The MSCI Pacific Index returned 1.2% in the week ending 27 February.
Japan’s TOPIX rose 1.6%. Sentiment was boosted by Bank of Japan governor Haruhiko Kuroda’s comments that the central bank would ease policy further if its 2% inflation target becomes seemingly more unattainable.
Sentiment among Japan’s small- and medium-sized companies picked up in February, with the Shoko Chukin small business confidence index rising to 46.5 from 46.3 in January—the first rise in three months.
In Hong Kong, the Hang Seng delivered a flat return, as weakness in Macau casino stocks weighed on returns.
Elsewhere, Australia’s resource-heavy All Ordinaries was up 0.9%, helped by a rally in base metals, while Singapore’s Straits Times fell 1.0%.
US stocks delivered lacklustre returns in the week to 27 February, as markets digested comments from Federal Reserve (Fed) chair Janet Yellen on the outlook for US interest rates. The S&P 500 slipped 0.3%, while the Dow Jones Industrial Average delivered a flat return and the technology-biased Nasdaq rose 0.2%.
Attention was focused on Yellen’s semi-annual monetary policy testimony on Tuesday, and for any clues on the timing of the first interest rate rise. In addition to delivering an upbeat assessment of the US economy, Yellen expanded on the use of the word “patient” in the central bank’s rate guidance. She stated that its removal would not automatically signify an imminent rate rise, but that instead the Fed would be flexible over the timing of the first increase, focusing on the health of the labour market in particular over the next few months.
Yellen’s comments led to speculation that the reference to “patience” would be removed in the Fed’s March meeting, but that the first rate rise may not come until September—instead of June, as currently expected.
However, inflation data released later in the week reinforced the view that the Fed could begin to raise rates this summer. US core consumer price inflation—which excludes food and energy—rose 0.2% in January, the firmest increase since October, while December’s reading was revised up to 0.1%. The stronger-than-expected reading gives the Fed confidence in its projection that US inflation will return to its 2% target level in the medium term.
Meanwhile, data suggested that manufacturing activity may be stabilising. Orders for durable goods rose 2.8% in January vs. a 3.7% decline in December, while core capital goods orders increased 0.6% compared to a 0.7% fall in the previous month.
Housing data was generally mixed. Existing home sales data for January was weaker than expected, with sales dropping 4.9% due to a shortage of properties on the market. However, the Case-Shiller Home Price Index was stronger than expected, confirming that house prices are continuing to rise.
US economic growth for the fourth quarter of 2014 was revised down in the week from 2.6% to 2.2%, due to a slower-than-expected rise in business inventory investment.
The outlook for interest rates looks set to continue to drive market sentiment over the coming months. Despite all the focus on timing, however, the more important issue is the pace of rate rises, and on this front the Fed is signalling a very gradual and gentle path higher.
The MSCI Europe Index rose 1.8% in the week ending 27 February.
Greece secured a four-month extension to its financial rescue programme, with eurozone finance ministers approving the Athens government’s list of the structural economic reforms it plans to implement by the end of June. The extension of the bail-out programme was also approved by German lawmakers in the Bundestag—a key hurdle for Greece to clear.
These developments alleviated immediate fears of Greece exiting the eurozone and lent support to regional equity markets. The German DAX was among the week’s strongest markets, up 3.2%. Spain’s IBEX 35 returned 2.7%, while the French CAC 40 and Italy’s FTSE MIB registered respective gains of 2.5% and 2.3%. Sweden’s OMX Stockholm 30, the Swiss SPI and the UK’s FTSE 100 rose by 1.6%, 1.5% and 0.5%, respectively.
Investor sentiment remained buoyant amid continued signs of improvement in the eurozone economy. Data released in the week suggested that recent trends in eurozone consumer price inflation had been better than initially thought, while a continued rise in lending, particularly to non-bank financial institutions, indicates that liquidity conditions in the eurozone are improving.
The German labour market strengthened in February, with the number of unemployed falling by 20,000, taking the unemployment rate to 6.5%, its lowest level in more than two decades. Furthermore, despite the introduction of a new minimum wage in Germany, the number of people in employment has been rising steadily.
In Sweden, meanwhile, gross domestic product (GDP) increased by a greater-than-expected 1.1% quarter on quarter in the final three months of last year. The biggest driver of strong fourth-quarter GDP growth was solid domestic sales, with a meaningful rise in both household spending and government consumption, while fixed investment was strong.
There are several concurrent trends supporting the outlook for European equities: the European Central Bank is set to embark on a large-scale programme of eurozone government bond purchases; a falling euro is supporting exporters across the eurozone; and there are gradually more concrete signs of improvement in the real economy. This environment should help European companies grow their profits in the year ahead.
Global Emerging Markets
Emerging market equities had a positive week ending 27 February. The MSCI EM Index returned 0.4%.
Among the individual markets, there was fairly limited dispersion in returns. In Asia, Korea’s Kospi rose 1.2%, while Taiwan’s TAIEX and the MSCI China Index both gained 1.0%. India’s Sensex delivered a broadly flat return, while the MSCI Thailand Index fell 1.6%.
Asian equity returns were buoyed by tentative signs of improvement in the Chinese economy. According to the HSBC China Manufacturing Purchasing Managers’ Index, there was a marginal pickup in the Chinese manufacturing sector in January, with domestic demand strengthening. However, because activity levels remain sluggish, the People’s Bank of China may undertake further monetary policy easing measures to support economic growth.
In Latin America, Mexico’s IPC and Brazil’s Bovespa registered respective gains of 1.5% and 0.7%. The Brazilian market took a hit in the week from the announcement by credit ratings agency Moody’s that it was removing state-owned oil company Petrobras’ investment grade rating. Shares in Petrobras, Brazil’s largest company, have suffered amid oil price declines and concerns about Chinese economic growth, and the company has become ensnared in a corruption scandal.
Eastern European market returns were mixed, with Poland’s WIG (+1.4%), Hungary’s BUX (+1.1%) and the Czech Republic’s PX (+0.7%) positive, while Russia’s RTS lost 1.5%. On a year-to-date basis, however, the Russian equity market is up 13.4%, despite the ongoing economic and political tensions.
Bonds & Currency
Developed market bonds were mixed over the week. In the US, the 10-year Treasury yield was down 13 basis points (bps) on the week, as the market interpreted comments from Federal Reserve chair Janet Yellen as more dovish than expected.
Eurozone sovereign bond yields fell in anticipation of the European Central Bank’s large-scale asset purchase programme. For the first time in history, Ireland’s 10-year bond yield fell below 1%, while the yield on the 10-year German government bond ended 7 bps lower. The yield on the 10-year UK Gilt ended 3 bps higher.
*Source: J.P. Morgan Asset Management
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