Asia Pacific
The MSCI Pacific Index returned 1.5% in the week to 20 November.
Australia’s All Ordinaries had a strong week, jumping 3.8% as investors continued to hunt for bargains outside the materials sector, which remains under a cloud on China demand worries.
Japan’s Topix was up 1.1%. The Bank of Japan (BoJ) left policy on hold at its meeting on Thursday, as widely expected, but investors anticipated further stimulus in the coming months after the Japanese economy slipped back into recession in the third quarter.
Japan’s gross domestic product (GDP) shrank at an annualised rate of 0.8% in the June-September period—more than expected, and marking a second successive quarter of contraction (the definition of a technical recession). The decline in GDP was largely driven by companies running down inventories. Consumption contributed an unexpectedly strong 1.2 percentage points, but weak investment knocked 0.7 percentage points off the overall growth rate.
The BoJ said the return to recession was not enough to alter the view that the inflationary trend is improving. However, the central bank’s governor, Haruhiko Kuroda, said businesses are not increasing capital expenditure as much as their plans had suggested. Weak growth data is likely to make the BoJ’s 2% inflation target more difficult to achieve as companies will be reluctant to boost wages or increase investment in a sluggish economic environment.
Hong Kong’s Hang Seng gained 1.6%, helped by hopes the mainland Chinese authorities will do more to support growth. Singapore’s Straits Times lost 0.3%.
United States
US stocks rose in the week to 20 November, as markets reacted positively to signs that the Federal Reserve (Fed) would raise interest rates before Christmas. The S&P 500 rose 3.3%, while the Dow Jones Industrial Average was up 3.4% and the technology-biased Nasdaq ended the week 3.6% higher.
The minutes of the Fed’s October meeting, released on Wednesday, triggered a sharp rise in expectations that the central bank would raise interest rates in December. The minutes confirmed the Fed’s belief that the conditions for a rate rise may “well be met” by its next meeting on 15-16 December, barring “unanticipated shocks”. The Fed also made it clear that the path of policy normalisation following the first rate rise would be very gradual.
US stocks rallied following the release of the minutes, suggesting that investors are comfortable with expectations that the first rate rise will take place in December. Sentiment was also supported by the Fed’s reassurance that it would take a cautious approach.
Firming inflation data released in the week further supported the view that rates would rise in December. Core consumer prices rose 0.2% in October, following two consecutive months of declines, bringing the year-on-year increase to 1.9%, close to the Fed’s 2% target. Meanwhile, the labour market continued to stabilise, with initial claims for unemployment benefits in the week of 14 November falling to 271,000 from 276,000 in the previous week.
However, a weaker-than-expected industrial production report could give the Fed pause for thought. Industrial production fell 0.2% in October, falling short of expectations for a modest increase, due to weakness in mining and utilities.
Investors will now turn their attention to Fed chair Janet Yellen’s testimony on the economy in Congress on 3 December, followed by the release of the US jobs report, for any further evidence of the timing of the first rate rise.
On the markets, technology stocks performed particularly well, led by a sharp rise for Apple shares following news that Goldman Sachs had added the stock to its “conviction buy” list. Energy stocks fell early in the week as crude oil prices retreated on the back of ongoing concerns about oversupply. However, later in the week, data from the American Petroleum Institute showed a sharp drop in US crude inventories, which helped energy stocks rise.
Europe
The MSCI Europe Index rose 3.1% in the week to 20 November amid further signs that the European Central Bank (ECB) would boost its monetary stimulus measures next month.
Among the major European markets, Germany’s DAX climbed 3.8%, the UK’s FTSE 100 and the Swedish OMX 30 were both up 3.5%, the Swiss SPI rose 2.9% and the French CAC 40 was 2.1% higher, while the Spanish IBEX 35 rose 1.8% and the Italian FTSE MIB gained 1.4%.
The week began with investors still in shock at the horrific terrorist attacks in Paris on the evening of 13 November. However, markets were not hit hard, as hopes grew that the international community may finally be devising a serious strategy to combat Isis, the Syria-based terrorist organisation.
Senior ECB officials noted the calm reaction of markets to the terrorist attacks, but warned of potential damage to the fragile eurozone recovery, highlighting the risks of weaker consumer confidence and investment. Tighter border controls and other security restrictions in the wake of the attacks could also hit eurozone growth prospects.
The ECB had already been sending clear hints that it would act to support the eurozone economy if inflation and growth remained weak. In the minutes to the ECB’s October policy board meeting, released last week, policymakers acknowledged that they may need to take more forceful action, possibly using a broader set of tools, to ensure that inflation objectives are met.
In a speech at the end of the week, ECB president Mario Draghi went even further, saying that ECB policymakers would “do what they must to raise inflation as quickly as possible”. Draghi’s speech was interpreted by investors as paving the way for the announcement of additional monetary stimulus measures at the ECB’s next board meeting, scheduled for 3 December.
The prospect of ECB action, along with a weaker euro, helped boost economically sensitive stocks. European markets were led by gains in the autos, industrials and chemicals sectors.
Golbal Emerging Markets
In a strong week for global equities, emerging market stocks delivered positive returns but lagged their developed peers. The MSCI Emerging Markets Index rose 1.9% vs. a 3.0% gain for the MSCI World.
The strongest performer among the major markets was Russia’s RTS, which leapt 9.0% as signs that Russia might cooperate with the US and Europe on efforts to end the civil war in Syria were viewed as signalling an improving relationship with the west.
In emerging Asia, the MSCI China Index added 1.5% in a quiet week for economic data. Investors continued to hope for further stimulus measures from Beijing to support growth. Taiwan’s TSE rose 1.6% as data showed strong tech demand continued to fuel export growth in October.
In Latin America, Mexico’s IPC ended the week 2.9% higher. The country’s economic recovery gathered momentum, with gross domestic product (GDP) growing 0.8% in the third quarter vs. the second, the fastest pace since 2013.
Brazil’s Bovespa returned 3.5% even as data showed that inflation exceeded 10% for the first time in 12 years in the year to November, further complicating the challenge of pulling the largest Latin American economy out of recession.
South Africa is also struggling to contain inflation in an environment of sluggish growth. Last week, the central bank raised interest rates for the second time in four months, taking them to 6.25%. The JSE All Share was up 2.0%.
Bonds& Currency
The front-end of the US yield curve underperformed last week as the October minutes of the Federal Open Market Committee (FOMC) meeting indicated a leaning towards a December lift-off for interest rate normalisation. Commentary from FOMC members suggested they would be comfortable with lifting rates from zero “soon”.
The potential for additional quantitative easing from the European Central Bank saw eurozone government bond yields reach new lows last week. The percentage of outstanding eurozone government bonds trading at a negative yield is approaching the record highs reached in April 2015. Over 67% of eurozone government bonds now yield less than 1%.
*Source: J.P. Morgan Asset Management
