The MSCI Pacific Index jumped 4.2% in the week ended 24 October, boosted by a 5.5% gain for Japan’s TOPIX.
Japanese stocks rose sharply as the US dollar registered a considerable 1.2% gain against the yen in the week. The dollar had weakened earlier in the month on global growth concerns, so the rise in its value back to the 108 yen level was encouraging for Japanese exporters who rely on a stronger dollar to boost their competitiveness in the key US market. A strong dollar also boosts the value of US sales when converted back into yen.
Japanese exporters are increasing their sales abroad according to the latest data. The Bank of Japan real export index rose 1.8% month on month in September following an unexpected decline in August.
Investors are also focusing on the Japanese government’s upcoming decision on whether or not to go ahead with a further rise in Japan’s consumption tax, which is due to increase to 10% in September 2015. A rise in the tax rate to 8% earlier this year has been blamed for sparking a slowdown in Japanese growth. Investors hope the next planned increase may be postponed, although the Japanese government is under pressure to raise revenues in order to tackle the country’s high level of public borrowing.
Elsewhere, Australia’s All Ordinaries rose 2.6% and Singapore’s Straits Times was 1.7% higher. Hong Kong’s Hang Seng gained 1.2% despite a slowdown in Chinese GDP growth and reduced Chinese stimulus hopes.
Wall Street bounced back from recent losses in the week ended 24 October, with the S&P 500 recording its strongest weekly gain since early 2013, up 4.1%. The Dow Jones gained 2.6% and the Nasdaq was 5.3% higher.
Sentiment was boosted by some stronger economic data, better-than-expected corporate profit announcements, and by further hopes that the Federal Reserve (the Fed) would keep US interest rates low for an extended period to boost the domestic economic recovery.
US economic data releases in the week were broadly encouraging, with a rise in existing home sales in September, higher house prices in August and a solid October manufacturing purchasing managers’ index reading suggesting that the US economy has maintained its strong momentum from the summer.
Investors also focused on the recent sharp fall in oil prices, which has the potential to add a tailwind to the recovery, while expectations are growing that interest rates will remain supportive for longer than previously expected given the lack of inflationary pressures in the global economy.
Last week, the latest consumer price index (CPI) data suggested that US inflation was running at a year-on-year rate of 1.7% in September. Core CPI, which excludes food and energy, is up just 1.0% at an annual rate over the last three months, suggesting that inflation is under control despite the pickup in US economic growth.
The tame inflation data has boosted hopes that the Fed will not begin to lift US interest rates from their record lows until the second half of 2015 at the earliest. Investors are hopeful that Fed policymakers will continue to reassure investors that rates will remain low for “a considerable time” following their next policy board meeting, which is coming up on 28/29 October.
European equities made gains in the week ending 24 October, with the MSCI Europe Index up 2.4%. Sentiment in the week was boosted by expectations that the conclusion of the European Central Bank’s (ECB’s) comprehensive assessment of the financial health of 130 eurozone banks would represent a vital step towards re-establishing the flow of credit in the single currency bloc, as well as serving as a catalyst for European growth.
The ECB’s comprehensive assessment has comprised a year-long asset quality review and stress tests, which have sought to establish the resilience and balance sheet strength of eurozone banks. Because many of the region’s banks have undertaken significant capital raising during the assessment period to enhance their balance sheets, the findings are expected to be broadly positive, as well as bringing greater transparency to the banking sector.
Italy and Spain were among the strongest markets, with the FTSE MIB rising 4.2% and the IBEX 35 gaining 3.8%. Sweden’s OMX Stockholm 30 and the Swiss SPI delivered respective returns of 3.7% and 3.4%, while the French CAC 40 rose 2.4%. In Germany, the DAX finished the week 1.6% higher, while the UK’s FTSE 100 was up 1.2%.
Some positive economic data also proved supportive of sentiment in the week. According to estimates by Markit, the eurozone composite purchasing managers’ index (PMI) rose in October, after falling to a 10-month low in September, signalling the first expansion in business activity for three months. In Germany, the PMI rose to its highest level in three months, highlighting growth in the manufacturing sector.
France, however, saw business activity fall in both the manufacturing and services sectors. Also of concern was the fact that across the eurozone, prices charged fell at the steepest pace since July of last year, which adds to existing worries about low levels of global inflation. A growing number of European companies are being forced to slash prices in an attempt to boost sales through discounting, which adds downward pressure on consumer price inflation.
In the UK, meanwhile, GDP increased by 0.7% in the third quarter of 2014, compared with growth of 0.9% in the second quarter. The UK economy is now 3% larger compared with the third quarter of 2013.
This news came alongside demands for Britain to pay an additional EUR 2.1 billion to the European Union’s (EU’s) budget by 1 December, due primarily to its economy performing better than other European economies, but also as a result of changes at the EU level to how a country’s gross national income is calculated. The hefty surcharge comes at difficult time for UK prime minister David Cameron, who is faced with a eurosceptic contingent in his own Conservative party, and also has to contend with the anti-EU stance of the UK Independence Party (UKIP).
In the UK corporate sector, shares in Tesco slumped as the struggling grocer announced in the week that it had overstated its profits by GBP 263 million, up from an initial estimate of GBP 250 million in September.
Global Emerging Markets
The MSCI Emerging Markets Index rose 0.7% in the week to 24 October, underperforming developed markets.
In Latin America, Brazil’s Bovespa fell 6.8% amid uncertainty over the outcome of the presidential election on Sunday. The latest polls showed that President Dilma Rousseff had gained slight ground against her rival, Aecio Neves. Investors have shown a clear preference for Neves, who has promised business-friendly policies to revive Brazil’s sluggish economy. Elsewhere, Mexico’s IPC was up 0.9%, while Argentina’s Merval returned 0.1%.
The MSCI China rose 1.3%. Manufacturing activity rose moderately in October, with the preliminary HSBC China Manufacturing Purchasing Managers’ Index edging up to 50.4, compared with a final reading of 50.2 in September. A reading above 50 indicates expansion. GDP for the third quarter rose 7.3%, down from 7.5% in the second quarter and marking the slowest pace in over five years.
Elsewhere in emerging Asia, India’s Sensex rose 2.8%, as the market remained buoyed by hopes for reform from prime minister Narendra Modi. Taiwan’s Taiex returned 1.6%, as September’s unemployment rate edged down further to 3.9%, while export orders growth beat expectations. South Korea’s Kospi was up 1.3%. The Korean economy grew at an annual pace of 3.2% in the third quarter, helped by rising private consumption.
In emerging Europe, Russia’s RTS dropped 3.4%. Data showed that Russia’s economy stalled in September, due to Western sanctions and falling prices for oil—its main export. Russia is on track to post its lowest rate of growth this year since 2009.
Turkey’s ISE 100 delivered a strong return of 5.1%. President Recep Tayyip Erdogan said on Thursday that Turkey’s economy continues to make record growth, and is expected to grow by 4% this year. The central bank left key interest rates unchanged.
Bonds & Currency
Major developed bond markets reversed some of the rally over the past two weeks, with 10-year yields 3-6 basis points higher in the US, Germany and UK.
Meanwhile, peripheral eurozone bonds rallied on hopes for further European Central Bank policy support.
*Source: J.P. Morgan Asset Management