The MSCI Pacific Index jumped 4.9% in a strong week for the region’s stock markets.
Singapore’s Straits Times led the region’s gains, surging 7.1% for its best weekly performance since October 2015. The market was boosted by a rebound in banking stocks, with the Singapore dollar rising to its highest level in four months against the US dollar as mixed economic data suggested US interest rates would rise only gradually this year.
Japan’s TOPIX rose 4.9%. Exporters rose as the yen weakened against the dollar and the Chinese economic outlook brightened, while banks continued to rebound as concerns about the impact of negative interest rates on profits eased.
Investors had been concerned that the Bank of Japan (BoJ) was looking to cut rates further into negative territory, but recent comments from BoJ officials suggest that no action will now be taken at the central bank’s meeting on 15 March.
Hong Kong’s Hang Seng and Australia’s All Ordinaries both rose 4.2%. Hong Kong was lifted by better sentiment towards Chinese growth, as the People’s Bank of China moved to add more stimulus to the mainland economy. In Australia, a surge in commodity prices helped lift mining and energy stocks.
US stocks rose in the week ending 4 March, boosted by better than-expected manufacturing data and an encouraging employment report. The S&P 500 rose 2.7%, while the Dow Jones Industrial Average was up 2.2% and the technology-biased Nasdaq ended the week 2.8% higher.
Investors were focused on the release of February’s manufacturing survey from the Institute for Supply Management (ISM) in the week, which suggested a brightening outlook for the US economy. The index came in at 49.5, well above the expected 48.5 and up from January’s 48.2, although remains below the 50 level that separates contraction from expansion. The outlook for the domestic economy was further bolstered by news that construction spending hit an eight-year high in January.
Meanwhile, the ISM non-manufacturing index edged back to 53.4 in February from 53.5 in January. Although the reading came in above expectations for a fall to 53.1, it marked the lowest level for nearly two years, with the employment sub-index contracting.
At the end of the week, February’s non-farm payrolls report was released, painting a solid picture of the US labour market. The report confirmed that US non-farm payrolls increased by 242,000 in February, well ahead of expectations, while the gains of the previous two months were revised up by 30,000. The unemployment rate remained unchanged at 4.9%. However, average hourly earnings fell 0.1% on the month.
The jobs report helps ease concerns that the US economy faces an imminent risk of slipping into recession, and highlights the continued favourable backdrop for the consumer—a major driver of US economic growth.
Energy stocks were among the week’s best performers, helped by further stabilisation in the oil price.
Attention is turning to the Federal Reserve’s (Fed) upcoming meeting and for any signs over whether the central bank will raise rates further. Despite the encouraging manufacturing and jobs reports, the chance of a rate rise at the March meeting looks unlikely, with markets expecting Fed officials to adopt a “wait-and see” stance for the first half of this year, until external volatility subsides.
The MSCI Europe Index rose 2.6% in the week ended 4 March, extending its recent strong rally as investors priced in further easing from the European Central Bank (ECB) at its meeting later in the month.
Eurozone markets led the gains, with Spain’s IBEX 35 up 5.5%, Italy’s FTSE MIB rising 4.5% and the German DAX and French CAC 40 both gaining 3.3%. Outside the euro area, Sweden’s OMX 30 rose 2.4%, the UK’s FTSE 100 gained 1.7% and Switzerland’s SPI was up 1.5%.
Sentiment was again boosted by expectations that the ECB would take bold action to boost the eurozone economy and tackle deflation at its meeting on 10 March. At the very least, investors expect the ECB to cut deposit rates further into negative territory, probably by around 10 to 15 basis points, and boost its monthly bond purchases by around EUR 10-15 billion.
The hope is that reducing the deposit rate (the interest rate paid to commercial banks for depositing their cash with the central bank) will encourage Europe’s commercial lenders to extend credit to consumers and businesses and therefore boost economic activity. To alleviate the pressure that negative deposit rates can have on bank balance sheets, investors expect the ECB to introduce a tiered rate structure.
Meanwhile, investors hope that a boost to the ECB’s monthly bond purchases will help to lift asset prices and spark inflation. However, with eurozone consumer prices falling 0.2% in the year to February, markets are looking for the ECB to not only boost the monthly amount of its bond purchases, but also to expand its scope to include corporate bonds, and to extend its purchases beyond the planned end date of March 2017.
On the markets, hopes that the ECB will take strong action to boost the economy were reflected last week in a further rebound for economically sensitive stocks, with car makers, industrials, basic resource companies, energy companies and banks leading markets higher.
The bounce in share prices since mid February’s lows has been very strong. Although ECB officials have signalled that action will be forthcoming, markets are open to disappointment if the central bank doesn’t deliver on investors’ raised expectations. In December 2015, markets sold off after the ECB cut rates and boosted its asset purchases less aggressively than investors had wanted.
Global Emerging Markets
The MSCI Emerging Markets Index gained 4.8% in the week ended 4 March as stronger commodity prices and stronger currencies helped lift sentiment.
Brazil’s Bovespa had a spectacular week, rising 18.0% as a combination of the commodity price rally and domestic political developments powered the market higher. On the political front, a police investigation into corruption allegations involving former president Luiz Inacio Lula da Silva were deemed positive by many investors, as the inquiry makes it more likely that current president Dilma Rousseff—Lula’s protégé—will not complete her term. Markets believe only a change in government will help lift Brazil out of its current economic lethargy.
Russia’s RTS climbed 8.0% as oil prices rallied sharply, with Brent crude ending the week at USD 38 per barrel—the highest level since January.
The MSCI China Index closed the week up 5.6%, supported by reassuring words from Chinese officials over the outlook for the Chinese economy and currency at the G20 meeting in Shanghai. The move by the People’s Bank of China to cut its reserve ratio requirement (the amount that China’s biggest commercial banks must hold as reserves) by 50 basis points to 17% was also welcomed by investors.
India’s Sensex moved 6.4% higher, as the government’s annual budget announcement targeted a reduction in the country’s fiscal deficit, allaying fears that fiscal targets would be loosened. Following the budget surprise, investors moved to price in the possibility that the Reserve Bank of India would bring forward an interest rate cut that had been expected for April.
Elsewhere, South Africa’s JSE All Share rose 5.6%, boosted by stronger mining and resources stocks, while Hungary’s BUX rose 4.6% amid expectations that Moody’s, the rating agency, may raise the country’s debt rating to investment grade for the first time since 2011.
Bonds & Currency
Bonds declined over the week amid a continued recovery in risk assets and the oil price.
Better-than-expected US growth and factory data helped push shorter-term Treasury yields to their highest levels since January. The yield on the policy-sensitive two-year US Treasury was up 7 basis points (bps) to 0.89%, while the 10-year yield was 11bps higher at 1.90%.
*Source: J.P. Morgan Asset Management
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