The MSCI Pacific Index returned 2.3% in the week ending 20 February, with Japan’s TOPIX (+3.5%) accounting for a significant share of the gains. Other regional markets delivered more modest returns. Hong Kong’s Hang Seng was up 0.6%, while Singapore’s Straits Times and Australia’s All Ordinaries rose 0.3% and 0.2%, respectively. New Zealand’s NZX 50, meanwhile, fell 0.6%.
The Bank of Japan (BoJ) left policy unchanged at its February meeting, stating that its programme of quantitative and qualitative monetary easing has been exerting the intended effect, and will continue with the aim of achieving the BoJ’s price stability target of 2.0%. BoJ governor Haruhiko Kuroda does not seem to be in any rush to increase monetary accommodation in the form of asset purchases.
Domestic developments in Japan have been supportive of investor sentiment. With most companies in the TOPIX now having reported, 70% have delivered better-than-expected profits. Furthermore, a poll by Reuters (the Reuters Tankan, which closely tracks the BoJ’s survey) showed that sentiment among Japanese businesses rose in February, particularly in the auto and transport equipment manufacturing sectors.
The Australian market eked out a positive return, due in part to the good performance of oil-related stocks following a jump in the price of Brent crude to around a two-month high. Elsewhere, Australia’s biggest investment bank, Macquarie Group, performed strongly as it issued a strong trading update and guided for profits towards the high end of its targeted range.
US stocks continued to make gains in the week to 20 February, as sentiment was buoyed by the latest minutes from the Federal Reserve’s (the Fed’s) meeting, which showed policymakers are concerned about the impact of raising interest rates too soon. The S&P 500 rose 0.6%, while the Dow Jones Industrial Average was up 0.7% and the technology-biased Nasdaq returned 1.3%.
On Wednesday, the minutes from the Fed’s January policy-setting meeting were released. The minutes highlighted concern that raising interest rates too early could weigh on the US economic recovery, negatively affecting the strengthening labour market, in particular. They also addressed the central bank’s use of the word “patient” in its rate guidance, acknowledging the risk that the removal of this reference could drastically shift expectations for the first rate rise and cause markets to overreact.
The minutes have led to speculation that the timing of the first rate rise could be pushed out to September, rather than June, as currently expected. However, the Fed stressed that its decision would remain dependent on US economic data.
Data released in the week continued to point to a strengthening labour market. Jobless claims fell 21,000 in the week to 14 February, more than expected, while Wal-Mart—the country’s largest private employer—announced a wage increase, following similar moves from firms such as Gap and IKEA.
Meanwhile, the manufacturing sector expanded in February. The preliminary reading of the Markit manufacturing purchasing managers’ index increased to 54.3 from 53.9 in January, beating expectations for a modest decline and remaining above the 50 mark, which separates contraction from expansion.
However, falling energy costs led to a drop in producer prices. The producer price index for final demand, which measures the prices that businesses receive for their goods and services, fell 0.8% in January from the previous month, marking its biggest decline in more than five years.
Financial stocks, which tend to benefit from an environment of higher interest rates, declined in the week.
The outlook for interest rates looks set to continue to drive market sentiment over the coming months. Attention will be focused on any change to language in the Fed’s March meeting. Despite all the focus on timing, however, the much more important issue is the pace of rate rises, and all signs point to tightening taking place very gradually.
The MSCI Europe Index returned 1.4% in the week ending 20 February, taking European equity returns on a year-to-date basis to a healthy 8.1%. Regional markets largely shrugged off developments in the Greek crisis, with sentiment supported by further economic improvement. This was reflected in upbeat eurozone January purchasing managers’ index (PMI) data in particular.
Italy was among the week’s top-performing markets, with the FTSE MIB rising 3.0%. The Swiss SPI and France’s CAC 40 delivered respective returns of 2.7% and 1.5%, while Sweden’s OMX Stockholm 30 gained 1.4% and Spain’s IBEX 35 was up 1.3%. The German DAX (+0.8%) and the UK’s FTSE 100 Index (+0.6%), meanwhile, fared less well.
According to Markit PMI estimates, growth in eurozone business activity reached a seven-month high in February, with faster expansion seen in both the manufacturing and the services sectors. Also encouraging was the pick up in the rate of job creation reported during the month, with employers becoming more confident in the outlook for the eurozone economy and looking to take on new staff to meet rising demand.
By country, the February PMI data showed an increasingly robust upturn in Germany, driven primarily by its services sector, while France finally showed signs of growth, having languished in stagnation for longer than many of its eurozone peers.
Other economic developments also supported investor sentiment, including a rise in eurozone consumer confidence in February following January’s large gain, and car registrations (which reflect individuals’ willingness to spend) ahead of estimates.
In the UK, inflationary pressures eased, with the consumer price index (CPI) rising by 0.3% in the year to the end of January 2015, down from 0.5% in December. Falling fuel and food prices were the main contributors to the slowing rate of inflation. UK labour market conditions continued to strengthen, with the unemployment rate for the three months to the end of December 2014 at 5.7%, down from 7.2% over the same period a year earlier.
Greece struck a deal with its international creditors late on Friday to extend its external aid arrangement for four months. Athens will now submit a list of concrete structural reform proposals to eurozone finance ministers (the Eurogroup) on Monday, which is expected to focus on reforms in areas such as tax evasion, corruption and public administration.
The Eurogroup has insisted that the only way for Greece to access the money in its current aid programme is to agree on specific reform measures and then implement them. Negotiations will now commence on a new aid package to take effect beyond June.
Global Emerging Markets
The MSCI Emerging Markets Index returned 0.1% in the week to 20 February.
The MSCI China was up 0.5%, led by higher demand for small-cap stocks that investors hoped would benefit from an increase in consumption in the Lunar New Year holiday. On Tuesday, the head of the People’s Bank of China’s research bureau said that Chinese economic growth could slow to between 6.9% and 7.1% this year, due to weakness in the property market and the risk of deflation.
Elsewhere in emerging Asia, India’s Sensex also returned 0.5%, as sentiment was boosted by the announcement from the Central Statistics Office that the country’s revised growth estimate for the fourth quarter—at 7.5%—was higher than that of China’s economy, which grew 7.3%. South Korea’s Kospi rose 0.2%, while Taiwan’s Taiex delivered a flat return.
In Latin America, Mexico’s IPC was up 1.1%, despite the central bank’s cut to its economic growth forecast for this year. The Mexican economy is expected to grow between 2.5% and 3.5% in 2015, less than the previous estimate of 3% to 4%, partly as a result of further declines in oil prices.
In eastern Europe, Russia’s RTS slipped 0.4%, due to concerns about the possibility of further sanctions on Moscow. Economic data also weighed on sentiment, with retail sales falling more than expected in January due to a sharp decline in real wages. The Czech PX 50 fell 0.8%, while Hungary’s Bux slipped 0.4% and Poland’s Wig was up 0.4%.
Bonds & Currency
Developed bond markets were relatively stable this week following last week’s volatility. Yields on 10-year UK Gilts, US Treasuries and German Bunds all registered single-digit increases, while the equivalent Japanese government bond yield fell slightly.
Spreads have been tightening in the US high yield bond market, due to higher Treasury yields and demand from Europe. Inflows into US credit have been strong year to date.
The US dollar-denominated emerging market corporate bond market has seen meaningful outflows this year.
*Source: J.P. Morgan Asset Management
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