Asia Pacific
The MSCI Pacific Index was down 0.9% in the week to 21 November.
Japanese stocks ended the week unchanged despite headline news on the economic and political front. Data released in the week showed that Japan’s economy—the world’s third largest—contracted by an annualised pace of 1.6% in the three months to the end of September, compared with forecasts of a 2.1% rise. This was followed by a 7.3% contraction in the second quarter.
Economic output has been hit by a drop in consumption following April’s consumption tax rise. Prime minister Shinzo Abe responded by postponing the next sales tax rise—scheduled for October 2015—by 18 months. Abe also dissolved parliament in the week, calling a snap election for 14 December. Abe’s party, the Liberal Democrats, already have a majority in the lower house, but Abe is hoping to consolidate power over the opposition party and to gain public support for Abenomics—his ambitious programme of reforms designed to restore economic growth.
Hong Kong’s Hang Seng fell 2.7%, due to disappointing demand for Hong Kong shares in the first week following the establishment of a much-awaited trading link between the Hong Kong and Shanghai stock exchanges. The Shanghai-Hong Kong Stock Connect allows overseas investors to buy mainland stocks freely, and wealthy mainland investors to invest freely in Hong Kong-listed shares.
Singapore’s Straits Times rose 0.9%, with sentiment boosted by data that showed Singapore home sales rose 18% in October from the previous month, while Australia’s resource-heavy All Ordinaries was down 2.6%, hit by falling iron ore prices.
United States
US stocks delivered positive returns in the week to 21 November, as encouraging domestic economic data releases outweighed global growth concerns, while minutes from the Federal Reserve’s (the Fed’s) October monetary policy board meeting showed confidence among policymakers in the US economic recovery. The S&P 500 was up 1.2%, while the Dow Jones Industrial Average rose 1.0% and the technology-biased Nasdaq returned 0.5%.
On Wednesday, minutes from the Fed’s 28-29 October meeting were released. Although relatively uneventful, the minutes suggested that the central bank was comfortable with the outlook for continued economic recovery in the US, and that an easy consensus was reached in relation to the decision to end its stimulus programme.
The minutes also revealed that the Fed remains concerned about the possibility that inflation will edge lower in the near term. This has led to speculation that the central bank might delay the first interest rate rise, which is widely expected to take place in the middle of 2015. The minutes showed the Fed maintained its “considerable time” language in reference to how long interest rates will remain at their current record lows.
Data released in the week confirmed that core inflation is stabilising, however, helping to ease concerns over declining inflation. US core consumer prices (excluding food and energy) rose 0.2% in October, marking the largest increase in five months. However, falling gasoline prices left the overall consumer price index unchanged.
Nevertheless, energy stocks posted the biggest gains in the S&P 500 in the week, boosted by a rebound in the price of crude oil, which has dropped sharply since the summer.
Economic data releases relating to the housing and labour markets showed strength in the US economy. Existing home sales increased 1.5% in October, beating estimates and confirming a continued upward trend, with sales up in six of the past seven months. Initial jobless claims edged down 2,000 to 291,000 in the week ending 15 November, with continuing claims falling to a 14-year low, confirming that the labour market continues to pick up.
Meanwhile, two manufacturing surveys sent contrasting signals about momentum in the sector. The Markit manufacturing purchasing managers’ index moderated in the flash November report, suggesting the US manufacturing sector is cooling off following a very strong run earlier in the year, while the Philadelphia Fed’s index of manufacturing activity in November surged above expectations, leaping to its highest level since 1993, signalling a substantial pickup in manufacturing activity in the Philadelphia area.
Europe
European equities shrugged off disappointing economic data to perform strongly in the week ending 21 November, with the MSCI Europe Index returning 2.7%. Markets rose as comments from European Central Bank (ECB) president Mario Draghi raised expectations that the ECB would expand its asset purchase programme.
