Money Matters September 16th, 2015

Asia Pacific
The MSCI Pacific Index gained 2.1% in the week to 11 September as sentiment was boosted by the prospect of further stimulus measures in China and Japan. Hong Kong’s Hang Seng was up 3.2%, while the Singapore Straits Times added 0.8%.
Japan’s TOPIX rose 2.5%. Japan’s prime minister, Shinzo Abe, pledged to cut corporate taxes by at least 3.3 percentage points next year to help put the country on a path to sustainable growth.
Meanwhile, an unexpected drop in machinery orders was viewed as adding to the pressure on the Bank of Japan to increase its support for the economy. Core machinery orders, which are viewed as a leading indicator for capital spending in the next six to nine months, fell 3.6% month on month (m/m) in July after a 7.9% m/m decline in June.
Australia’s All Ordinaries ended a volatile week 0.7% higher. The Australian unemployment rate fell to 6.2% in August from 6.3% in July, with both full- and part-time employment rising.
New Zealand’s NZX 50 returned 1.5%. The Reserve Bank of New Zealand cut rates by 0.25%, in line with expectations. The central bank’s governor, Graham Wheeler, said more easing was likely and further currency weakness “appropriate”.
United States
US stocks rose in the week to 11 September, despite continued uncertainty over the likely outcome of the Federal Reserve’s (Fed’s) policy meeting on 16/17 September. The S&P 500 and the Dow Jones Industrial Average were both up 2.1%, while the technology-biased Nasdaq rose 3.0%.
The week failed to provide any clarity as to whether the Fed would raise interest rates for the first time in nearly a decade at its September meeting.
The World Bank’s chief economist warned that the central bank should hold off from raising rates until the global economy is on a more stable footing, stating that the central bank risks triggering “panic and turmoil” in emerging markets. Given ongoing concern over growth in China and its impact on the global economy, a Fed decision to raise interest rates could spark a new crisis in emerging markets.
However, another batch of solid US employment data reinforced the picture of a strengthening labour market, adding to the case for a rate rise. The Job Openings and Labour Turnover Survey, watched closely by Fed chair Janet Yellen, confirmed that total job openings surged to 5.75 million in July, from 5.32 million in June.
Initial jobless claims declined by 6,000 to 275,000 in the week ending 5 September, in line with expectations. For the last six months, new claims for unemployment benefits have been below the 300,000 level that economists associate with a healthy jobs market.
The University of Michigan’s consumer sentiment index fell 6.2 points to a 12-month low of 85.7 in the preliminary September report. This larger-than-expected decline can most likely be attributed to the recent drop in global share prices, with the survey’s director indicating that the bulk of the decline in confidence came late in the month, as stock markets fell heavily.
Technology stocks were among the week’s strongest performers, driven by a number of encouraging presentations from companies at the Citi Global Technology Conference. Shares of Apple performed strongly in particular, rebounding following the announcement of a new iPhone pricing plan, which will give US users a new iPhone each year on the carrier of their choice for USD 32 per month.
Europe
Most major European stock markets delivered moderate positive returns in the week to 11 September as August’s volatility receded. The MSCI Europe Index rose 0.9%.
Italy’s FTSE MIB was the strongest performer, returning 1.4%, while Spain’s IBEX was the weakest, sliding 0.9%. The UK’s FTSE 100 was up 1.2%, the German DAX gained 0.9% and the French CAC 40 added 0.6%.
Economic data releases in the week suggested a modest recovery remains underway in the eurozone. Second-quarter gross domestic product (GDP) growth for the single currency region was revised up to 0.4%, from a preliminary estimate of 0.3%. The first-quarter reading was also revised up, from 0.4% to 0.5%.
Domestic demand slowed in the second quarter, with both household consumption and investment spending falling vs. the first three months of the year. However, growth was supported by a revival in exports, helped by the depreciation of the euro over the last year.
German trade data for July suggested euro weakness is continuing to boost exports, despite sluggish global demand and worries over the impact of the slowdown in China. Seasonally adjusted exports climbed by 2.4% month on month to a record high, with demand from the US, the UK and the rest of the eurozone more than offsetting weakness in emerging markets.
In contrast, UK manufacturing data pointed to the toll that a strong currency is taking on the UK economy. Manufacturing output fell 0.5% in July compared with the previous year, the first annual decline in more than two years.
The Bank of England’s Monetary Policy Committee left interest rates on hold at its meeting on Thursday, as widely expected. Policymakers also slightly reduced their third-quarter GDP projection, reflecting rising external risks, particularly in China.
On regional markets, materials stocks were the strongest performers as hopes of further economic stimulus in China and production cuts by mining giant Glencore boosted commodity prices. Glencore said it would suspend production at its copper operations in Zambia and the Democratic Republic of Congo, taking about 400,000 tonnes of the metal out of the market, as part of a plan to shore up its balance sheet.
Energy stocks lagged as oil failed to participate in the commodity price rally, with Brent crude sliding 2.4% over the week.
Global Emerging Markets
The MSCI Emerging Markets Index rose 1.8% in the week to 11 September.
The Chinese stock market stabilised, with the MSCI China ending 4.4% higher, as hopes for further stimulus grew. Trade data for August was mixed. Exports fell 6.1% year on year, recovering modestly from July’s slowdown, while imports were down 14.3% from a year earlier, marking the biggest decline since January this year. Beijing revised down its estimate of 2014 economic growth to 7.3% from 7.4%, fuelling concerns over the country’s ability to meet the official 2015 growth target of 7%.
Chinese officials sought to soothe nerves at the meeting of G20 finance ministers and central bank governors on Saturday. Commenting on the issues of growth and foreign exchange in particular, officials reassured markets that they did not foresee a hard landing in the Chinese economy and that they aren’t pursuing an aggressive devaluation policy. On Tuesday, China’s Finance Ministry said it would proceed with “stronger proactive fiscal policy” to support economic growth.
Elsewhere in emerging Asia, India’s Sensex was up 1.6%. Industrial production data for July came in higher than expected, boosted by a surge in capital goods production, while consumer goods production disappointed for a second consecutive month.
South Korea’s Kospi was up 2.9%, as sentiment was buoyed by the prospect of further stimulus measures in China. As widely expected, the Bank of Korea kept its monetary policy unchanged. Taiwan’s Taiex rose 3.8%, despite a fall in the purchasing managers’ index in August to 46.1, the lowest level since July 2011.
In Latin America, Brazil’s Bovespa slipped 0.2%, following a downgrade of the country’s sovereign debt rating to “junk” status by ratings agency Standard & Poor’s. Mexico’s IPC was up 0.1%.
In emerging Europe, Hungary’s BUX was down 1.2%. Sharply lower fuel prices drove the inflation rate down to zero in August, reinforcing the case for the central bank to maintain loose monetary conditions for an extended period. Turkey’s BIST 100 fell 2.2%, despite better-than-expected economic growth for the second quarter.
Bonds & Currency
Following the recent volatility on bond markets, core yields were little changed last week as investors adopted a wait-and-see approach ahead of the Federal Reserve’s crucial policy-setting meeting on 16 and 17 September.
Ten-year yields in the US were 6 basis points (bps) higher, while UK yields were flat and German and Japanese yields around 2bps lower. Shorter-dated bonds reflected little anxiety about the prospect of tighter monetary policy, with the US two-year yield unchanged.
*Source: J.P. Morgan Asset Management