new policy measures to support the eurozone economy at its policy meeting on Thursday. However, contrary to expectations, the central bank announced that it would wait until early next year to decide whether further monetary stimulus will be needed.
Meanwhile, the ECB announced cuts to its growth forecasts for the eurozone economy over the next two years. It now expects growth of 0.8% this year and 1% in 2015, vs. its June predictions for 0.9% and 1.6%. Inflation forecasts were also lowered, reflecting the continuing fall in oil prices.
Data released in the week confirmed that manufacturing activity in the eurozone remained sluggish in November, with the manufacturing purchasing managers’ index revised down to 50.1 from the initial estimate of 50.4, close to the 50 level that separates contraction and expansion. Manufacturing activity contracted in Germany, France and Italy, but rose in Spain, vs. expectations of a fall.
In Germany, the Bundesbank halved its 2015 growth forecast for the German economy, from 2% to 1%, and cut its prediction for 2014 growth to 1.4% from 1.9%. However, Bundesbank president Jens Weidmann said there were signs the current weakness will be short lived.
In the UK, chancellor of the exchequer George Osborne announced his Autumn Statement on Wednesday. The release, which comes six months before the May 2015 election, outlined the reform of residential property stamp duty, aiming to help lower house purchase costs, and the tightening of taxes for banks and large multinational corporations.
Next week, investors will be focused on the second round of the ECB’s targeted long-term refinancing operations. Market estimates for bank take up of the ECB’s cheap loans range between EUR 120-170 billion—anything around this level or stronger will indicate the eurozone’s credit environment is beginning to show signs of life, while anything below could trigger further monetary policy stimulus in early 2015.
Global Emerging Markets
The MSCI Emerging Markets Index was down 0.5% in the week ended 5 December.
Russia’s RTS again fell sharply, down 6.7%, amid a further drop in oil prices and another sharp depreciation in the value of the rouble on foreign exchange markets. Brent crude prices hit a five-year low of USD 67 per barrel at the start of the week, hitting the value of Russia’s major export, while the country’s central bank was forced to intervene to support the rouble as the currency continued to fall sharply against the dollar and euro.
Brazil’s Bovespa also experienced a heavy fall, down 4.9%, as the country’s central bank raised interest rates by half a percentage point to 11.75% to control rising inflation. The move was the second increase in less than two months. November data showed inflation in Brazil is running at an annual pace of close to 6.7%—well above the central bank’s 4.5% target despite near-zero economic growth this year.
Elsewhere, the MSCI China Index rose 0.9%, extending its strong recent gains sparked by easier monetary policy and hopes for an economic rebound. Taiwan’s Taiex and South Korea’s Kospi also made gains, up 0.2% and 0.3% respectively.
In emerging Europe, Hungary’s BUX (+2.3%) and Poland’s WIG (+0.8%) ended the week higher, although Turkey’s ISE 100 was down 1.1% amid concerns over higher inflation and a weaker lira.
Bonds & Currency
US Treasury yields rose across the board after a strong US jobs report led to speculation that the Federal Reserve may raise rates sooner than initially expected. Shorter-dated Treasury yields rose to their highest level since April 2011, with the policy-sensitive two-year Treasury yield up 15 basis points (bps) on the week, at 0.64%. The US 10-year yield was up 11 bps over the week, at 2.31%.
In contrast, in the eurozone periphery, the prospect of further European Central Bank easing pushed yields to record lows.
*Source: J.P. Morgan Asset Management
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