Money Matters, January 22nd, 2015

Asia Pacific
The MSCI Pacific Index was down 1.2% in the week ending 16 January, as continuing weakness in commodity prices and concerns over global economic growth dampened risk appetite.
Australia’s resource-heavy All Ordinaries was the region’s worst performer, falling 3.0%, as further declines in iron ore, copper and oil prices led to heavy selling of mining stocks. On the positive side, however, a solid jobs report confirmed that Australia’s unemployment rate unexpectedly fell to 6.1% in December from 6.2% in November.
Japan’s TOPIX fell 1.2%, as renewed weakness for oil prices caused the Japanese yen to strengthen further, weighing on manufacturing exporters in particular. A stronger yen is negative for exporters, as it makes Japanese products less attractive in international markets and reduces the value of profits earned overseas.
Hong Kong was the only region to deliver a positive return, with the Hang Seng rising 0.8%. Returns were boosted by better-than-expected Chinese trade data and a positive reaction to the announcement of a reorganisation plan for two of the city’s biggest companies, Cheung Kong and Hutchison Whampoa.
Elsewhere, Singapore’s Straits Times slipped 1.1%.hh
United States
US stocks ended the week to 16 January in negative territory, as a decline in US retail sales and a weak start to the fourth-quarter corporate earnings season weighed on sentiment. The S&P 500 was down 1.2%, while the Dow Jones Industrial Average and the technology-biased Nasdaq fell 1.3% and 1.5% respectively.
Crude oil prices continued to retreat in the week, while copper prices also fell sharply, down 12% so far this year, leading to further sharp declines in energy stocks and fuelling concerns over a slowdown in global economic growth. Adding to these concerns, the World Bank announced cuts to its global growth forecasts for this year and next. However, it raised its forecast for growth in the US this year from 3% to 3.2%.
Global growth concerns led to a cautious mood ahead of the fourth-quarter corporate earnings season, which kicked off in the US in the week. 40 S&P 500 companies have reported so far, posting a 6.7% year-on-year (y/y) decline in earnings growth. This is mainly due to the financial sector, where banking stocks have fallen sharply due to lower-than-expected earnings.
Data confirmed that US retail sales contracted by 0.9% in December from the previous month—the most in almost a year. The weaker-than-expected figure raises questions over whether the recent fall in gasoline prices is boosting consumer spending, as expected.
However, other economic data releases were strong. US consumer confidence reached its highest level in December in more than a decade, according to a report released by the University of Michigan, while confidence among small business owners improved significantly, according to the National Federation of Independent Business optimism index.
Meanwhile, the Job Openings and Labour Turnover Survey confirmed that job openings in the US rose to the highest level since 2001 in November, boosting the outlook for future wage growth.
Inflation data remained lacklustre. Consumer price inflation fell 0.4% in December, bringing the y/y increase down to 0.8% from 1.3% in November. Core inflation, which excludes food and energy, eased to an annual pace of 1.6%. Slowing inflation, combined with recent weak wage growth, has led to speculation that the Federal Reserve could delay its first rise in interest rates, which is widely expected to take place in June.
Europe
Equity returns were strong across many eurozone markets, buoyed by expectations that the European Central Bank (ECB) will announce sovereign debt purchases at its next policy meeting on 22 January. Sharp declines in Swiss stocks—the SPI plunged 13.1%—as a result of the Swiss National Bank’s (SNB’s) surprise decision to remove the franc’s peg against the euro dampened European returns more broadly, with the MSCI Europe Index delivering a modest return of 0.5%.
Among the individual markets, Italy’s FTSE MIB and the German DAX were among the top performers, returning 5.9% and 5.4%, respectively. The French CAC 40 was up 4.8%, while Spain’s IBEX 35 rose 3.3%. Sweden’s OMX 30 was up 1.7%, while the UK’s FTSE 100 registered a 0.8% gain.