Germany and Italy saw some of the biggest gains, with the DAX and the FTSE MIB both up 5.2%. Spain’s IBEX 35 and the French CAC 40 delivered respective returns of 3.7% and 3.4%, while the Swiss SPI gained 1.8% and the UK’s FTSE 100 finished the week 1.4% higher.
European equity returns took a hit earlier in the week as the latest purchasing managers’ index (PMI) data for the eurozone disappointed, signalling the weakest growth in the manufacturing and services sectors for 16 months in November. The rate of eurozone manufacturing output growth remained modest, while growth in the services sector slowed. France remained a key area of weakness, while expansion in German business activity fell to its weakest rate since July 2013.
The latest bout of lacklustre economic data suggests the ECB’s monetary policy actions—including its programme of cheap lending and private asset purchases, coupled with record-low interest rates—have had limited effect on reviving eurozone economic growth. This is leading to increased pressure on the ECB to undertake more aggressive monetary stimulus measures, including the purchase of bonds issued by eurozone governments.
Resistance to quantitative easing (QE), or government bond purchases as practiced by central banks in the US, the UK and Japan, remains high among eurozone governments, particularly Germany. However, comments made by Draghi later in the week hinted at the prospect of some easing in the stance against QE in Europe, which led to a sharp rally in regional equities.
Draghi emphasised the need to raise inflation and inflation expectations as fast as possible, and said that if current policy remained ineffective, the ECB would consider altering the size, pace and composition of its asset purchases. As well as boosting equities, Draghi’s comments led to the euro depreciating towards a two-year low, and eurozone government bonds rallying across the board.
In the UK, meanwhile, retail sales growth was strong in October, reversing the previous months’ decline. On the political front, the eurosceptic UK Independence Party (UKIP) won a by-election to secure its second parliamentary seat, although the result was closer than predicted by polls.
Global Emerging Markets
The MSCI Emerging Markets rose 1.1% in the week to 21 November.
Brazil was the strongest performer, with the Bovespa up 8.3%. The index rose sharply on Friday on hopes that president Dilma Rousseff would announce the appointment of a new market-friendly finance minister. However, expectations were dashed, with no indication of when the announcement would be made. Guido Mantega, Brazil’s current and longest-serving finance minister, has lost favour with markets after four years of sluggish economic growth.
Returns elsewhere across Latin America were also strong. Mexico’s IPC rose 2.9%, despite a downward revision to domestic growth expectations, while Argentina’s Merval ended the week 2.3% higher.
The MSCI China slipped 2.6% in the first week following the establishment of a trading link between the Hong Kong and Shanghai stock exchanges, as profit-taking among mainland investors outweighed fund inflows from international investors. Uncertainty about the outlook for China’s economy reignited after the HSBC-Markit flash manufacturing purchasing managers’ index fell to 50.0 in November, less than expected and marking the lowest reading since May. On Friday, the People’s Bank of China surprised markets with a rate cut, with the central bank stating it is ready to use monetary instruments to boost liquidity in the country’s interbank market if needed.
Taiwan was Asia’s top major market, with the Taiex rising 1.2%. Taiwan’s export orders for October doubled market expectations, due to strong demand for Apple’s iPhone 6 and 6 Plus, which include parts made by numerous Taiwanese technology manufacturers. India’s Sensex and South Korea’s Kospi both rose 1.0%.
In emerging Europe, Russia’s RTS returned 5.8%. Sentiment was boosted by news that Russia’s upper house of parliament approved an “anti-offshore” law requiring taxpayers to report foreign profits—this is designed to prevent capital outflows via “offshores,” estimated at USD 200 billion in 2014.
Bonds & Currency
Prices of government bonds in the US and Europe strengthened in the week as investors reacted positively to further policy easing from the Chinese central bank and signs that the European Central Bank may take more aggressive policy action.
The 10-year US Treasury yield was down 1 basis point (bp) in the week, while the 10-year German Build yield was 2 bps lower and the equivalent Italian yield fell 10 bps to a record low. Several other eurozone sovereign yields also hit record lows.
*Source: J.P. Morgan Asset Management
