The MSCI Pacific Index delivered a return of 0.8% for the week ending 30 January. Australia, New Zealand and Japan were among the stronger markets, with the All Ordinaries, the NZX 50 and the TOPIX gaining 1.5%, 1.2% and 0.8%, respectively. Hong Kong and Singapore lagged, as the Hang Seng and the Straits Times recorded respective declines of 1.4% and 0.6%.
Investor sentiment on Japan was supported by a positive fourth-quarter corporate earnings season. With close to 40% of TOPIX companies having reported, 2014 earnings growth is averaging around 10%, with more than 60% of companies so far delivering earnings ahead of expectations.
Japanese exporters appear to be benefiting from the weaker yen, with the Bank of Japan’s measure of real export volumes rising by 3.3% month on month in December. This takes growth in Japanese exports for the final three months of the year to 20.8% quarter on quarter, well ahead of the third quarter’s 6.4% growth.
Meanwhile, the Monetary Authority of Singapore (MAS) and the Reserve Bank of New Zealand (RBNZ) moved towards an easier monetary policy stance. In an unscheduled policy meeting ahead of a regular review in April, the MAS unexpectedly announced an easing of its currency policy, sending the Singapore dollar sharply lower vs. the US dollar. It cited a shift downwards in the outlook for inflation, largely due to the decline in global oil prices.
US stocks delivered negative returns in the week to 30 January, as the Federal Reserve’s (the Fed’s) latest policy statement and disappointing GDP data weighed on sentiment. The S&P 500 was down 2.8%, while the Dow Jones Industrial Average and technology-biased Nasdaq returned -2.9% and -2.6% respectively.
On Thursday, the Fed released its latest policy statement, following its two-day monetary policy board meeting. The focus was on any change in the Fed’s language from December, particularly around the timing of the first interest rate rise.
The Fed made a couple of alterations to its language used to paint a more positive picture of the domestic economy—economic activity was described as expanding at a “solid” rather than “moderate” pace, while jobs growth was “strong” rather than “solid.” The central bank recognised that inflation had fallen further below its long-term objectives, but said it expects inflation to rise gradually towards 2% over the medium term.
The policy statement offered few clues as to when interest rates would rise. The Fed’s reference to “international developments” suggests that concerns over the global economy could lead to the Fed becoming more cautious when normalising policy. However, the central bank reiterated that it would remain “patient,” suggesting that a mid-year rise continues to look likely.
Data released in the week confirmed that US economic growth slowed to an annualised pace of 2.6% in the fourth quarter, from 5% in the third quarter, despite the boost to consumer spending from lower fuel prices.
Meanwhile, forward-looking economic data was mixed. On the positive side, the Conference Board’s consumer confidence index rose sharply to a seven-year high of 102.9 in January from 93.1 in December, the highest since August 2007, helped by the recent plunge in petrol prices as well as the improving labour market. On the negative side, orders for durable goods—viewed as a proxy for business investment—were weak, falling 3.4% in December vs. expectations for an increase.
The fourth-quarter corporate earnings season continued, with 26% of S&P 500 companies reporting so far. Results have been lacklustre, with 54% of companies beating sales estimates, by 1% on average. Financials and energy companies have posted negative earnings growth in particular, while Apple is the standout performer so far.
The outlook for interest rates looks set to continue to drive market sentiment over the coming months, with the first rise still widely expected to take place in the middle of the year.
The MSCI Europe Index fell 0.1% in the week to 30 January as uncertainty over Greece and concerns about deflation offset the positive reaction to the European Central Bank’s (ECB’s) quantitative easing announcement.
Among the major markets, Spain’s IBEX 35 was down 1.7%, the UK’s FTSE 100 slipped 1.2%, the French CAC 40 was down 0.8% and Italy’s FTSE MIB was 0.1% lower. Germany’s DAX managed a 0.4% rise, while Switzerland’s SPI gained 2.7%.
