Sep 30, 2014
The MSCI Pacific Index rose 0.3% in the week ending 19 September, with Japan driving the gains.
The TOPIX rose 1.4% in the week ending 19 September, with Japanese equities reaching their highest levels since before the 2008-09 financial crisis. Supported by Japanese yen weakness, sentiment was boosted further by prime minister Shinzo Abe’s comments about reforming the country’s public pension fund as soon as possible—the USD 1.2 trillion fund’s exposure to equities is set to be increased significantly.
Other regional markets suffered declines. Hong Kong’s Hang Seng fell 1.2%, weighed down by weakness in China. Property stocks in particular suffered as a result of lacklustre developments in the Chinese housing market. The Hong Kong market appeared to shrug off new monetary easing measures from the People’s Bank of China.
Australia’s All Ordinaries was down 1.7%. A declining iron ore price had a negative effect on Australian mining giants, including BHP Billiton. New Zealand’s NZX 50 was down 1.0%, amid uncertainty about the outcome of the weekend’s election. Singapore’s Straits Times finished the week 1.2% lower. Retail sales fell by a monthly 0.7% in July, suggesting that consumer spending in Singapore is continuing to weaken into the third quarter of the year.
Wall Street made gains in the week to 19 September, after the Federal Reserve (the Fed) calmed concerns about an early rise in interest rates. The S&P 500 rose 1.3% and the Dow Jones Industrial Average was up 1.7%. However, the technology-biased Nasdaq rose just 0.3%.
Concluding its two-day policy meeting on Wednesday, the Fed’s rate-setting board—the Federal Open Market Committee (FOMC)—delivered a positive message to investors, supporting US stock market returns. The FOMC reiterated its pledge that it will not raise interest rates until a “considerable time” has passed after its stimulus programme ends, most likely in October. It also took another step towards normalising its policy stance, as it reduced its monthly asset purchases by a further USD 10 billion, to USD 15 billion.
Fed chairwoman Janet Yellen stressed that the central bank’s policy would continue to be data-dependent, meaning that interest rates would not be raised until the economy is strong enough to bear them—the first rate rise is currently expected to take place in the middle of 2015. However, the Fed did hint that it could raise rates at a faster pace than expected through 2015 and 2016.
Contributing to the Fed’s decision to keep interest rates at their record lows has been a lack of inflationary pressure, despite stronger economic growth over the summer. The consumer price index fell 0.2% in August from July, the first decline in more than a year, and annual inflation is currently at 1.7%, well below the Fed’s 2% target.
On the stock market, banks performed particularly strongly in the week, as higher interest rates could allow them to charge a greater margin for loans and earn more from their investments—potentially boosting revenues and profits. Interestingly, higher yielding stocks held up well, despite the potential for rising interest rates, with both the utilities and telecoms sectors recording gains.
However, technology stocks underperformed, held back by some disappointing corporate profit reports in the software sector, including worse-than-expected quarterly earnings from software developer Oracle, which also announced that its chief executive and co-founder Larry Ellison was stepping down after 37 years in charge.
The outlook for interest rates looks set to continue to drive market sentiment in the short term, with investors likely to keep a close eye on any change in the Fed’s language. However, we believe that US share prices should have little to fear from the start of interest rate rises. Instead, higher rates should confirm to investors that the US economy is on a sustainable footing.
European equity returns were positive in the week ending 19 September, with the MSCI Europe Index up 0.8%. As tensions between Russia and Ukraine continued to cause concern, investors were relieved that Scots voted by a larger-than-anticipated margin in favour of remaining part of the UK, removing some of the uncertainty that would have resulted from a “yes” vote for independence.
Sweden was the week’s strongest market, with the OMX Stockholm rising 2.4%, while the German DAX gained 1.5% and Spain’s IBEX 35 was up 1.0%. The FTSE 100 and Swiss SPI both rose 0.5%, while Italy’s FTSE MIB fell 0.5%.
