The MSCI Pacific Index rose 0.7% in the week ended 26 February.
Japan’s TOPIX was 1.5% higher as investors continued to look towards next month’s Bank of Japan monetary policy meeting. With the economic outlook deteriorating and inflation slipping (the core inflation rate fell back to zero in January) many commentators believe that the Japanese central bank could be preparing to announce further stimulus measures.
Meanwhile, investors digested comments from chief cabinet secretary Yoshihide Suga suggesting that Japan’s second consumption tax increase, scheduled for April 2017, could be delayed if the domestic economic situation doesn’t improve. Although prime minister Shinzo Abe said that the tax rise would only be delayed in the event of a serious economic shock, Suga said that the government could postpone the increase if the move looks like it will weaken the domestic economy or reduce total tax revenues.
Hong Kong’s Hang Seng ended the week 0.4% higher amid further volatility on domestic Chinese markets. In his annual budget address, Hong Kong’s financial secretary, John Tsang, announced a multi-billion-dollar package of measures to support the city’s economy, including tax cuts and a plan to boost housing supply.
Singapore’s Straits Times fell 0.3% and Australia’s All Ordinaries ended 1.3% lower, with sentiment under pressure from the volatility in China, which raised concerns over the strength of the global economy.
US stocks rose in the week ending 26 February, boosted by some encouraging domestic economic data. The S&P 500 was up 1.6%, while the Dow Jones Industrial Average rose 1.5% and the technology-biased Nasdaq ended the week 1.9% higher.
Growth and inflation data released in the week was better than expected, bolstering the picture of a strengthening domestic economy. The US economy grew at an annualised pace of 1% in the fourth quarter, up from an initial estimate of 0.7%, according to revised data from the Department of Commerce. Meanwhile, the core personal consumption expenditure deflator—the Federal Reserve’s (Fed’s) preferred measure of inflation—rose 1.7% in the year to January, marking the strongest increase since 2012.
A solid US durable goods orders report was also released, which highlighted widespread strength with headline orders increasing 4.9% in January, recovering the 4.6% decline in December. Nondefence capital goods orders—a proxy for business investment—rose 3.9%.
Labour and housing market data continued to strengthen. The four-week moving average for initial jobless claims inched down to 272,000 in the week ending 20 February—the lowest level since December. Meanwhile, existing home sales beat expectations in January, echoing recent reports of solid mortgage purchase application volumes.
On the negative side, manufacturing activity slowed, with the headline Markit manufacturing purchasing managers’ index down from 52.4 in January to 51.0 in the flash February report — the weakest level since 2009. The Markit non-manufacturing purchasing managers’ index showed that the service sector had contracted for the first time since October 2013.
Confidence data also disappointed. The US Conference Board’s index of consumer confidence fell to 92.2 in February from a downwardly-revised 97.8 in January, marking a bigger drop than expected.
With over 95% of the S&P 500 companies having reported, fourth-quarter earnings per share is down 3.5% from a year earlier. Manufacturing businesses and companies with higher US dollar exposure have suffered greater declines in earnings growth relative to services and domestic peers.
Attention is turning to the Fed’s upcoming policy meeting and for any signs over whether the central bank will raise interest rates further. At least one rate rise is expected to take place this year, although the chance of a rise at the March meeting still looks unlikely.
A sustained rally for oil prices and better sentiment on China contributed to a second consecutive positive week for European equities. The MSCI Europe Index rose 1.8%.
In the eurozone, Italy’s FTSE MIB was the strongest performer, jumping 3.4%, while the French CAC 40 was up 2.2%, Spain’s IBEX rose 1.9% and the German DAX returned 1.3%.
Hopes that Mario Draghi might pull something big out of the bag at the European Central Bank’s (ECB’s) meeting on 10 March have supported the rebound on European markets over the past fortnight. At the same time, recent responses to policy announcements suggest investors are becoming increasingly sceptical about the ability of central banks to do much more to support growth in an environment of ultra-low interest rates and huge quantitative easing programmes. As a result, there is scope for disappointment unless the ECB comes up with a significant and surprising policy move.
The eurozone composite (manufacturing and services) purchasing managers’ index fell to its lowest level in 13 months in February, underscoring the challenge that faces the ECB. New orders declined for a third consecutive month, while average prices charged by companies were the lowest in a year.
Meanwhile, the Ifo survey of German business sentiment plunged to a four-year low in February. Confidence has been rocked by worries over the health of the country’s largest lender, Deutsche Bank, which has been forced to reassure investors that it will not struggle to make coupon payments on its bonds amid worries over the impact of negative interest rates and slowing global growth on European bank earnings.
Financial stocks rallied sharply last week, lifted by expectations that any additional deposit rate cut will exempt certain deposit pools to limit the effect on bank profit margins. Energy stocks also had a strong week as talk about production cuts supported the oil price despite a lack of tangible action.
In the UK, sterling slumped to a seven-year low last week on increased risks of a UK exit from the European Union as several high-profile members of the governing Conservative party joined the Out campaign. However, the FTSE 100 returned 2.4% over the week, reflecting the fact that a weaker currency is good news for many of the UK’s largest companies, which source a significant proportion of their earnings overseas.
Global Emerging Markets
The MSCI Emerging Markets Index was flat in the week ended 26 February.
Gainers included Russia’s RTS, which rose 4.3% as oil prices rebounded following confirmation that several major oil producers, including Russia, Saudi Arabia, Venezuela and Qatar, would meet next month. Investors hope the meeting could help stabilise volatile oil markets.
Turkey’s BIST 100 rose 2.6% as the central bank kept interest rates unchanged, as expected. In central Europe, Hungary’s BUX was up 2.1% as local telecom operator Magyar Telekom said it would raise its dividend payment.
Chinese stocks fell, with the MSCI China Index down 0.5% on the week as local markets succumbed to renewed selling pressure.
Indian stocks also weakened ahead of the upcoming federal budget announcement as reports suggested the government may need to widen its fiscal deficit. The Sensex was 2.3% lower.
Brazil’s Bovespa ended the week 0.1% higher. Moody’s became the latest rating agency to downgrade Brazil’s debt rating to junk on Wednesday. Although the downgrade weighed on banks and some state-controlled companies, the decision was widely expected and the market reaction was muted.
In Taiwan, the Taiex rose 1.0%. Technology company Hon Hai Precision rose after its takeover offer was accepted by the board of Japanese rival Sharp Corp.
Argentina’s Merval jumped 9.3% as reports suggested that the country was close to reaching a USD 5 billion settlement with creditors over the terms of debt restructurings in 2005 and 2010.
Bonds & Currency
The yield on the policy-sensitive two-year US Treasury note was up 5 basis points (bps) on the week following the release of a stronger-than-expected PCE inflation report.
Outside the US, bonds rallied as weak February flash purchasing managers’ index readings raised concerns over growth momentum in the first quarter following a weak fourth quarter. 10-year yields in Germany and Japan fell by around 5-8bps in the week.
*Source: J.P. Morgan Asset Management
Markets respond to mixed economic data Markets were mixed in a week that saw the release of differing economic data. The UK’s FTSE 100 dropped