A sharp rebound in Japanese shares provided a major boost to the MSCI Pacific Index, which gained 6.9% in the week ended 19 February.
Japanese stocks bounced back from the sharp falls of the previous week, with the TOPIX up 8.0% as weak economic data boosted hopes that the Bank of Japan (BoJ) would add further monetary stimulus to shore up the Japanese economy. Improved global sentiment also helped encourage investors to seek out bargains created by the earlier sell-off.
Economic news was disappointing, with Japan’s economy contracting 0.4% in the final three months of 2015 compared to the previous quarter, while exports fell for a fourth straight month in January, suggesting that the economic outlook remains bleak. Investors hope that the BoJ will move to add stimulus measures in the face of slowing growth, although the surprise move to introduce negative deposit rates last month inflicted massive damage on share prices across the Japanese banking sector.
Elsewhere, Hong Kong’s Hang Seng gained 5.3%, boosted by encouraging Chinese bank lending data and a stable Chinese currency, while Singapore’s Straits Times was up 4.6%.
In Australia, the All Ordinaries rose 4.0%—its strongest weekly gain since November—as energy stocks were boosted by stronger oil prices at the beginning of week, amid speculation over possible production cuts.
US stocks rose in the week ending 19 February, as sentiment was boosted by better-than-expected domestic economic data. The S&P 500 rose 2.8%, experiencing its longest run of gains this year, while the Dow Jones Industrial Average was up 2.6% and the technology-biased Nasdaq ended the week 3.8% higher.
US economic data released in the week painted a picture of a strengthening economy. Industrial production jumped 0.9% in January from a month earlier, following three consecutive months of declines. The better-than-expected figure was helped by a surge in utilities output, following a return to more seasonable weather after an unusually warm December. Manufacturing output also beat expectations in January, rising 0.5%, driven by a jump in auto production.
Inflation data for January was also better than expected. The producer price index rose despite expectations for a decline, as rising food prices offset declining energy prices. The consumer price index (CPI) was unchanged, while the core CPI, which excludes food and energy, hit a three-and-a-half-year high of 2.2% in January, up from 2.1%.
Meanwhile, the US labour market continued to improve. Initial claims declined 7,000 to 262,000 in the week ending 13 February, to the lowest level since November, while the four-week moving average fell 8,000 to 273,000, the lowest since December. The data, which sends an upbeat signal regarding conditions in the labour market, suggests that some of the higher claims figures reported about a month ago may have been related to temporary factors, such as an unfavourable change in the weather and layoffs of temporary workers following the holiday season.
Investors were also focused on the release of the minutes of the Federal Reserve’s January interest rate setting meeting for any further clues on the timing of the next interest rate rise. The minutes were viewed as dovish as they highlighted concerns over the risks to the US economy from the recent financial market volatility, with many investors taking the view that the US central bank would be in no hurry to raise interest rates. The chance of a rate rise in March is now slim, but a June rate rise is still on the cards, particularly as fears over China’s economy recede.
Almost 85% of the companies in the S&P 500 have now reported fourth-quarter earnings. So far, the best earnings growth is being reported in the telecoms, consumer discretionary, healthcare and technology sectors.
The MSCI Europe Index rose 4.3% in the week ending 19 February—the best weekly performance in over a year—as investors welcomed the prospect of further economic stimulus measures from the European Central Bank (ECB).
Hopes for a stabilisation in oil prices and fading concerns about Chinese currency depreciation also boosted sentiment, with the French CAC 40 (+5.7%), Sweden’s OMX 30 (+5.4%), Germany’s DAX (+4.7%) and the UK’s FTSE 100 (+4.3%) among the strongest performers for the week. Elsewhere, Spain’s IBEX 35 rose 3.5%, the Swiss SPI was up 3.1% and Italy’s FTSE MIB gained 2.4%.
Investors broadly welcomed signs that the ECB is preparing to unveil additional easing measures at its next policy setting meeting in March, particularly as senior ECB officials suggested that the central bank would take into account the potential impact of negative deposit rates on the region’s commercial lenders.
Investors have been worried that the ECB is looking to boost stimulus by cutting its deposit rate (the rate paid to commercial banks for storing cash with the central bank) further into negative territory. Negative rates are meant to encourage banks to boost lending, but investors are concerned that the policy is putting pressure on bank profits and making it more expensive for them to write loans.
Addressing investor concerns, ECB president Mario Draghi stressed last week that the ECB could deploy a variety of instruments if it decides that more action is required and reminded investors that the banking sector is now in a much stronger position compared to the situation back in 2012. Meanwhile, ECB vice president Vitor Constancio suggested that the central bank was looking at ways to deliver further policy easing that would encourage Europe’s commercial banks to increase lending without inflicting further damage on their profits.
ECB policy speculation sparked a modest rebound for European banking stocks from the sharp losses of the previous week, but the banks sector still significantly underperformed the broader market as hopes for further economic stimulus measures provided a bigger boost to economically-sensitive stocks—particularly those in the autos, industrials and basic resources sectors.
However, it remains to be seen how much further support the ECB can provide. Given the slowdown in global growth, ongoing weakness in commodity prices and the slow pace of regional structural reform, the central bank faces a considerable challenge to boost demand and push inflation up from zero towards its target of close to 2%.
Global Emerging Markets
The MSCI Emerging Markets Index climbed 4.2% in the week ended 19 February, as stronger commodity prices and better news from China boosted risk appetite.
The MSCI China Index surged 7.4%, as comments from central bank governor Zhou Xiaochuan that he saw no basis for further weakness in the renminbi helped stabilise the Chinese currency and calm markets. Comments from Chinese Premier Li Kequiang that the Chinese economy still had great potential also boosted sentiment.
Meanwhile, Chinese bank lending data rose sharply in January to RMB 2,510 billion from RMB 598 billion in December, boosted by seasonal factors, expectations for further renminbi weakness and liquidity injections from the People’s Bank of China.
Russia’s RTS jumped 5.2% as Russia and Saudi Arabia reached an accord to cap oil production, sparking hopes that a wider agreement could potentially be reached with other major producers to cut production and boost oil prices.
Brazil’s Bovespa gained 4.4%, as improved global sentiment helped investors shrug off a move from rating agency Standard & Poor’s (S&P) to cut Brazil’s credit rating further into junk territory. The rating downgrade to BB from BB+ comes just five months after S&P stripped Brazil of its investment grade rating.
India’s Sensex rose 3.1%, as the rupee fell to new lows against the dollar, boosting exporters, while investors looked ahead to the upcoming Federal budget announcement on 29 February amid hopes the government will announce new fiscal stimulus measures.
South Korea’s KOSPI was 4.4% higher. The Korean won ended the week at its weakest level in more than five years against the US dollar, hit by escalating geopolitical tensions as North Korea tested a new long-range missile.
Bonds & Currency
Bond markets were little changed over the week. The yield on the 10-year US Treasury was flat, while the German 10-year Bund yield was down 7 basis points as prospects grew for further easing from the European Central Bank.
*Source: J.P. Morgan Asset Management
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