The MSCI Pacific Index slipped 0.2% in the week to 30 October.
Japan’s TOPIX was the strongest performer, up 0.7%. At its meeting on Friday, the Bank of Japan announced that it would keep monetary policy unchanged, despite much speculation that it would expand its asset purchase programme. The central bank instead extended the timeframe for meeting its 2% inflation target to the second—rather than first—half of next fiscal year.
Sentiment among Japan’s small businesses dipped in October, with the Shoko Chukin small firm survey down from 49.0 in September to 48.7 in October. However, industrial production rose in September vs. expectations for a decline.
Hong Kong’s Hang Seng was down 2.2% amid ongoing concerns over the outlook for China’s economy. September’s trade data improved modestly, with exports rising 0.9% month on month, led by an increase in shipments of electronic products to Japan and China.
Elsewhere, Australia’s All Ordinaries fell 1.8%, as data confirmed that inflation slowed to its weakest pace since 2012. Singapore’s Straits Times ended the week 2.3% lower despite a rise in industrial production in September.
Wall Street ended a strong month on a muted note, with the Dow Jones up 0.1% and the broad S&P 500 gaining 0.2% in the week to 30 October.
The Federal Reserve (Fed) appeared to open the door for a December interest rate rise with an unexpectedly hawkish statement after its meeting on Tuesday and Wednesday. Fed policymakers voted nine to one to leave rates unchanged at 0% – 0.25% — where they have been since the financial crisis.
However, in the statement that accompanied the decision, the rate-setting Federal Open Market Committee dropped the language about international risks that appeared in September, and explicitly raised the question of a rise at the next meeting.
The Fed acknowledged that the pace of job growth had slowed and warned that it would need to be “reasonably confident” that the current ultra-low level of inflation would rise to its 2% target before it raises rates, but said US household spending and business investment were increasing solidly.
Last week’s economic data releases did little to sway interest rate expectations. US GDP growth slowed to 1.5% quarter on quarter in the third quarter, down from a very strong 3.9% in the April-June quarter, but the decline was largely driven by a well-signposted slowdown in inventory accumulation, with consumer spending remaining robust.
The consumer price index fell 0.2% from August to September, the sharpest decline in eight months, as fuel prices fell. However, the Fed’s preferred core inflation measure, which strips out temporary factors, climbed to 1.9%, just short of target.
The interest rate futures market is adopting a wait-and-see approach, pricing in roughly a 50:50 chance of a December rate increase. That could change this week, though, with several Fed officials scheduled to make speeches, and October’s employment report due out on Friday.
On the markets, materials stocks made further progress in the rally that saw them become the best-performing S&P 500 sector in October, helped by better sentiment on China and bargain hunting by investors. A positive third-quarter corporate earnings season also continued to support stocks, with around 75% of the S&P 500 companies to have reported to date exceeding earnings expectations, according to Bloomberg.
On the political front, the US House of Representatives reached a quick deal to raise the debt ceiling and pass a long-term budget, easing worries that politicians were heading for another damaging round of brinkmanship.
The MSCI Europe Index fell 0.5% in the week ended 30 October amid ongoing speculation over central bank policy and the economic outlook on both sides of the Atlantic.
Individual stock market performance was mixed, with the German DAX up 0.5% and the Swiss SPI 0.3% higher, while the French CAC 40 (-0.5%), Swedish OMX 30 (-0.5%), Spanish IBEX 35 (-1.1%), Italian FTSE MIB (-1.3%) and British FTSE 100 (-1.3%) all ended the week lower.
Natural resources and energy stocks held markets back, as commodity prices weakened on concerns over Chinese demand and gas prices dropped sharply on mild weather forecasts. Banks also struggled following some disappointing earnings results from several major European lenders.
European investor sentiment was further hit by speculation over US interest rates, as the Federal Reserve hinted that it may still raise rates this year following its policy meeting on Wednesday.
In contrast, hopes that European Central Bank (ECB) policy stimulus will boost the eurozone economic recovery continued to provide support to European equities, as expectations grew that the ECB will announce an extension to its quantitative easing (QE) programme at its December meeting.
Economic data released in the week suggested the eurozone recovery, while fragile, remains on track. The eurozone unemployment rate fell to 10.8% in September—down from 10.9% in August and well below its peak of 12.1% in late 2011. German business confidence also remained strong in October according to the latest Ifo survey, suggesting the eurozone’s largest economy remained in good health despite slowing emerging market demand and the Volkswagen emissions scandal.
Outside the eurozone, Sweden’s central bank, the Riksbank, increased the size of its QE programme from SEK 135 billion to SEK 200 billion, citing global economic uncertainties, despite stronger domestic GDP and inflation data.
In the UK, meanwhile, preliminary GDP data for the third quarter suggested that the economy had grown 0.5% quarter on quarter, which was slightly less than had been expected.
The moderation in UK GDP growth, alongside recent weakness in business surveys, may reduce the pressure on the Bank of England as it deliberates about when to raise UK interest rates from their current record low.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.8% in the week ending 30 October.
In Latin America, Brazil’s Bovespa was down 3.6%, as shares came under pressure from news that the Brazilian government had revised its budget forecast and now expects to run a deficit in 2015, having previously forecast a surplus.
Mexico’s IPC fell 1.0% after the Bank of Mexico announced that it would keep interest rates unchanged. Preliminary data confirmed that Mexico’s economy grew at an annual rate of 2.4% in the third quarter.
In emerging Asia, the MSCI China was down 2.4%, as corporate earnings results—in particular from banks—disappointed. Indian equities also came under pressure from weak corporate earnings results, with the Sensex falling 3.0%.
South Korea’s Kospi slipped 0.5%. According to the Bank of Korea’s survey, consumer sentiment improved further in October, marking the fourth consecutive monthly rise. Industrial production rose 1.9% month on month in September, up from 0.2% in August, led by an acceleration in technology products.
Taiwan’s Taiex ended the week 1.4% lower following news that the economy contracted by more than expected in the third quarter, as exports fell on the back of weak demand out of China.
In emerging Europe, Russia’s RTS was down 3.1%. The Bank of Russia kept interest rates unchanged at its meeting on Friday for the second consecutive month, citing high inflation risks. Economists are expecting the Russian economy to contract this year against the backdrop of persistently low oil prices.
Hungary’s BUX and Poland’s WIG were down 1.5% and 1.7%, respectively. Turkey’s BIST 100 fell 0.9% amid uncertainty ahead of the country’s parliamentary election.
Bonds & Currency
On core government bond markets, the US underperformed following a more hawkish message from the Federal Reserve (Fed). The yields on the two-year and 10-year Treasury rose after the Fed hinted at a possible December rate rise.
The yield on the 10-year German Bund also rose slightly, even as expectations grew that the European Central Bank would bolster its quantitative easing programme.
*Source: J.P. Morgan Asset Management
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