The MSCI Pacific Index rose 1.2% in the week ending 6 February.
Australia’s resource-heavy All Ordinaries was the region’s strongest performer, up 4.0%, led higher by the energy sector, which surged on the rising oil price. Mining stocks, in particular, performed strongly, benefiting from the higher iron ore prices.
On Tuesday, the Reserve Bank of Australia announced a surprise cut to interest rates, boosting investor sentiment. Later in the week the central bank lowered its forecasts for inflation and economic growth, raising expectations for another interest rate cut in the middle of the year.
In Japan, the TOPIX returned 0.1%. Disappointing domestic earnings reports held back gains, although financials stocks performed strongly after Mitsubishi UFJ Financial Group posted better-than-expected fourth-quarter earnings.
Hong Kong’s Hang Seng rose 0.7%, with energy stocks leading the index higher, while Singapore’s Straits Times ended the week 1.2% higher.
US stocks rebounded in the week to 6 February, as an encouraging jobs report painted the picture of a strengthening US economy. The S&P 500 was up 3.0%, while the Dow Jones Industrial Average rose 3.8% and the technology-biased Nasdaq returned 2.4%.
January’s employment report, released on Friday, confirmed that 257,000 jobs were created in the US in January, beating forecasts and marking the biggest increase since November 2008. The readings for November and December were both revised up, resulting in a total of just over one million jobs being created over the last three months. The report also highlighted an increase in wages, with average hourly earnings rising 0.5% in January, taking annual wage growth to 2.2%—the most in five months.
Despite the increase in new jobs, the unemployment rate increased slightly from 5.6% to 5.7%, due to a rise in the number of people seeking work.
The strong employment report, which suggests that the US economy is gaining momentum, has led to an increase in expectations that the Federal Reserve will proceed with raising interest rates in the middle of this year, most likely in June.
Data released in the week suggested that activity in the manufacturing sector is losing steam. The Markit manufacturing purchasing managers’ index came in at 53.9 in January, unchanged from December but still well above the 50 level that separates expansion from contraction.
Meanwhile, corporate news—namely a large takeover deal in the pharmaceuticals sector—was positive for market sentiment, with pharmaceutical giant Pfizer announcing that it would acquire Hospira, a provider of injectable drugs, for USD 17 billion.
The fourth-quarter corporate earnings season continued, with 64% of S&P 500 companies having reported so far. 77% of these have beaten earnings assumptions, with earnings growth averaging around 6%. Oil & gas and financials companies have suffered a drop in profits.
Nevertheless, the rise in US stocks in the week was led by energy companies, which benefited from the rally in global oil prices to their highest level in nearly a month.
European equities had a positive week ending 6 February, with the MSCI Europe Index up 1.6%. Investor sentiment was supported by a slew of healthy economic data from across the region, although Greece’s ongoing tensions with its international creditors added to volatility.
The Swiss SPI was among the stronger markets, gaining 2.5%. The French CAC 40, Spain’s IBEX 35 and the UK’s FTSE 100 delivered respective returns of 1.9%, 1.6% and 1.5%, while Germany’s DAX rose 1.4% and Italy’s FTSE MIB finished 1.3% higher.
Markets welcomed the release of encouraging Markit eurozone composite purchasing managers’ index (PMI) data that showed combined manufacturing and service industry activity accelerating for the second successive month in January, and the index reaching its highest level since July 2014. Output expanded in Germany, Italy and Spain, while the Irish economy was a stand-out performer. The downturn in the French economy continued.
On the employment front, the rate of job creation reached levels last seen in mid 2011, indicative of increasing optimism among employers about the year ahead. The prices charged component of the PMI showed the biggest monthly fall for nearly five years, with deflationary pressures likely to continue as lower global oil prices feed through to the real economy. In providing a boost to consumer spending power, this could serve as a tailwind to the eurozone recovery.
UK manufacturing also had an upbeat start to the year, with the Markit/CIPS Manufacturing PMI showing a rise in both output growth and new orders in January. Manufacturing output expanded for the twenty-third consecutive month, with the domestic market the primary driver of new orders.
Meanwhile, Greece continued to clash with its international creditors, failing to reach agreement on a new financing programme. Greek ministers toured eurozone capitals during the week to drum up support for a re-negotiation of the terms of the country’s bail out. Greek finance minister Yanis Varoufakis held long and intensive discussions with his German counterpart, Wolfgang Schäuble—the two failed to even “agree to disagree” over the proposals of the new anti-austerity Greek government.
In an effort to break the apparent stalemate in negotiations, the European Central Bank (ECB) revoked a waiver that allowed Greek government debt, despite its junk status, to be used as collateral in exchange for cheap cash from the ECB as part of its longer-term refinancing operations. Although this raises some concerns about how Greek banks will remain funded, they have the option of turning to emergency liquidity assistance from the Bank of Greece, which is more expensive. The Greek saga is likely to continue to affect sentiment in the coming weeks.
Global Emerging Markets
The MSCI Emerging Markets Index rose 1.5% in the week ending 6 February, although individual market returns varied widely.
Russia’s RTS surged 12.1% as oil prices rose sharply on the week, while hopes emerged of a possible peace plan to stop an escalation in the fighting in eastern Ukraine.
In central Europe, Hungary’s Bux rose 4.9% amid hopes for further interest rate cuts. Industrial production grew more than expected in the year to December, although output was down marginally on the month. Other central European markets were also stronger on the week, with the Czech PX-50 up 2.4% and Poland’s Wig 0.6% higher.
In Latin America, Brazil’s Bovespa recorded a 4.0% gain, boosted early in the week by the news that the chief executive of the state-run oil company Petrobras would resign. Investors hoped that Petrobras, which has been embroiled in various scandals, would benefit from new leadership.
Elsewhere in the Latin America region, Mexico’s Bolsa was 4.3% higher, boosted by higher oil prices and by a solid quarterly profit announcement from cement maker Cemex.
In emerging Asia, the MSCI China Index closed 0.6% higher. The People’s Bank of China eased its reserve requirement ratio for the country’s banks in a move designed to add liquidity to the banking system and support lending. Growth concerns were raised by weak industrial data, as the HSBC Purchasing Managers’ Index for January fell to 49.7. A reading below 50 indicates that manufacturing output is contracting.
India’s Sensex was down 1.6% amid weakness for bank stocks on concerns over rising bad loans. Elsewhere, Taiwan’s Taiex was 1.0% higher, while South Korea’s Kospi eked out a 0.3% gain.
Bonds & Currency
US Treasury yields rose over the week as the probability of the Federal Reserve raising interest rates by mid year appeared to increase following a strong US jobs report. Yields on two- and 10-year Treasuries rose to 0.64% and 1.94% respectively, 16 basis points (bps) higher on the week.
The 10-year German Bund yield was up 7 bps over the week to 0.38%.
*Source: J.P. Morgan Asset Management
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