Investors were taken by surprise in the week by the SNB’s decision to abandon its minimum exchange rate for the Swiss franc against the euro, which has been in place since 2011. As a result, the franc gained about 30% against the euro and the US dollar, while the yield on the 10-year Swiss government bond fell into negative territory.
In the short term, floating the franc—or allowing its value to once again be determined by market forces—is negative for Swiss companies. The eurozone is a sizeable export market for many Swiss companies, and a stronger franc makes them less competitive than peers in the single currency bloc.
The SNB’s removal of the currency peg coincides with growing anticipation that the ECB will announce further asset purchases at the next meeting of its Governing Council, and align its monetary policy more closely with the full-scale quantitative easing (QE) pursued by other central banks.
One factor that potentially increases the likelihood of the ECB committing to further measures to support the eurozone economy was the favourable ruling by the European Court of Justice on the legality of the ECB’s existing Outright Monetary Transactions (OMT) programme of bond purchases.
However, uncertainty is high about the exact shape of further ECB support measures. ECB president Mario Draghi is widely expected to be pushing for a large package of government bond purchases, amounting to at least a EUR 500 billion injection. There are question marks over the breakdown of purchases among debt issued by investment grade and non-investment grade member states, and the entity which will bear the burden of risk on its balance sheet—individual central banks or the ECB.
The views of German chancellor Angela Merkel and the country’s members on the ECB’s Governing Council are likely to influence the content of any announcement. Limitations on QE could dampen its ability to boost inflation and provide adequate support to the peripheral eurozone countries.
With the focus on prospective ECB action, investors shouldn’t lose sight of the tentative improvements in the eurozone economy. Germany’s economy expanded at 1.5% in 2014, the strongest annual growth rate in three years, vehicle sales are rising above levels not seen over the past two-and-a-half years, and a weakening euro should continue to support earnings growth.
Global Emerging Markets
Most emerging markets were lower in the week ending 16 January, amid worries over global growth. The MSCI Emerging Markets Index fell 0.5%.
The spectre of deflation hit central European markets, with Poland’s WIG 3.4% lower and Hungary’s BUX down 2.9%. Poland’s headline consumer price index (CPI) fell 1.0% in the year to December, while Hungary’s CPI was down 0.9%. Investors were further concerned by the impact of the sharp rise in the Swiss franc on Polish and Hungarian borrowers and banks, given the popularity of Swiss franc mortgages in both countries.
In emerging Asia, South Korea’s KOSPI dropped 1.9%. Despite downgrading its outlook for both economic growth and inflation this year, the Bank of Korea kept interest rates on hold at 2.0%.
The MSCI China Index was down 0.5% ahead of some key economic reports due to be released on 19 January. Investors will focus on fourth-quarter GDP data for evidence of any further slowdown in growth. Expectations are for a modest deceleration in annual GDP growth to 7.2%, down from 7.3% in the third quarter.
In contrast, India’s Sensex rose 2.4%. The Reserve Bank of India surprised investors by cutting interest rates from 8.0% to 7.75%—the first reduction since May 2013. Investors hope the rate cut will provide a boost to weak domestic demand and investment. With inflation set to continue to fall, expectations are for further rate reductions in the coming months.
In Latin America, Brazil’s Bovespa gained 0.4%. Oil producer Petrobras rose sharply after saying it would report its delayed third-quarter results following a dispute with its auditor. Mexico’s IPC, meanwhile, was down 2.3% as concerns over US growth and the weak commodity price outlook hit sentiment.
Bonds & Currency
Bond yields were lower in the week ending 16 January, amid concerns over further falls in oil prices and weakening global economic growth.
The yield on the 10-year US Treasury was down 14 basis points (bps) to 1.74% in the week, while the yield on the 10-year German Bund hit a record low of 0.40% before closing at 0.42%.
The yield on the 10-year Swiss government bond entered negative territory, as the Swiss central bank announced it would abandon its minimum exchange rate for the Swiss franc against the euro.
*Source: J.P. Morgan Asset Management