Swiss stocks rose on speculation that the country’s central bank would intervene to weaken the Swiss franc. The franc has appreciated sharply since the Swiss National Bank abandoned its exchange rate ceiling against the euro in mid January.
Elsewhere, markets were hit by concerns over the political situation in Greece, as the populist anti-austerity Syriza party won the country’s general election. Syriza has vowed to reverse the spending cuts and economic reforms demanded by Greece’s international creditors. The new Greek prime minister, Alexis Tsipras, says he will ask for some of the country’s debts to be written off.
Some investors are worried that Greece could be forced out of the eurozone if the terms of its bailout programme are breached. “Grexit,” as a Greek exit has been dubbed, would inevitably lead to speculation about which other debt-laden eurozone countries could leave the currency union, potentially sparking a damaging chain reaction across the continent.
The chances of Grexit still appear small, however, given that most Greeks (and the Greek government) want to stay in the eurozone. Nevertheless, Greece’s European partners will not want to give too many concessions to Syriza so as not to encourage radical parties elsewhere. In Spain, for example, the leftwing Podemos party—which shares much of Syriza’s anti-austerity agenda—is riding high in polls ahead of elections later this year.
Meanwhile, deflation concerns increased as the eurozone consumer price index (CPI) fell 0.6% in the year to January. The outcome was significantly worse than the 0.2% fall in consumer prices recorded in December. Falling oil prices have been a significant contributor to the drop in the CPI. Ultimately, lower fuel costs would be expected to boost consumer spending and corporate profits, but there are worries that deflation is becoming entrenched.
Uncertainty over Greece and concerns over deflation may continue to hold markets back, but the afterglow from the ECB’s quantitative easing announcement should help to support sentiment. Investors hope that sovereign debt purchases will increase demand for higher yielding assets, including company shares, while boosting business and consumer confidence across the eurozone.
Global Emerging Markets
The MSCI Emerging Markets Index finished the week 1.7% lower.
The Russian market once again exerted significant downward pressure on the broader index, as the RTS lost 10.2%. Latin American markets also had a lacklustre week, with Mexico’s IPC and Brazil’s Bovespa delivering respective returns of -4.0% and -3.8%. The MSCI China Index fell 2.9%, while India’s Sensex was down 0.3%.
Poland’s WIG and the South Korean KOSPI, meanwhile, eked out positive returns of 0.8% and 0.7%.
On the monetary policy front, the Central Bank of Russia (CBR) unexpectedly cut its key interest rate by 200 basis points (bps), to 15%. Market participants weren’t expecting the CBR to loosen policy so soon after it raised the rate by a massive 500 bps to 17% in December 2014, in an effort support the collapsing rouble and curb inflationary pressures.
Although the rouble remains under pressure and inflation continues to trend upwards, Russian policymakers appear to be shifting their focus to mitigating a further slump in the economy that could destabilise Russia’s financial system. Business leaders have warned that the economy could grind to halt and undermine Russian banks unless interest rates are lowered.
In China, meanwhile, the equity market suffered losses in the week as Chinese regulators announced that they will launch a new investigation into the lending practices of domestic banks. Banks have been told to tighten supervision of their lending practices to ensure that loans aren’t used to take aggressive bets in the Chinese equity market. Previous regulatory clampdowns—as recently as January—have led to sharp equity market declines.
Bonds & Currency
US Treasury yields fell sharply over the week as bond markets interpreted the Federal Reserve’s policy statement as dovish. The 10-year Treasury yield was down 16 basis points (bps) on the week to 1.66%, the lowest level since May 2013.
The German 10-year Bund yield fell to below 0.3%, down 7 bps, due to a further decline in eurozone inflation.
*Source: J.P. Morgan Asset Management
Money Matters February 5th, 2015Money Matters February 5th, 2015 AMA Team https://secure.gravatar.com/avatar/4ad9c580ca7195a1d4f6c40c38a18a15?s=96&d=mm&r=g