Asia Pacific
The MSCI Pacific Index was down 2.6% in the week ended 3 October.
Japan’s TOPIX suffered a 3.7% decline. Weak economic data hit sentiment, as a sharp drop in industrial production in August sparked concerns about the outlook for the Japanese economy. Weak auto sales data in Japan and the US hit share prices among Japan’s large car manufacturers. Although the yen ended the week broadly unchanged against the US dollar, volatility on foreign exchange markets—including a sharp fall in the dollar—hit exporters.
Hong Kong’s Hang Seng dropped 2.6% in a holiday-shortened week, as growing pro-democracy protests set up a potential confrontation with the Chinese government over the vetting of candidates for the leadership of the territory ahead of public elections in 2017. Disappointing Chinese manufacturing data also hit sentiment.
Elsewhere, Singapore’s Straits Times was 1.2% lower, while Australia’s All Ordinaries was flat on the week as a rebound in banking stocks helped nullify weakness in the mining sector sparked by Chinese growth concerns.
United States
US stocks fell in the week ended 3 October, with the S&P 500 down 0.8% and the Dow Jones 0.6% lower. Concerns over eurozone growth and political protests in Hong Kong were negative for sentiment, while speculation over the timing of US interest rate increases continued to unsettle investors amid a flurry of economic reports.
The most eagerly awaited economic release was the non-farm payrolls report at the end of the week, which came in much stronger than expected. The US economy added 248,000 jobs in September, up sharply from August, while the unemployment rate fell from 6.1% to 5.9%.
The strong jobs report suggests that the US economy has maintained its strong momentum through the summer. However, expectations that the pace of the labour market recovery would spark a more aggressive response from the Federal Reserve (the Fed) were tempered by weak wage growth, as average weekly earnings rose just 2.0% over the year to September.
Weak wage growth is adding to concerns over disinflationary pressures in the US economy, as commodity prices fall and the US dollar strengthens. The personal consumption expenditures index—the Fed’s preferred inflation measure—rose just 1.5% in August from a year earlier. The Fed may be reluctant to act to raise rates too quickly if inflation looks set to remain well below its 2% target.
Other economic data releases were mixed last week. The Institute for Supply Management (ISM) manufacturing index fell more than expected to 56.6 in September but remained well above the 50 level that separates expansion in activity from contraction. The ISM services index, however, was stronger than expected despite falling slightly in the month to 58.6.
Consumer sentiment took a hit in September according to the Conference Board consumer confidence index, which fell 7.4 points to 86.0 in the month. The index remains strong relative to other readings in the last few years, but the drop in confidence does suggest consumer spending may weaken in the coming months.
Although the pace of growth appears to be slowing from the very strong expansion recorded in the second quarter, US economic data remains consistent with a robust economic recovery. The labour market in particular is improving rapidly, while activity in the manufacturing and services sectors remains strong. However, with inflation below target, the Fed is unlikely to change its course on interest rates, which are expected to remain on hold at record lows until the middle of 2015.
Europe
European stock markets lost ground in the week ending 3 October, with the MSCI Europe Index down 2.1%. The European Central Bank’s (ECB’s) much-anticipated announcement of the details of its asset-purchase programme was initially perceived as disappointing.
Germany led the declines, with the DAX losing 3.1%. Italy’s FTSE MIB fell 2.9%, while Spain’s IBEX 35 and the French CAC 40 finished the week 2.6% lower. Sweden’s OMX was down 1.9% and the UK’s FTSE 100 lost 1.8%.
The main focus last week was the ECB’s latest policy-setting meeting. Interest rates were kept 
on hold at 0.05% as expected, while ECB president Mario Draghi provided details of his much anticipated asset-purchase programme. Draghi did not set a definitive goal for the total amount of asset purchases, although he has in the past hinted that stimulus amounting to around EUR 1 trillion could be provided. He did, however, commit to continue to the programme for at least a two-year period.
