The MSCI Pacific Index returned 0.2% in the week ending 6 November.
Japan’s TOPIX rose 0.4%. Sentiment was boosted by strong quarterly earnings results and hopes for further monetary policy action from the Bank of Japan.
A successful debut for Japan Post was also positive as the government sold off a stake in the postal company.
In Hong Kong, the Hang Seng delivered a 1.0% return, boosted by hopes that the Chinese economy had bottomed.
Elsewhere, Australia’s resource-heavy All Ordinaries was down 0.4% as commodity prices weakened, while Singapore’s Straits Times rose 0.4%.
Wall Street stocks gained in the week to 6 November as a robust employment report and other encouraging data releases suggested the US economy is strong enough to withstand an interest rate rise. The Dow Jones added 1.4%, while the broad S&P 500 was up 1.0% and the technology-focused Nasdaq rose 1.8%.
The Institute for Supply Management’s (ISM’s) index of US manufacturing activity slipped to its lowest level of the year in October. However, the new orders component rose, potentially signalling stronger activity ahead.
The ISM non-manufacturing index, which measures activity in the service sector, rose sharply, from 56.9 in September to 59.1 in October, with the employment component nearing an all-time high.
Friday’s non-farm payrolls report showed that 271,000 jobs were created in October, well ahead of expectations and of the 230,000 average over the last 12 months. The unemployment rate fell to 5.0%—the lowest level in seven years—as the labour force expanded and the number of jobless people declined.
More part-time workers found full-time work, while wages grew at the fastest pace since 2009, with average hourly earnings rising 2.5% vs. the same month a year earlier.
Given that rising wages tend to signal future inflation, expectations are mounting that the Federal Reserve (Fed) will raise interest rates at its next meeting. Comments earlier in the week from several Fed officials—including chair Janet Yellen and vice-chair Stanley Fischer—were widely seen as supporting this view.
In a congressional hearing, Yellen said the US economy was performing well and that the 15-16 December meeting would be a “live possibility” for a rate rise. Fischer told a meeting of the National Economists Club that inflation may rise quickly to the 2% target once the oil price stabilises and the dollar stops strengthening.
Investors initially responded cautiously to Friday’s jobs news and the signal it provided about monetary policy, with stocks falling back immediately after the announcement. However, a rally towards the end of the day suggested that the greater certainty that will come with the first rate rise in nine years will be broadly positive for US equities.
By sector, banks were the strongest performers last week on expectations they will benefit as interest rates normalise. Solid earnings reports lifted technology stocks, while energy stocks outperformed the broader market despite a pullback in crude prices.
The MSCI Europe Index rose 0.9% in the week ending 6 November, boosted by stronger eurozone stock markets amid continued central bank policy support and a weaker euro.
The French CAC 40 gained 1.8%, Germany’s DAX was up 1.3%, Spain’s IBEX 35 rose 0.9% and Italy’s FTSE MIB climbed 0.4%. Outside of the eurozone, Switzerland’s SPI rose 0.6%, while the UK’s FTSE 100 ended 0.1% lower.
Eurozone markets were lifted by further speculation that the European Central Bank (ECB) would move to ease monetary policy at its December meeting, even as the US Federal Reserve prepares to raise US interest rates.
The divergence in central bank policy saw the gap between US and German two-year bond yields hit the widest level since 2006, while the euro slid 1.3% against the U.S. dollar to just USD 1.07.
The weaker euro is supportive for eurozone exporters, with industrials, chemicals and technology stock among the outperformers last week.
In contrast, basic resource stocks lagged, with commodity prices under pressure from a stronger US dollar, as the chances of a December US interest rate rise grew stronger. The UK stock market, which has a heavy weighting in mining stocks, underperformed.
Economic data was slightly weaker in the eurozone, adding to expectations that the ECB would act to boost its quantitative easing programme in December. In Germany, industrial production fell 1.1% and factory orders were down 1.7% in September, suggesting that growth in Europe’s largest economy is slowing.
In the UK, meanwhile, a surge in October’s manufacturing purchasing managers’ index (PMI) and a rise in the services PMI suggested UK growth remained strong.
Nevertheless, the Bank of England tempered expectations for interest rate increases with the release of a dovish November Inflation Report, as UK inflation expectations were revised lower due to the drop in commodity prices and weak emerging market backdrop.
Global Emerging Markets
The MSCI Emerging Markets Index rose 1.1% in the week to 6 November as hopes that China’s economy is stabilising outweighed worries over the implications of a potential US interest rate rise.
The MSCI China Index returned 1.9%. Manufacturing activity in China contracted for a third consecutive month in October, according to the country’s official purchasing managers’ index. However, the reading was unchanged from September, potentially indicating that the economy is bottoming. The non-manufacturing PMI rebounded from September’s 14-month low to reach its highest level since July.
Elsewhere in emerging Asia, PMI data was broadly disappointing. South Korea’s manufacturing PMI slipped back to 49.1 in October from 49.2 in September after rising strongly for three straight months (readings below 50 signal contraction rather than expansion). The Kospi gained 0.6%.
India’s Sensex slid 1.5% as the manufacturing PMI fell back in October for third consecutive month. The defeat of the ruling Bharatiya Janata party in a key state election also weighed on the market, threatening to undermine confidence in the prime minister, Narendra Modi, whose reform agenda has made him a popular leader.
In Latin America, Brazil’s Bovespa gained 2.3% and Mexico’s IPC was up 1.6%, helped by better sentiment on China. Brazil’s consumer prices rose more than forecast in October, as a deepening recession limited the ability of the central bank to raise interest rates.
In emerging Europe, Russia’s RTS added 1.0%, while Hungary’s BUX surged 3.4%, continuing the strong run that has seen it become one of the best-performing markets over the year to date.
Bonds & Currency
US Treasuries sold off this week, driven by better US economic data and comments from Fed Chair Yellen continuing to indicate that December could see the first rise in US interest rates.
The divergence in central bank policy between the US and Europe, where the ECB is moving toward further easing, saw the gap between US and German two-year bond yields hit the widest level since 2006.
*Source: J.P. Morgan Asset Management
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