The focus of investors was on the first tender of the European Central Bank’s (ECB’s) targeted longer-term refinancing operations (TLTROs), which saw eurozone banks subscribe to EUR 82.6 billion in cheap loans—with a total of EUR 400 billion available in 2014, the take-up in the first round was relatively conservative. Widely viewed as the most important part of the stimulus measures announced by the ECB in June, the TLTROs allow the ECB to provide Europe’s banks with cheap long-term funds, which the central bank hopes will be used to boost lending to businesses that have been starved of credit.
The majority of the cheap loans went to southern European banks. Italy’s biggest bank, UniCredit, was among the highest borrowers, while Spain’s five largest banks also subscribed heavily. While the total uptake of loans could be viewed as disappointing, more banks may be willing to participate in the second TLTRO in December, when the ECB’s European bank Asset Quality Review has been completed.
Next on the ECB’s agenda, however, is the 2 October meeting of its governing council, at which details of its other stimulus measures—namely, asset-backed security and covered bond purchases—will be provided. Whether markets come to regard these measures collectively as sufficient to address the eurozone’s woes, including stagnant economic growth and subdued inflationary pressures, is likely to prove crucial in determining whether the ECB moves to consider full-blown quantitative easing in the form of purchases of eurozone government bonds.
Meanwhile, the UK equity market received a small boost as Scotland voted to remain part of the UK. Investors’ concerns had been exacerbated in the weeks leading up to the referendum by several financial companies threatening to relocate their headquarters to the remainder of the UK if Scotland opted for independence. Uncertainty about an independent Scotland’s European Union membership negotiations had also affected sentiment. Sterling surged on news that the United Kingdom would stay intact.
In Sweden, the political landscape shifted to the left, as the Social Democratic Party, led by Stefan Löfven, emerged as the victor in the general election, ending eight years of rule by Frederik Reinfeldt’s conservative-led coalition. The election also showed growing support for the far-right anti-immigration Sweden Democrats.
Global Emerging Markets
The MSCI Emerging Markets Index fell 0.1% in the week to 19 September, underperforming developed markets.
The MSCI China was down 1.8%, as weak economic data raised concerns the world’s second-largest economy may be at risk of a slowdown. Industrial output rose 6.9% in August from a year earlier, down from the 9% growth recorded in July and the lowest since the global financial crisis. Meanwhile, retail sales for August climbed 11.9%, lagging forecasts and suggesting that consumers are more cautious.
However, the People’s Bank of China announced further stimulus measures in the week to counter a slowdown in the economy. The central bank first announced it would inject USD 81 billion into five major state-owned banks, and later in the week made a second surprise move with a cut to short-term borrowing costs for banks.
Elsewhere in emerging Asia, South Korea’s Kospi rose 0.6%, helped by the government’s announcement that it will boost spending by more than previously planned for the next three years in order to spur the economy. Taiwan’s Taiex was up 0.2%, while India’s Sensex returned 0.1%.
In Latin America, Brazil’s Bovespa rose 1.5%, despite polls showing that president Dilma Rousseff is running neck-and-neck with her main rival, Marina Silva, just two weeks ahead of the vote. Investors have criticised Rousseff’s government for being too interventionist in the economy. Argentina’s Merval rose 4.8%, while Mexico’s IPC slipped 0.1%. Dry weather in Argentina’s main wheat-growing area helped reduce the flooding that has worried farmers since July.
In emerging Europe, Russia’s RTS fell 3.5%, as Western sanctions continued to weigh on investor sentiment. Former finance minister Alexei Kudrin said that he expected the Russian economy to stagnate this year or weaken further, and that growth would be negative in 2015. Meanwhile, Gazprom, Europe’s leading energy provider, reduced its 2014 production forecast in the week.
Bonds & Currency
In the US government bond market, yields on two-year Treasuries, which are most sensitive to changes in expectations about Federal Reserve monetary policy, finished the week near their highest levels since the middle of 2011. Yields at the long end of the curve, however, didn’t rise along with the short end, leaving many investors to wonder why—lingering concerns about US growth and inflation may be one reason.
In the credit markets, high yields spreads tightened modestly, while investment grade spreads were broadly flat and emerging market spreads widened.
*Source: J.P. Morgan Asset Management
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Sep 30, 2014