The MSCI Pacific Index rose 0.6% in the week ended 6 March, as further share price gains in Japan helped outweigh weakness in Hong Kong.
In Japan, the TOPIX rose 1.1%, as exporters were boosted by a weaker yen against the US dollar following stronger US economic data. Drug makers also supported the market following news of positive testing and potential tie ups in the sector.
In Singapore the Straits Times gained 0.4%, but Australia’s All Ordinaries fell 0.5% as the Reserve Bank of Australia kept interest rates on hold despite expectations for further cuts to boost the country’s sluggish economic outlook.
In Hong Kong, the Hang Seng dropped 2.7%. Shares fell sharply after the Chinese government lowered its economic growth targets for 2015 to around 7%, raising concerns over the underlying health of the Chinese economy. The People’s Bank of China took markets by surprise at the beginning of the week by cutting interest rates by a quarter of a percentage point.
US stocks fell in the week to 6 March, as a stronger-than-expected jobs report strengthened the case for the Federal Reserve (the Fed) to raise interest rates sooner rather than later. The S&P 500 was down 1.6%, while the Dow Jones Industrial Average fell 1.5% and the technology-biased Nasdaq slipped 0.7%.
The week was dominated by the release of February’s employment report on Friday, amid speculation over the timing of the Fed’s first interest rate rise. According to the employment report, released by the US Labor Department, the US economy added 295,000 jobs in February, more than the 240,000 expected, while the unemployment rate fell from 5.7% to 5.5%, the lowest since 2008. However, wage growth was tepid, with average hourly earnings rising just 0.1% from January.
Investors believe that the stronger-than-expected employment report has increased the likelihood of the Fed removing the word “patient” in its March meeting, potentially paving the way for interest rates to rise in June, rather than September.
Other economic data released in the week was lacklustre. The Institute for Supply Management’s index of manufacturing activity slipped from 53.5 in January to 52.9 in February, partly due to weaker demand in Europe and Asia. Although the reading marks the lowest level since January 2014, it remains above the 50 level that separates contraction from expansion.
Factory orders also disappointed, with new orders for manufactured goods slipping 0.2% in January, marking the sixth consecutive monthly decline. Orders for non-defence capital goods excluding aircraft—seen as a measure of business confidence and spending plans—rose 0.5%, although this was down from 0.6% the previous month.
Auto sales data was weak, with six of the country’s seven largest car manufacturers reporting lower-than-expected year-to-date sales.
The outlook for interest rates looks set to continue to drive market sentiment over the coming months, with attention focused in particular on any change to the language used in the Fed’s policy statement on 18 March.
The MSCI Europe Index gained 0.2% in the week ended 6 March amid mixed performance for Europe’s main stock market indices.
Optimism over the outlook for eurozone growth boosted Germany’s DAX, which rose 1.3%, while Switzerland’s SPI was up 0.8%. The Italian FTSE MIB rose 0.4% and the French CAC 40 was up 0.3%, but the UK’s FTSE 100 fell 0.5% and Spain’s IBEX 35 was down 0.8%.
The main focus for investors was the latest European Central Bank (ECB) governing council meeting, as ECB president Mario Draghi unveiled the central bank’s latest forecasts for the eurozone economy.
The ECB expects the eurozone to grow by 1.5% in 2015, rising to 1.9% in 2016 and 2.1% in 2017—well ahead of its previous forecasts. Perhaps more encouraging were the ECB’s inflation projections, which suggest eurozone inflation will rise from an average rate of zero this year to 1.8% in 2017, which is back within the ECB’s target.
Draghi also confirmed that the ECB would begin its government bond buying programme on 9 March. Between March 2015 and September 2016 the ECB will buy EUR 60 billion worth of eurozone bonds each month, totalling EUR 1.08 trillion over the period. The ECB will not buy bonds yielding less than its -0.2% deposit rate for banks, which will prevent it from making losses on its purchases.
Crucially, Draghi was keen to assure markets that the ECB would not hit supply problems, even though its bond purchases are set to easily outstrip eurozone sovereign debt supply in 2015. A significant shortage of bonds would help push prices up and force yields down even further—calling into question the ability of the ECB to avert deflation from becoming entrenched in the eurozone.
The market will therefore continue to look closely at inflation data. If evidence emerges that deflation risks are receding as the year progresses (as the ECB expects), then eurozone government bond yields should start to edge higher—particularly if this coincides with interest rate increases in the US.
However, the outlook for eurozone inflation is dependent to a large extent on the uncertain path of oil prices. If oil prices remain low, then inflation may continue to undershoot ECB forecasts in the coming months despite the introduction of quantitative easing.
Global Emerging Markets
The MSCI Emerging Markets Index was down 0.7% in the week ending 6 March.
The MSCI China fell 2.6%, as sentiment was dampened by the decision of premier Li Keqiang to lower the country’s growth target for 2015 from 7.5% to “around 7%.” The People’s Bank of China cut interest rates on Saturday for a second time in three months to try to support the economy. Manufacturing activity has picked up modestly, with the final HSBC-Markit China manufacturing purchasing managers’ index for February coming in at 50.7, ahead of January’s reading.
Elsewhere in emerging Asia, India’s Sensex rose 0.8%, boosted by a surprise interest rate cut from the Reserve Bank of India. Investors also welcomed the announcement of the much-anticipated budget on Saturday, which included a nationwide sales tax and cuts to corporation tax.
Taiwan’s Taiex returned 0.2%, despite a fall in export orders in January due to weak demand from Japan and Europe. South Korea’s Kospi ended the week 1.4% higher.
In Latin America, Brazil’s Bovespa was down 3.1%, after the country’s Supreme Court approved the investigation of a number of politicians accused of involvement in the corruption scandal at state-owned oil company Petrobras.
Mexico’s IPC dropped 2.1%, as a stronger-than-expected jobs report out of the US led to speculation that US interest rates could rise sooner rather than later.
Across emerging Europe, returns were mostly positive. Russia’s RTS returned 0.8%, helped by a rise in the price of oil—Russia’s chief export—in the week. The Czech PX-50 rose 1.4%, while Hungary’s BUX was up 0.4% and Poland’s WIG returned 0.1%.
Turkey’s ISE 100 was down 4.6%, however. Ongoing criticism from president Tayyip Erdogan over the central bank’s monetary policy—in particular putting pressure on the central bank for lower interest rates—helped push the Turkish lira to a new all-time low against the US dollar.
Bonds & Currency
Developed market bonds sold off in the week, with US bonds underperforming following a robust labour market report. The yield on the 10-year Treasury was up 24 basis points (bps) on the week, as markets believed the stronger-than-expected jobs report strengthened the case for the Federal Reserve to raise interest rates sooner rather than later.
In the eurozone, the yield on the 10-year German Bund rose 7 bps on the week, although most peripheral eurozone sovereign yields were at, or close to, record lows following the unveiling of the details of the European Central Bank’s latest stimulus measures.
*Source: J.P. Morgan Asset Management
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