The MSCI Pacific Index fell 2.8% in the week ending 12 December.
Japan’s TOPIX was down 3.2% ahead of this weekend’s elections to the lower house of the Japanese parliament. The snap elections were called by prime minister Shinzo Abe following last month’s decision to postpone a planned rise in the country’s consumption tax amid a further deterioration in the Japanese economy.
As expected, Abe’s ruling coalition won a strong mandate to continue its programme of economic stimulus and structural reform known as “Abenomics.” With the Japanese economy back in recession, investors hope that a strong policy response from the government, as well as further monetary support from the Bank of Japan, will help to tackle deflation and boost growth in 2015.
Elsewhere, Hong Kong’s Hang Seng fell 3.1% as mainland economic data painted a mixed picture of Chinese growth, while Australia’s All Ordinaries dropped 2.2% amid weaker oil prices and concerns over the outlook for Chinese demand for industrial commodities. In contrast, Singapore’s Straits times outperformed, recording a flat return for the week.
Wall Street fell sharply in the week ending 12 December amid concerns over global growth as oil prices continued to tumble. The headline Dow Jones Index was down 3.8% on the week, while the broad S&P 500 was 3.5% lower.
Brent crude fell to a new five-year low of £61 per barrel at the end of the week as the International Energy Agency cut its forecasts for oil demand next year. Oil producers and other energy-related stocks were among the biggest fallers in the week, but most sectors struggled as risk aversion spread through the market.
Investors are concerned that falling oil prices are being caused by weak global economic activity as well as an expansion in supplies from shale reserves. Mixed economic data from China and renewed nervousness over the eurozone also hit sentiment in the week.
Despite concerns over global growth, domestic US economic data remains strong. Weak oil prices are providing a boost to household incomes, as shown by the latest retail sales and consumer confidence reports. Retail sales increased by a stronger-than-expected 0.7% in November, while the University of Michigan’s consumer confidence index rose sharply in December to its highest level of the current economic expansion.
Lower fuel prices, combined with a strengthening labour market and recovering housing market, all bode well for consumer demand in the coming months, and this should support a further pickup in economic momentum.
The outlook for the economy and the strength of the US consumer will be key to the debate over the timing of US interest rate increases. The Federal Reserve’s interest rate setting board, the Federal Open Market Committee (FOMC), meets this week to set monetary policy. Expectations are for policymakers to begin preparing the markets for an interest rate rise in the middle of 2015.
The FOMC may drop its reference to keeping interest rates at record lows for a “considerable time,” which would signal a rate increase at either the June, July or September FOMC meetings—depending on the strength of the economic data next year.
The US economic recovery is helping to boost corporate profits growth, and this should continue to support US share prices into 2015. If, as expected, the rise in interest rates is gradual and well signposted, investors should be able to take tighter monetary policy in their stride.
European equities fell sharply in the week to 12 December, with the MSCI Europe down 5.6% amid concerns over the outlook for eurozone growth and political uncertainty in Greece.
Germany’s DAX returned -4.9%, while Spain’s IBEX dropped 6.9%, France’s CAC fell 7.0% and Italy’s FTSE MIB was down 7.4%. In the UK, the FTSE 100 returned -6.6%. The Swiss SPI, which is much more defensive, outperformed but was still down 3.5%.
On Thursday, the European Central Bank (ECB) announced the second allotment of its targeted long-term refinancing operations (TLTRO), designed to support lending in the eurozone by providing cheap long-term funding to the region’s banks. However, demand for the TLTRO was at the low end of analyst estimates, at EUR 130 billion, intensifying pressure on the ECB to take additional measures to expand its balance sheet in the coming months and inject more liquidity into the eurozone system.
Meanwhile, comments from Ewald Nowotny, head of Austria’s central bank and a member of the ECB’s governing council, further boosted expectations that the ECB will have to introduce additional monetary policy stimulus in 2015. Nowotny warned that the eurozone economy was undergoing a “massive weakening,” with inflation likely to fall further, and said that a quantitative easing programme could be “useful.”
There was further evidence of weak inflationary pressures in France and Germany in the week. The final French inflation number for November, showing prices rising by just 0.4% year on year (y/y), was even weaker than previously thought and slightly lower than in October. German inflation last month also dropped slightly from 0.8% y/y in October to 0.6%.
Greece was another cause for concern for investors after prime minister Antonis Samaras brought forward the country’s presidential elections by two months to 17 December. Failure by Samaras to secure a victory for his presidential candidate in December would force a snap general election to be called. With opinion polls suggesting a possible victory by the far-left, anti-European Syriza party, Greek bond yields rose back above 9%, reflecting concern over the country’s commitment to bringing its finances into shape.
Energy stocks continued to fall sharply in the week amid ongoing concerns about falling oil prices. In the UK, mining and oil stocks led the FTSE 100’s decline, with BP, BG and Petrofac all falling significantly.
Global Emerging Markets
Emerging Markets had a difficult week, with the MSCI Emerging Markets Index down 3.9%.
Russia’s RTS continued to slide, losing 12.1% in the week as the price of oil—the country’s major export—dropped sharply and the rouble hit new record lows against the US dollar. Russia’s central bank raised interest rates by one percentage point to 10.5% as it tried to defend the currency. Russian stocks are now 45% lower year to date.
Other oil and commodity exporting countries also struggled. In Latin America, Brazil’s Bovespa sank 7.7% as a growing corruption scandal at state-run oil company Petrobras added to worries over the falling oil price. Brazil’s currency, the real, fell to its lowest level since 2005 against the US dollar.
Concern over Chinese demand for commodities also hit sentiment in the region as Chinese factory output rose less than expected in November. Mexico’s IPC fell 3.5%, while Argentina’s Merval collapsed 13.7%. Argentinean stocks were hit by worries over the country’s finances, with bonds worth USD 12 billion due to be repaid in 2015.
The MSCI China Index was down 3.1%. Factory output grew less than expected last month, but retail sales grew strongly, up 11.7% over a year ago, suggesting that efforts to rebalance the economy towards consumption are beginning to pay off. Domestic China shares continued to perform very strongly. The Shanghai Composite Index, which includes domestic Chinese companies (A shares) which aren’t freely accessible to international investors, rose 0.5% in the week.
Elsewhere in Asia, Taiwan’s Taiex was 1.9% lower and South Korea’s Kospi fell 3.3%, while India’s Sensex was 3.9% lower.
Bonds & Currency
Investor risk aversion and tumbling oil prices pushed bond yields lower in the week ending 12 December. In the US, 10-year Treasury yields ended the week down 23 basis points at 2.08%, while in the eurozone German Bund yields fell to their lowest level ever, at just 0.63 as investors moved to price in more stimulus from the European Central Bank.
*Source: J.P. Morgan Asset Management
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