Surprise policy easing from the Bank of Japan (BoJ) contributed to a better week for Pacific markets. The MSCI Pacific Index jumped 3.4%.
Japan’s TOPIX surged 4.2%, helped by an unexpected decision by the BoJ to join the European Central Bank and Swiss National Bank—among others—in adopting negative interest rates. Japan’s policymakers left the pace and size of their quantitative easing programme unchanged, but reduced the rate on bank reserves held at the central bank from 0.1% to -0.1%.
The central bank’s governor, Haruhiko Kuroda, said the decision did not mean the BoJ had run out of scope to increase asset purchases from the current pace of JPY 80 trillion a year, and indicated that the programme could be increased in the future, if necessary, and interest rates could also fall further.
The move sparked a sharp decline in the yen against the dollar, reversing the strengthening trend of the past few weeks, which has been fuelled by safe-haven buying and has led to worries over profits at the country’s exporters.
Hong Kong’s Hang Seng gained 3.2%, helped by a rally for energy stocks and a strong bounce for Macau gaming-related names after casino operator Las Vegas Sands said it was seeing a stabilisation in the market.
Australia’s All Ordinaries was up 1.8%, while Singapore’s Straits Times rose 2.0%.
US stocks rose in the week ending 29 January, as sentiment was boosted by positive consumer confidence data and stronger-than-expected fourth-quarter corporate earnings results. The S&P 500 rose 1.7%, while the Dow Jones Industrial Average was up 2.3% and the technology-biased Nasdaq ended the week 0.5% higher.
The main focus was the Federal Reserve’s (Fed’s) first policy meeting since December’s interest rate rise. As expected, the Fed left interest rates unchanged, acknowledging recent market stresses, as well as potential risks to growth and inflation. However, the central bank did not rule out a March rate rise, keeping alive the uncertainty over the outlook for US monetary policy.
The fourth-quarter corporate earnings season reached its peak in the week, with the biggest banks, industrials and technology firms having now reported. Results have been stronger than expected, particularly for banks—as of Friday morning, around 200 S&P 500 companies had reported, with 80% beating on earnings per share by an average of 4.6%.
Economic data released in the week was mostly positive. The Conference Board Consumer Confidence Index increased 1.8 points to a three-month high of 98.1 in January, coming in above consensus expectations and confirming that households are managing to shrug off the uncertainty in financial markets.
Data also pointed to a strengthening housing market. House prices continued to push higher, according to the Case-Shiller and FHFA home price indices, which both rose in November, while new and pending home sales jumped in December.
However, US economic growth slowed to just 0.7% in the fourth quarter (on an annualised basis) from 2% in the previous quarter, while the headline for the Markit services purchasing managers’ index declined from 54.3 in December to 53.7 in the flash January report, marking the weakest reading since December 2014.
Energy stocks experienced significant volatility as oil prices continued to fluctuate, suffering fresh losses early in the week, before rallying to three-week highs. Outside energy, investors were focused on Apple, which experienced sharp falls in response to concerns about slowing iPhone shipments.
European stocks continued to follow swings in the oil price in the week to 29 January, ending a challenging month on a firmer footing as Brent crude hit a three-week high. The MSCI Europe Index gained 1.7%.
The rise in oil prices came as Russia said it was willing to discuss the possibility of coordinated production cuts with Opec. A dovish statement from the US Federal Reserve also contributed to improved sentiment on global equity markets, as did expectations of further easing from the European Central Bank (ECB).
Regional economic news was mixed. The European Commission’s economic sentiment indicator fell back slightly in January, but remained consistent with above-trend GDP growth. Eurozone inflation rose to an annual rate of 0.4% in January, up from 0.2% in December, but well below the ECB’s target of 2.0%. The rise was driven by what is likely to be a temporary easing in energy price deflation due to a base effect in January.
Fourth-quarter corporate earnings reports were broadly positive, with two of the region’s biggest industrial conglomerates, Siemens and Philips, announcing solid results.
Among the major regional markets, the UK’s FTSE 100 was the strongest performer, rising 3.1% as index heavyweights in the energy and mining sectors rallied. Diversified miner Anglo American announced 4,000 job cuts in its South African iron ore unit as part of an extensive restructuring operation designed to help it weather the commodities downturn.
France’s CAC 40 added 1.9%, helped by a robust fourth-quarter GDP growth reading. The French economy grew 1% quarter on quarter in the October-December period, despite the dampening effect of the Paris terrorist attacks on household consumption. Net trade was also a drag on the headline data, but fixed investment, particularly by non-financial corporates, was very strong.
Spain’s IBEX returned 1.1% and the German DAX was up 0.3%. Italy’s FTSE MIB missed out on the rebound, sliding 2.0% to take its January loss to 12.9%—the worst performance for any major global market.
On Wednesday, Italy finally reached a deal with the European Union on a new government guarantee scheme to manage the large stockpile of non-performing loans held by the country’s banks. However, financial stocks fell heavily before and after the announcement, amid concerns that the programme will be too limited to remove drags on bank performance and on the country’s economy.
Global Emerging Markets
The MSCI Emerging Markets Index was up 3.6% in the week ending 29 January 2016, helped by a rebound in commodity-sensitive markets as stronger oil and metal prices helped boost emerging market currencies. Sentiment was also lifted by news of slower US GDP growth, which suggested that US interest rates may not rise as quickly as previously feared.
Russia’s RTS climbed 7.8% as the price of Brent crude jumped 8.0% in the week, boosted by rumours that the Russian authorities were in discussions with Opec about potential coordinated production cuts—although the rumours were denied by Opec officials.
Brazil’s Bovespa rose 6.2%, boosted by improving sentiment as stronger commodity prices helped stabilise Brazil’s currency, the real. Growing hopes that US interest rates would only rise at a very modest pace was also supportive.
Elsewhere in Latin America, a stronger peso and stronger oil prices boosted Mexico’s IPC, which was up 4.8% in the week. Despite last week’s currency gains, the weakness of the peso remains a major concern, with Mexico’s central bank confirming that it would retain its dollar auction mechanism to try to stabilise the currency. The central bank will offer USD 200 million if the peso drops by 1% from the previous day’s close, and a further USD 200 million if the peso drops 1.5%.
Turkey’s BIST 100 gained 4.6%, again supported by currency gains as the Turkish lira, which had fallen 20% in the last 12 months against the US dollar, strengthened on hopes that a more dovish Federal Reserve would help stem investment outflows.
China’s markets also continued to gain attention amid further volatility in the domestic A-share market. The Shanghai Composite Index dropped 7% in the week, as the People’s Bank of China said it would increase its liquidity operations to avoid a liquidity crunch over the Lunar New Year celebrations. Internationally traded Chinese stocks fared much better, with the MSCI China Index up 1.9% in the week.
Bonds & Currency
Bonds rallied sharply last week, with US Treasury yields touching multi-month lows, as the Federal Reserve issued a dovish policy statement and the Bank of Japan unexpectedly moved to negative interest rates.
On credit markets, a bounce in oil prices and a corresponding pickup in global risk appetite saw US high yield spreads narrow, with energy issuers rebounding and retail flows turning positive.
*Source: J.P. Morgan Asset Management
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