The ECB’s pipeline of measures—which includes targeted longer-term refinancing operations (TLTROs) as well as purchases of asset-backed securities and covered bonds—is substantial and shows its determination to support eurozone economic growth and tackle disinflationary pressures.
The ECB’s asset purchases are due to begin mid October, while the results of its comprehensive assessment of the balance sheets of regional banks will be released towards the end of the month and the next TLTRO is scheduled for December. While investors appear to be holding out for further stimulus measures akin to the quantitative easing (QE) pursued by the Federal Reserve and the Bank of England, opposition to the ECB engaging in fully fledged QE through direct purchases of eurozone government bonds is high, particularly in Germany.
Draghi also made reference to the slow progress being made by some eurozone countries, including France and Italy, on implementing structural reforms, saying that “in order to strengthen investment activity, job creation and potential growth, other policy areas [alongside monetary policy] need to contribute decisively. In particular, the legislation and implementation of structural reforms clearly need to gain momentum in several countries.”
The ECB’s concerns were illustrated by disappointing economic data. The final reading for the September Markit eurozone composite purchasing managers’ index painted a picture of an economy struggling against multiple headwinds, including subdued domestic demand in several countries, low levels of bank lending, the impact of Russia-related sanctions and the reluctance of firms to expand due to an uncertain business climate.
The outlook for the UK, however, remained more positive. The latest figures from the Office for National Statistics showed that UK GDP in the second quarter of 2014 was approximately 2.7% higher than the pre-financial crisis peak of the first quarter of 2008, and that the economy had rebounded from the recession much faster than initially thought. While positive economic developments served to raise expectations that UK interest rates will rise earlier than expected, these were dampened by signs that the housing market may be cooling.
Global Emerging Markets
Emerging market equities continued their recent underperformance relative to developed markets in the week ending 3 October, with the MSCI Emerging Markets Index losing 1.7%, while the MSCI World Index fell 1.4%.
In Latin America, Brazil’s Bovespa was down 4.7%, with returns suffering amid concerns that incumbent president Dilma Rousseff would be re-elected in upcoming presidential elections (the first round of voting was scheduled for 5 October). The current government’s heavy intervention in domestic businesses—including state-owned energy giant Petrobras—has been viewed by many as undermining the country’s long-term economic growth prospects. Mexico’s IPC fared relatively better, declining by 0.5%. Mexico benefits from a high degree of exposure to the strong US economic recovery.
Meanwhile, the MSCI China Index fell 1.9%. Following September’s weak manufacturing data, the People’s Bank of China (PBoC) continued to add to its raft of mini-stimulus measures, which has seen it ease policy in a targeted manner to support weaker areas of the economy. With the aim of boosting the ailing Chinese property market, the PBoC announced an easing in mortgage-lending standards, with people buying second homes eligible for lower down payments and rates.
Taiwan’s TAIEX delivered a return of 1.3%, due primarily to strength in the financials and technology sectors, while Korea’s KOSPI was down 2.7%. India’s Sensex finished the week 0.2% lower. The Reserve Bank of India is widely expected to leave interest rates on hold at its next monetary policy meeting, as commodity price declines are leading to an easing in inflationary pressures.
In eastern Europe, Russia’s RTS fell 5.5% as sanctions-related developments continued to impede business activity. Polish equity returns were also sluggish, with the WIG down 1.5%. The National Bank of Poland is expected to signal that it will cut interest in the near future if downward pressures on prices persist.
Bonds & Currency
In the US Treasury market, the yield on the two-year government bond rose sharply following the much stronger-than-expected US jobs report. The yield on the 10-year Treasury barely increased on the day of the release, however, and finished the week lower due to falling inflation expectations and slumping borrowing costs in Europe, where the 10-year German Bund yield finished the week near its recent lows.
In the credit markets, spreads continued to widen, and high yield and emerging market debt underperformed.
*Source: J.P. Morgan Asset Management
