Equities across the Asia Pacific region delivered positive returns in the week ending 20 March, supported by the latest dovish rhetoric from the Federal Reserve (the Fed). The MSCI Pacific Index was up 1.7%.
Australia’s All Ordinaries (+2.6%) led the gains. Shares in the country’s three biggest banks—the Commonwealth Bank of Australia, Westpac and ANZ—surged on the prospect of ongoing liquidity provision from the major developed central banks—including the Fed.
Hong Kong’s Hang Seng returned 2.3%, taking its cue from the solid performance of mainland Chinese equities. Banking and real estate stocks have been the outperformers, benefiting from signs that Chinese authorities are loosening policy to support the struggling property sector.
Japan’s TOPIX rose 1.3% on the week. Speculation continued about the prospect of the Bank of Japan adding to its quantitative easing programme to counter falling consumer price inflation, as Governor Haruhiko Kuroda revised downwards the outlook for near-term inflation. The equity market received support from the announcement by three Japanese pension funds that they would shift more of their assets from bonds into equities, following the Government Pension Investment Fund’s similar re-allocation decision.
US stocks rallied in the week to 20 March, boosted by signs that the Federal Reserve (the Fed) is taking a more cautious approach to raising interest rates. The S&P 500 was up 2.7%, while the Dow Jones Industrial Average and the technology-biased Nasdaq rose 2.1% and 3.2% respectively.
The week was dominated by the Fed’s much-anticipated policy meeting on Tuesday and Wednesday, in which it made it clear that it is in no rush to raise interest rates. As widely expected, the central bank dropped its pledge to be “patient” before starting to normalise monetary policy.
However, the Fed stressed that the removal of the word “patient” did not automatically mean that interest rates would begin to rise at its June meeting. Instead, the central bank made it clear that the timing of the first rate rise would be dictated by unfolding economic developments—in particular, the Fed would wait to see “further improvement” in the US labour market and a pickup in inflation towards its 2% target.
In addition to cutting its projections for interest rates over the next few years, the Fed lowered its 2015 forecasts for growth and inflation. However, it stressed that the forces driving these lower, such as weak oil prices and a stronger US dollar, were only temporary.
US stocks reacted positively to the Fed’s March policy statement, as the central bank’s cautious outlook on the economy was viewed as lessening the chances of a June rate rise. A postponed interest rate rise is good news for US companies, as it means that they can continue borrowing cheaply for a longer period of time.
In contrast to the strength in the US labour market in recent weeks, data confirmed that the recovery in the housing market remains subdued. Housing starts fell steeply in February, down 17%, due to the colder-than-normal weather, while the NAHB housing market index—an indicator of sentiment in the US housing market—declined from 55 in February to 53 in March, the lowest level since July 2014.
Meanwhile, manufacturing output declined 0.2% in February, marking the third consecutive monthly decline, due to a sharp drop in auto production.
Energy stocks led the S&P 500 higher, particularly in the second half of the week, as oil prices rebounded.
The outlook for interest rates will continue to drive sentiment in the coming months, with markets closely watching US employment, wage growth and inflation data in particular for any indication of the timing of the first rise. However, rate rises—when they begin—are expected to be more gradual than some initially anticipated.
European equities had a strong week ending 20 March, with the MSCI Europe Index up 2.5%. Gains were supported by dovish comments from the US Federal Reserve, which suggested that it will not rush to raise interest rates. Spain’s IBEX 35 gained 3.5%, while the French CAC 40 returned 1.5%. Sweden’s OMX Stockholm 30 rose 2.7%, while the Swiss SPI and the German DAX delivered respective returns of 2.3% and 1.2%.
The FTSE 100 Index was among the week’s top performers, rallying 4.2%, with UK equities having their second-best day of 2015 following Chancellor George Osborne’s last budget before the May general election. The emphasis of the budget was on Osborne highlighting the government’s economic achievements and demonstrating that it is sticking to its “long-term economic plan.” UK equities are likely to have been buoyed by the measures announced to support oil and gas companies, given their heavy weighting in the FTSE 100.
