The MSCI Pacific Index returned 0.1%. Japan recovered strongly to be the top regional market in the week ending 13 March, with the TOPIX up 1.3%.
With the decline in the global oil price exerting downward pressure on inflation, Japanese authorities continued to downplay the odds of further monetary accommodation from the Bank of Japan. Reports released in the week suggested that Japan’s trade balance had turned positive, with a current account surplus in January at the highest level since before the February 2011 earthquake.
Other regional markets were down for the week. Singapore’s Straits Times fell 1.6%, despite a rebound in retail sales in January after a weak end to 2014.
2Australia’s All Ordinaries and Hong Kong’s Hang Seng both declined 1.4%. The Hong Kong market was dragged lower by the continued poor performance of Macau gaming stocks, including Sands China and Galaxy.
Speculation over the timing of US interest rate increases continued to hit sentiment on Wall Street last week, with the S&P 500 down 0.9% and the Dow Jones 0.6% lower.
The market expects the Federal Reserve (the Fed) to begin raising rates later this year from their current record low level of close to zero. In recent months, signs of strength in the US labour market have brought forward expectations for the first rate rise to as early as June, despite some mixed economic news overall.
Last week, February’s retail sales report showed a drop in sales for the third consecutive month, contributing to further cuts in first-quarter economic growth forecasts. However, consumer demand may have been depressed by the harsh winter weather in North America and therefore we may see a bounce back in spending in the coming months.
Meanwhile, there were further signs that strong jobs growth is filtering through into higher wages. According to the latest survey from the Bureau of Labor Statistics, employer costs for employee compensation rose at an annual rate of 12.1% in the fourth quarter of 2014, suggesting that wage inflation may be picking up.
The Fed has previously signalled that the strength of the labour market and the outlook for inflation are particularly important factors when considering the timing of the first interest rate rise. With the unemployment rate falling to just 5.5% last month, jobs growth running at more than 200,000 per month and wages picking up, investors continue to expect rates to rise sooner rather than later.
One significant consequence of the Fed’s move towards policy tightening has been the recent strength of the US dollar on foreign exchange markets. The contrast between the Fed and the European Central Bank, which has just launched a quantitative easing programme, has helped to push the dollar to its strongest level against the euro in over 12 years. The dollar is also at multi-year highs against several other major currencies.
Worries about interest rate increases and the impact of the stronger dollar are taking their toll on forecasts for US company profits. Higher interest rates can raise borrowing costs and curtail consumer demand, while the stronger dollar makes US companies less competitive internationally and means that overseas sales are worth significantly less when converted back into dollars.
However, interest rates rises—when they begin—are expected to be gradual and drawn out. The economic impact should therefore be contained. Meanwhile, the effect of the stronger dollar on corporate earnings forecasts is perhaps more limited than the headlines would suggest.
Although US corporate earnings are expected to grow by just 2% in 2015, down from expectations for 8% growth at the beginning of the year, the picture looks considerably brighter when energy companies are excluded. The energy sector is expected to see a 55% drop in earnings this year thanks to the collapse in oil prices. Excluding the energy sector, US earnings are still expected to grow by around 9%.
Eurozone stocks were boosted by the start of the European Central Bank’s (ECB’s) government bond purchase programme in the week ending 13 March, with the German DAX among the biggest beneficiaries, up 3.0%. Italy’s FTSE MIB rose 1.2% while France’s CAC 40 returned 0.9%. Spain’s IBEX 35 was down 0.5%.
Returns for Europe more broadly (the MSCI Europe Index ended the week unchanged) were tempered by UK weakness. The FTSE 100 Index, which has significant exposure to energy and mining stocks, fell 2.5% in an environment of commodity price weakness and US dollar strength.
Among the other non-eurozone markets, the Swiss SPI returned 0.8%, with gains supported by the strong share price performance of Credit Suisse. Shares in Switzerland’s second-biggest bank by market capitalisation were boosted by the announcement that Tidjane Thiam, boss of UK insurer Prudential, would take over as the bank’s chief executive.
On 9 March, the ECB launched its sovereign quantitative easing (QE) programme, lending further support to investor sentiment. Between March 2015 and September 2016, the ECB will buy EUR 60 billion worth of eurozone bonds each month. 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.
The launch of full-blown QE—years after the US and the UK began to buy large quantities of government bonds—led to further declines in the euro, which has already depreciated extensively against the US dollar, and sent yields on many eurozone government bonds lower—and in some cases, further into negative territory. This trend could buoy European equity markets, if investors begin to shift their allocations from cash and bonds into potentially higher yielding assets.
In a slow week for European economic data releases, investors focused on January’s industrial production reports, which were disappointing in both the eurozone and the UK. Among the individual countries, Germany and France posted good January data, while Finland and Italy lagged.
In the UK, the outlook for the domestic housing market remained mixed. According to the Royal Institution of Chartered Surveyors (RICS), home prices at the headline level had risen over the past three months, but London bucked the trend, with surveyors reporting price declines.
UK equities are likely to be affected by the lead up to, and outcome of, the upcoming general election, which may result in a hung parliament if no single party gains an outright majority.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.6% in the week ending 13 March.
Russia’s RTS (-7.7%) was among the biggest fallers as the oil price fell back after recent gains, putting further pressure on the rouble.
Turkey’s ISE 100 also struggled, down 4.6%, as worries over political meddling in the country’s monetary policy and a weak lira weighed on sentiment. The lira fell towards a new record low against the US dollar despite intervention from Turkey’s central bank in the currency markets, as President Tayyip Erdogan demanded that policymakers cut interest rates ahead of elections in June.
Elsewhere in emerging Europe, Poland’s WIG was down 1.2% and the Czech PX 50 fell 0.1%, but Hungary’s BUX gained 2.1% on hopes for interest rate cuts.
In emerging Asia, India’s Sensex fell 3.2%, hit by allegations of a coal scam in the metals industry. South Korea’s KOSPI was down 1.3% despite the announcement of a surprise quarter-point interest rate cut from the Bank of Korea, which took Korean rates down to a record low of 1.75%.
The MSCI China Index declined 0.6%. The latest economic data was mainly weaker than expected, including retail sales and industrial production, although exports and bank lending data were strong. Investors continue to anticipate further policy measures from the government to boost growth.
In Latin America, Mexico’s IPC gained 1.7% as the country’s central bank intervened to boost the peso, after the Mexican currency hit a record low against the US dollar. In contrast, Brazil’s Bovespa dropped 2.8% amid concerns over the country’s worsening fiscal problems as President Dilma Rousseff struggled to gain political support for her austerity programme.
Bonds & Currency
US Treasury yields fell in the week ended 13 March as investors priced in less chance of a June tightening in US monetary policy. The 10-year Treasury yield was down 12 basis points (bps) on the week to 2.12%.
The biggest moves, however, were in eurozone yields as the European Central Bank began its EUR 60 billion per month bond purchase programme. The 10-year German Bund yield hit a record low of just 0.19% at one stage, before rising back to end the week at 0.25%. Italy’s 10-year yield fell to 1.16%–down a hefty 17bps on the week.
*Source: J.P. Morgan Asset Management
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