Asia Pacific
The MSCI Pacific Index was down 0.7% in the week to 26 September.
Japan’s TOPIX delivered a flat return. Core inflation (consumer prices excluding fresh food) rose 1.1% in August from a year earlier, down from 1.3% in July (excluding the effects of April’s consumption tax rise). The lower-than-expected reading raises speculation that the Bank of Japan could be forced to undertake additional monetary easing in order to meet its 2% inflation target next year.
On the positive side, Japan’s manufacturing activity picked up in the third quarter, with the Markit flash manufacturing purchasing managers’ index averaging 51.5, higher than the April-June average of 50.3.
Australia’s resource-heavy All Ordinaries was down 2.2%, with miners leading the decline after iron ore prices dropped to a five-year low. Meanwhile, the Reserve Bank of Australia announced it was working with regulators to try to curb double-digit growth in mortgage lending to property investors, amid concerns that the housing market is overheating.
Elsewhere, Hong Kong’s Hang Seng fell 2.6%, despite stronger-than-expected manufacturing data out of China, while Singapore’s Straits Times slipped 0.4%.
United States
US stocks fell in the week to 26 September as the market continued to come off its record highs reached earlier in September. The S&P 500 fell 1.4%, the Dow Jones Industrial Average was down 1.0%, and the technology-biased Nasdaq returned -1.5%.
Investors continued to focus their attention on geopolitical flashpoints in Russia and the Middle East, while uncertainty over the outlook for eurozone and Chinese growth was also cause for concern. Closer to home, the question over the timing of the Federal Reserve’s (the Fed’s) first interest rate rise again caused some volatility.
An upward revision to US GDP growth sparked renewed speculation that the Fed could raise interest rates before the middle of next year, as the market currently expects. GDP growth between April and June was revised up from an annual rate of 4.2% to 4.6%, marking the fastest rate of growth since the fourth quarter of 2011. Exports increased by 11.1%, while business spending rose by 9.7% from the previous three months of the year.
Economic data released in the week suggests that the US economy has continued to grow at a strong pace in the third quarter, with particular strength in the housing and manufacturing sectors.
Sentiment in the manufacturing sector continued to look strong, with the Markit manufacturing purchasing managers’ index unchanged at 57.9 in September—the second highest reading on record. Meanwhile, US new home sales surged 18% in August, far more than expected. Orders for capital goods ex-defence and aircraft—a measure of business investment—also rose 0.6% in August, following a 0.2% drop in July.
On the stock market, technology stocks performed poorly, dragged down by a sharp fall for Apple after problems with its latest iPhone software attracted criticism from users.
The debate over the timing of the first interest rate rise continues to drive market sentiment. This has been reflected in the recent strength of the US dollar in foreign exchange markets, and also in rising US Treasury yields. However, despite the stronger dollar, an improving domestic economic backdrop should be positive for US company profits, ultimately providing support for US share prices going forward.
Europe
European stock market returns were negative in the week ending 26 September, with the MSCI Europe Index down 2.0%. Disappointing economic data released in the week suggested that eurozone growth had slowed further in September. This increased pressure on the European Central Bank (ECB) to signal a strong commitment to supporting the eurozone economy when it announces details of its private asset purchase programme at the 2 October meeting of its governing council.
In Germany the DAX lost 3.2%, as index returns were dampened by a sharp fall in the share price of insurance and asset management company Allianz following the resignation of Bill Gross, chief investment officer and co-founder of its fully-owned subsidiary, PIMCO.
The UK’s FTSE 100 finished its worst week since March 2.8% lower. In the absence of significant economic data, stock-specific declines weighed on the market alongside concerns about geopolitical tensions and eurozone growth. Sweden’s OMX was down 1.8% and the French CAC 40 lost 1.5%. Spain’s IBEX 35, the Swiss SPI and Italy’s FTSE MIB declined 1.4%, 0.9% and 0.8%, respectively.
On the economic front, the latest purchasing managers’ index (PMI) releases from Markit showed that eurozone business activity had expanded in September at the slowest rate this year, with the composite index falling for the second successive month. Upward pressure on prices remained subdued, given continued weak demand for eurozone goods and services.
In Germany, the eurozone’s largest economy, strength in the services sector was offset by continued weakness in manufacturing, according to Markit. The Ifo survey, which provides a measure of the German business climate, was weaker than expected in September. The French PMI, meanwhile, disappointed across the board.
Against the backdrop of weak economic data, speculation continued about the shape that the 
ECB’s measures to stimulate the eurozone economy would take. The central bank is set to provide details of its new stimulus measures—namely, asset-backed security and covered bond purchases—at its 2 October meeting. These measures follow the targeted longer-term refinancing operations (TLTROs) announced by the ECB in June. The first TLTRO, which offered eurozone banks cheap long-term funds with a view to encouraging lending to businesses, was met with relatively muted demand earlier in September.
The range of measures that the ECB could potentially undertake to revive the flagging eurozone economy is likely to be constrained by the strong views of individual countries. In Germany, opposition to fully fledged quantitative easing, entailing the ECB purchasing bonds issued by eurozone governments, is high. Even lesser measures face stiff opposition, with German finance minister Wolfgang Schäuble saying that he is “particularly unhappy” that the ECB will buy asset-backed securities. Some of this caution may be due to the risky reputation acquired by asset-backed securities, particularly those linked to the US housing market, during the financial crisis.
Global Emerging Markets
Emerging market equity returns lagged developed markets in the week ending 26 September, with the MSCI Emerging Markets Index down 2.1%, while the MSCI World Index fell 1.5%.
Signs that the tensions in Ukraine were cooling, and that Russia, Ukraine and the European Union were getting closer to striking a gas deal that would avert disruption to flows in coming months, lent some support to Russian stocks. The Russian RTS was among the relatively better performing markets in the week, down by just 1.2%.
Elsewhere in eastern Europe, Poland’s WIG and Hungary’s BUX suffered respective losses of 1.9% and 4.3%, as weak eurozone economic data weighed on both markets.
In Latin America, Brazil’s Bovespa declined 1.0%, while Mexico’s IPC fell 1.9%. With Brazil preparing for the presidential election, to be held on 5 October, the latest MDA poll showed a narrowing gap between incumbent Dilma Rousseff and opposition candidate Marina Silva. Hopes are high for a new government to revive Brazil’s sluggish economy—GDP contracted 0.6% in the second quarter, while finance minister Guido Mantega recently announced that money would be withdrawn from the country’s sovereign wealth fund to meet spending targets.
Meanwhile, China’s manufacturing activity expanded by more than expected in September. According to the HSBC China manufacturing purchasing managers’ index, manufacturing output and new orders continued to expand, while new order growth gained momentum. Despite recent limited stimulus measures undertaken by the People’s Bank of China, the central bank has shown no signs of taking more comprehensive measures to support the economy, which markets would be likely to welcome. The MSCI China Index finished the week 2.5% lower.
Taiwan’s TAIEX and Korea’s KOSPI lost 2.7% and 1.1%, respectively, while India’s Sensex declined 1.7%.
Bonds & Currency
In the US government bond market, heightened speculation that the Federal Reserve could raise rates before the middle of next year pushed the yield on the policy-sensitive two-year US government bond up 2 basis points (bps) to 0.59%—close to a three-year high.
Yields at the long end of the curve, however, didn’t rise along with the short end, with the 10-year Treasury yield down 5 bps over the week.
*Source: J.P. Morgan Asset Management