While the net impact on UK GDP of the chancellor’s budget is limited, it may well exert an impact on party political preferences, and particularly on the voting decisions of yet undecided “swing voters.” There were modest increases to UK growth forecasts, and the chancellor committed to potentially easing public spending cuts a year earlier than planned—however, there would be sharp cuts to real spending in the first three years of the next parliament. Meanwhile, several measures were targeted at giving greater freedom to pensioners and savers.
The UK economy is doing better than most of its European partners. However, the outcome of the general election is uncertain and is likely to lead to increased volatility. In addition, investors will be focusing on moves in the value of sterling against other major currencies and the likely timing and pace of UK interest rate rises.
Meanwhile, Sweden’s central bank, the Riksbank, lowered its key interest rate further into negative territory and added to its bond-purchase programme. The action was taken to counter the recent strengthening of the Swedish krona against the euro—which is being pushed lower by the European Central Bank’s quantitative easing programme. Sweden’s low inflation rate has been causing concern for years, and a strengthening krona adds to disinflationary pressures by making Swedish exports less competitive.
Authorities across Europe made little progress on making concrete steps towards resolving the Greek debt crisis. The agreement reached on 20 February was re-affirmed, while Greece has committed to presenting a full list of specific reforms to be implemented in exchange for the eventual release of bail-out funds in the coming days. German Chancellor Angela Merkel’s direct intervention in the negotiation process was perceived positively.
Global Emerging Markets
The MSCI Emerging Markets Index rose 2.2% in the week to 20 March.
The MSCI China returned 3.0%, buoyed by comments from premier Li Keqiang that policymakers would introduce further measures to boost the Chinese economy if growth falls below the government’s 7% target. Hopes for further stimulus measures were raised after data highlighted significant weakness in China’s property market—new home prices fell 5.7% in February from a year earlier, marking the fastest decline on record.
Elsewhere in emerging Asia, Taiwan’s Taiex was up 1.8%, as sentiment was boosted by a recovery in the manufacturing purchasing managers’ index for the second consecutive month. South Korea’s Kospi returned 2.6%, despite an unexpected surge in the unemployment rate to 4.6% in February from 3.8% in January.
In India, the Sensex slipped 0.8%. On Wednesday, the Organisation for Economic Cooperation and Development (OECD) said that the Indian economy is likely to grow 7.7% in 2015 and 8% in 2016, making it the fastest-growing major economy over the next two years.
Returns in Latin America were strong, boosted by news that the US Federal Reserve is in no hurry to raise interest rates. Brazil’s Bovespa and Argentina’s Merval rose 6.9% and 11.1% respectively. In Brazil, state-owned oil company Petrobras led gains, boosted by the rebound in oil prices in the week. Mexico’s IPC returned -0.1%.
Meanwhile, Turkey’s ISE 100 was among the strongest performers, rising 7.7%, after Turkey’s central bank left interest rates unchanged, helping the Turkish lira to stabilise.
Poland’s Wig was up 3.3%, helped by a pick up in industrial production in February, while Hungary’s BUX rose 3.0% and the Czech PX-50 returned 0.8%. Russia’s RTS ended the week 3.4% higher.
Bonds & Currency
US Treasury yields fell in the week as the Federal Reserve’s (the Fed’s) March policy meeting confirmed that the central bank is in no hurry to raise interest rates. The yield on the two-year Treasury was down 6 basis points (bps) on the week, touching its lowest level in six weeks on Wednesday.
In the eurozone, spreads on peripheral government bonds over German Bunds widened across the board. Some of the weakness in peripheral bond prices can be attributable to increased issuance, as peripheral countries have exploited the increased demand from the European Central Bank to sell a greater share of 10-year debt. Peripheral yields are also likely to have trended upwards as a result of the increased uncertainty brought about by the latest meeting of European and Greek authorities.
*Source: J.P. Morgan Asset Management
Money Matters March 26th, 2015Money Matters March 26th, 2015 https://austenmorris.com/wp-content/uploads/2015/03/7bed8638-b22c-488d-804f-08a898018279.jpg 620 387 AMA Team https://secure.gravatar.com/avatar/4ad9c580ca7195a1d4f6c40c38a18a15?s=96&d=mm&r=g