Asia
The MSCI Pacific Index fell 0.3% in the week to 18 September, led by weakness in Japan, where the TOPIX was 1.1% lower.
Japanese stocks struggled, particularly at the end of the week, as investors reacted negatively to the US Federal Reserve’s cautious remarks regarding the outlook for global growth. Earlier in the week, the Bank of Japan (BoJ) kept Japanese monetary policy on hold and made little change to its economic outlook despite recent volatility on stock markets.
With Japan’s economy contracting in the second quarter and wage growth disappointing, investors had hoped for some indication from BoJ governor Haruhiko Kuroda that further monetary easing could be implemented. Instead, Kuroda said that he didn’t think Japan would fall into a new recession and reiterated his belief that inflationary pressures were building.
Elsewhere, Singapore’s Straits Times fell 0.3% while Australia’s All Ordinaries and Hong Kong’s Hang Seng both gained 1.9%. In Australia, Malcom Turnbull ousted Tony Abbott as prime minister, as a string of polls suggested the coalition government was heading for defeat in next year’s election. Turnbull is seen as more business friendly. However, political volatility had little market impact, as investors focused instead on the US interest rate decision.
United States
Wall Street stocks ended a volatile week little changed as investors focused on the Federal Reserve’s (Fed’s) policy-setting meeting on Wednesday and Thursday. The Dow Jones closed 0.3% lower, while the S&P 500 slid 0.2% and the technology-focused Nasdaq crept 0.1% higher.
For most of the summer, investors had expected the first interest rate rise in almost a decade to come at the Fed’s September meeting. However, August’s extreme global market volatility, prompted by worries over slowing growth in China, led to a scaling-back of these expectations. Ahead of the meeting, polls suggested analysts were split on the likelihood of a move.
In the event, the Federal Open Market Committee (FOMC), the Fed’s monetary policy board, left interest rates unchanged, citing “recent global economic and financial developments” that might restrain economic activity and put further downward pressure on inflation.
At the press conference that followed the meeting, Fed chair Janet Yellen said policymakers were watching for an unexpectedly “abrupt” slowdown in China, but stressed that the majority of the FOMC still expected the first rate rise to come in 2015.
However, the Fed’s inaction casts doubt on that timetable, and on the path of interest rates thereafter. Under the old guidance, a falling unemployment rate was supposed to trigger the first rate rise and put the Fed on a path of 0.25% increases at roughly every second meeting. The unemployment rate has come down at a very steady pace for the last six years, and analysts assuming a continuation of this trend had also been able to assume a gradual path of Fed tightening.
Now, though, it is clear that both the initiation and the pace of tightening will also depend on global growth and financial market stability, which the Fed has little power to influence and probably less to forecast. This being the case, it is quite possible that some other event will occur between now and the end of the year to postpone a liftoff in rates until 2016, and that Fed tightening could easily stall after it has started due to another temporary bout of market volatility.
The market response to the decision reflected the greater uncertainty in the interest rate outlook. US equities briefly rallied, but erased their gains and continued to fall to the end of the week.
Europe
The MSCI Europe Index fell 0.6% in the week ended 18 September, held back by uncertainty over US interest rates and continued worries over the outlook for global growth.
Among the biggest European markets, Spain’s IBEX 35 outperformed with a 1.1% gain. However, all other major markets were lower. Sweden’s OMX 30 fell 2.4%, Germany’s DAX was down 2.0% and Italy’s FTSE MIB dropped 1.1%, while the Swiss SPI lost 0.4%, the French CAC 40 declined 0.3% and the UK’s FTSE 100 was 0.2% lower.
European markets made steady headway for much of the week before falling sharply on Friday in the wake of the decision by the US Federal Reserve (Fed) not to raise US interest rates. Although the lack of action from the Fed was not unexpected, sentiment was undermined by the Fed’s cautious assessment of the current state of the global economy.
While US interest rates are still expected to rise this year, European Central Bank (ECB) officials again suggested that eurozone monetary policy could be eased further to support regional growth. Speaking after the Fed announcement, ECB executive board member Benoit Coeure said that the Fed’s decision confirmed the ECB’s assessment of global risks to growth and emphasised the ECB’s readiness to act if needed.
Economic news was broadly positive. Eurozone industrial production rebounded in July with a 0.6% month-on-month rise, while in the UK the unemployment rate fell back to 5.5% from 5.4% in the three months to July. UK wages grew by 2.9% in the April-to-July period compared to a year ago, while UK productivity continued to show clear signs of improvement.
Markets were boosted in the week by merger news, with Belgian-listed brewer AB InBev making an approach for UK-listed rival SABMiller in a deal that could be worth as much as GBP 73 billion. Dutch-listed telecoms company Altice also launched a bid for US cable TV company CVC for USD 17.7 billion.
While investors are likely to continue to focus on the Fed, some important European data points will be released this week. Eurozone consumer confidence is released on Tuesday and the latest purchasing managers’ indices are out on Wednesday. Consumer confidence is close to pre-crisis highs but would be expected to rise further in the medium term as unemployment continues to fall.
Global Emerging Markets
The MSCI Emerging Markets Index rose 2.3% in the week ending 18 September, outperforming the MSCI World, which fell 0.2%.
The MSCI China rose 2.9% in a week of mixed economic data releases. Industrial production growth for August came in slightly behind expectations, while fixed asset investment slowed. However, retail spending and housing data was better than expected. Retail sales rose 10.8% year on year in August, up from 10.5% in July, while housing sales have increased 18.7% so far this year.
Elsewhere in emerging Asia, Taiwan’s Taiex was up 1.9% and South Korea’s Kospi rose 2.8%, while India’s Sensex ended the week 2.4% higher as lower-than-expected inflation data raised hopes that the Reserve Bank of India would cut rates later this month.
In Latin America, Brazil’s Bovespa and Mexico’s IPC returned 1.9% and 1.8%, respectively, buoyed by news that the US Federal Reserve kept interest rates on hold at its September meeting. The Brazilian real fell to a 13-year low in the week as political and economic concerns led to speculation that the country could face another credit rating downgrade, following last week’s downgrade by Standard & Poor’s.
In emerging Europe, Turkey’s BIST 100 rose 5.3%. The Turkish lira climbed in the week, ending an eight-week drop, following the unexpected announcement that former deputy prime minister Ali Babacan—widely respected for his market-friendly policies—would stand as a candidate for the ruling AK Party in the country’s elections on 1 November.
Russia’s RTS gained 2.2%, despite disappointing retail sales and industrial production data for August.
Elsewhere, Poland’s WIG slipped 0.4% as industrial production and retail sales disappointed for the second consecutive month in August. However, consumer confidence reached its highest level since 2008.
Bonds & Currency
The prospect that US interest rates could remain lower for longer pushed government bond yields sharply lower, having risen through the earlier part of the week. The two-year US Treasury note, which is sensitive to rate moves, fell 12 basis points (bps) immediately following the Fed announcement, and ended the week 2bps lower at 0.69%. German 10-year Bund yields dropped 12bps on Friday to end the week 1bp higher at 0.67%.
*Source: J.P. Morgan Asset Management
