Money Matters June 26th, 2014

Asia Pacific
The MSCI Pacific Index rose 1.2% in the week ended 20 June.
Japan’s TOPIX gained 2.0%. Japanese stocks were lifted mid week by positive comments from the Fed on the outlook for economic growth and US interest rates. Stocks were further supported by demand from local pension funds, which continue to raise their equity weightings following the recent announcement that the government’s main pension fund was looking to raise its equity exposure.
Speculation that Japan’s prime minister Shinzo Abe would soon formally announce the “third arrow” of his economic reform programme also boosted sentiment.
Australia’s All Ordinaries rose 0.3%, with the mining, energy and industrial sectors leading the gains. Chinese premier Li Keqiang said that there would be no hard landing in China, a significant source of demand for Australia.
Hong Kong’s Hang Seng dropped 0.5%. Oil companies gained, lifted by rising energy prices as tensions escalated in Iraq. However, weak Chinese housing data hurt property developers listed in Hong Kong.
Singapore’s Straits Times fell 1.0%, as exports for May fell unexpectedly on weakness in shipments of electronics and pharmaceuticals to Singapore’s key markets.
United States
Reassuring comments from the Federal Reserve (the Fed) provided a boost to sentiment in the week to 20 June. The S&P 500 rose 1.4%, pushing the broad US stock index up to a new record high. The Dow Jones was up 1.0% and the technology-biased NASDAQ gained 1.3%.
There had been some concern among investors that the Fed would signal a more hawkish stance at last week’s meeting of its interest rate setting board, the Federal Open Market Committee (FOMC). These concerns had been sparked by recent comments from Bank of England governor Mark Carney, which warned markets not to be complacent over the outlook for UK interest rates.
Worries over a potential change in Fed policy grew early last week following the release of inflation data for May, which showed that core US consumer prices had risen at their fastest annual pace in 15 months. US Treasury yields rose sharply after the data release, as bond markets moved to price in higher inflation expectations.
However, the FOMC statement—released Wednesday—delivered a positive message to investors, suggesting that interest rates are likely to stay on hold at their record low for some time to come. The Fed reduced its monthly asset purchases by a steady USD 10 billion, to USD 35 billion, and gave a broadly encouraging assessment of the US economic outlook, while comments from Janet Yellen, Fed chairwoman, suggested that policymakers are not concerned by the higher May inflation data.
In her press conference following the FOMC meeting, Yellen said inflation was “roughly in line” with where the Fed expected it to be, and that despite recent “noise”, evidence suggests inflation is “moving back gradually over time toward our 2% objective”. The Fed’s inflation forecasts continue to see below target inflation through to the end of 2016. The inference for investors is that the Fed believes it can keep interest rates low well into next year without sparking a sharp pickup in inflation.
Yellen also gave no indication that the Fed is concerned about financial stability, given the extremely low levels of volatility currently in markets and the sharp rise in stock markets seen in recent years. Yellen said that she did not think stock market valuations were outside of historical norms.
With interest rates likely to remain on hold until late 2015, and with economic growth continuing to improve gradually and corporate profits growing healthily, the immediate fundamental backdrop for the US stock market remains highly supportive.
Europe
European stocks made gains in the week ending 20 June as the Fed provided reassurance that US interest rates would remain low for some time to come and the minutes of the latest meeting of the Bank of England’s (BoE’s) Monetary Policy Committee showed that the members had voted unanimously to keep rates unchanged. The MSCI Europe Index was up 0.4%.
Germany was the top performer, with the DAX gaining 0.8%. The UK’s FTSE 100, the Swiss SPI and Spain’s IBEX 35 rose 0.7%, 0.5% and 0.4% respectively, while returns for the French CAC 40 were flat. Laggards included Italy and Sweden, with the FTSE MIB losing 0.8% and the OMX Stockholm 30 down 0.3%.
Markets largely shrugged off the latest escalation in the ongoing tensions between Russia and Ukraine, which saw Russian state-owned Gazprom halt shipments of natural gas to meet Ukraine’s needs. The European Union (EU) depends on Russian gas piped through Ukraine to meet its overall energy supply needs—however, the impact of the recent disruption is likely to be moderated by the fact that it is European summertime, when levels of gas consumption tend to be lower.
European stocks made gains in the week ending 20 June as the Fed provided reassurance that US interest rates would remain low for some time to come and the minutes of the latest meeting of the Bank of England’s (BoE’s) Monetary Policy Committee showed that the members had voted unanimously to keep rates unchanged. The MSCI Europe Index was up 0.4%.
Germany was the top performer, with the DAX gaining 0.8%. The UK’s FTSE 100, the Swiss SPI and Spain’s IBEX 35 rose 0.7%, 0.5% and 0.4% respectively, while returns for the French CAC 40 were flat. Laggards included Italy and Sweden, with the FTSE MIB losing 0.8% and the OMX Stockholm 30 down 0.3%.
Markets largely shrugged off the latest escalation in the ongoing tensions between Russia and Ukraine, which saw Russian state-owned Gazprom halt shipments of natural gas to meet Ukraine’s needs. The European Union (EU) depends on Russian gas piped through Ukraine to meet its overall energy supply needs—however, the impact of the recent disruption is likely to be moderated by the fact that it is European summertime, when levels of gas consumption tend to be lower.
The MSCI China was down 1.0%, adversely affected by concerns that any additional government stimulus measures would have a limited impact on the slowing economy. The property sector was particularly weak, with large developers falling on poor housing market data. Housing sales for the first five months of the year fell 10.2% year on year, while average new home prices in 70 cities slid 0.15% in May.
Taiwan’s TAIEX returned 0.8%. Taiwanese exports rose at a much slower rate than expected in May. However, upcoming new product launches from tech giants such as Apple should be positive for suppliers and assemblers, many of which are Taiwan-based.
In India, the Sensex dropped 0.5%. The new government announced a steep rise in rail passenger and freight fares, the first step in prime minister Narendra Modi’s plan to reform the Indian economy.
In Latin America, Mexico’s IPC returned 0.9%. Sentiment was boosted by positive industrial production data from the US, which buys close to 80% of Mexican exports. Minutes from the Bank of Mexico’s most recent monetary policy meeting stymied expectations that June’s interest rate cut will be followed by further easing measures.
Brazil’s Bovespa slipped 0.3%. With a view to boosting domestic competitiveness, Brazil’s finance minister announced that a tax-credit programme for exporters would be made permanent, and a business credit programme that was set to expire at the end of 2014 would be extended.
In emerging Europe, Russia’s RTS fell 1.2% as the market came under pressure from Moscow’s decision to cut off gas supplies to crisis-hit Ukraine.
Bonds & Currency The US Treasury yields rose sharply following the release of May inflation data—core US consumer prices had risen at their fastest annual pace in 15 months—as bond markets moved to price in higher inflation expectations.
The strong performance of European and US credit continued. In the European high yield market, yields fell six basis points to a new record low of 3.61%.
*Source: J.P. Morgan Asset Management