Asia Pacific equities gained in the week ending 7 November, with the MSCI Pacific Index up 1.5%.
Japan’s TOPIX rose 2.3%. Investor sentiment remained supported by the Bank of Japan’s (BoJ’s) recent actions to boost its government bond buying programme from around JPY 50 trillion each month to JPY 80 trillion. Over the medium term, investors hope that the BoJ’s increased monetary support will boost optimism among businesses and consumers about the prospects for the economy and the upward trajectory of inflation.
The impact of the BoJ’s announcement has been most visible in the currency markets, where the yen has weakened significantly. A weaker yen has already provided a boost to Japanese exports and profit growth in the manufacturing sector, with many companies reporting a lift in profits for the July-to-September quarter and raising their guidance for the full financial year, due in part to yen weakness.
Singapore’s Straits Times (+0.4%) and Australia’s All Ordinaries (+0.3%) also registered modest gains in the week. In Australia, stress tests on domestic banks, performed by the Australian Prudential Regulation Authority, sparked some concerns about the high reliance of the biggest domestic banks on mortgage lending for profit growth, which could undermine their ability to bounce back in the case of a housing market shock. As a result, increased capital requirements could potentially be imposed on domestic lenders.
Hong Kong’s Hang Seng was down 1.9%, as performance in mainland China remained sluggish.
The S&P 500 gained 0.7% in the week ending 7 November, climbing back to new record highs as investors continued to put money back into the market following mid October’s selloff. The Dow Jones was up 1.1%, while the NASDAQ was unchanged as technology stocks underperformed following some disappointing corporate earnings news.
The economic newsflow remained encouraging, with the latest economic data strong enough to convince investors that the recovery is well entrenched, but not so strong as to suggest that the Federal Reserve (the Fed) would need to raise interest rates anytime soon.
Chief among the week’s data releases was October’s employment report, which showed that the US economy had created 214,000 jobs last month. The figure was slightly below the most bullish expectations, but is strong enough to suggest that consumer confidence will remain well supported into the end of the year. The unemployment rate ticked down to 5.8%, the lowest since July 2008.
However, average hourly earnings were up just 0.1% in the month. Although there is always a lag between an improvement in the labour market and a pickup in wages, the current low level of wage growth, along with falling oil prices and declining mortgage rates, suggest that inflation should remain benign. Therefore, the Fed is expected to keep US interest rates on hold at their current record lows until at least the middle of next year.
The market was also broadly supported by the US mid-term election results. As expected, the Republican Party won control of the Senate, as well as the House of Representatives, giving it control of Congress. The result makes it harder for President Obama and the Democratic Party to legislate without agreement from the Republicans, increasing the risk of deadlock on some issues.
However, investors believe that the Republicans will be reluctant to stir controversy in the lead up to the 2016 presidential elections. The result may also boost the chances of meaningful tax and energy reform, which the Republicans support and which could provide a boost to business. A Republican Congress may also be expected to give the president greater powers to authorise international trade agreements.
Finally, corporate profit reports continued to underpin market sentiment, as announcements of profits for the third-quarter of the year (July to September) broadly beat expectations. With all reports now in, around 80% of US companies listed on the S&P 500 beat forecasts, with 60% reporting stronger sales—an important indication that consumer and business demand may be picking up.
European equities finished the week ending 7 November lower, with the MSCI Europe Index down 0.5%. Italy and Spain were among the weakest regional markets, with the FTSE MIB and the IBEX 35 declining 3.5% and 3.4%, respectively. The French CAC 40 lost 1.0%, the German DAX fell 0.4% and the Swiss SPI suffered a 0.2% loss. The UK’s FTSE 100 bucked the trend to register a 0.3% gain.
Investors were focused on the latest European Central Bank (ECB) meeting. As expected, the ECB left interest rates unchanged at record-lows and provided no enhancements to the lending and asset purchase programmes that it has already announced in order to support eurozone economic growth and ward off deflationary pressures.
However, ECB president Mario Draghi did confirm that the ECB intends to grow its balance sheet to the size it was at the beginning of 2012—an expansion of EUR 1 trillion that will take the balance sheet from EUR 2 trillion currently to EUR 3 trillion over two years. All members of the ECB’s governing council voted in favour of the move, dispelling rumours about dissatisfaction with Draghi’s non-consensual style of decision making.
Amid continued weakness in the eurozone economy, investors have been calling for the ECB to undertake quantitative easing (QE) in the form of government bond purchases, particularly given the Bank of Japan’s recent expansion of its aggressive QE programme. Opposition to the ECB buying government bonds is high, particularly in Germany, but some speculate that ECB asset purchases could be expanded to include bonds issued by non-financial corporates and supranational institutions.
In Germany, there has also been opposition at the domestic level to increased public spending to support economic growth. Signs of a modest shift in the fiscal policy of chancellor Angela Merkel’s government were evident as it announced an additional EUR 10 billion in public spending over three years. According to finance minister Wolfgang Schäuble, the government remains on track to meet its debt reduction targets. German economic data released in the week provided a boost to sentiment, with exports and industrial output rebounding in September after sharp falls in the previous month.
UK economic data, meanwhile, continued to provide reassurance that the recovery was becoming further entrenched. According to the Office of National Statistics, manufacturing output increased by 0.4% month on month in September, with transport equipment, computer and electronic products, and chemicals among the main sectors contributing to the increases. Domestic demand remained resilient, while export demand, particularly from the eurozone, was subdued.
Global Emerging Markets
The MSCI Emerging Markets Index was down 1.3% in local currency terms in the week ending 7 November.
Russia’s RTS was 7.7% lower, as the rouble fell 9% in the week to hit new record lows against the dollar and the euro. The rouble has depreciated by around 30% against the dollar this year, hit by capital flight following the unrest in eastern Ukraine, and by a significant fall in oil prices (oil is Russia’s biggest export).
The latest declines came as Russia’s central bank said it would spend no more than USD 350 million a day to defend the currency. However, with the rouble in freefall, the central bank released a statement at the end of the week to say that it would intervene if currency weakness threatened Russia’s financial stability.
The two largest constituents of the emerging markets benchmark index, China and South Korea, were both down on the week. The MSCI China Index was 1.8% lower ahead of the release of the latest round of monthly economic reports for October. The market will be looking for a step up in stimulus measures from the Chinese government if the data points to any further weakening in economic momentum.
South Korea’s Kospi was down 1.3%, as the won fell to a 14-month low against the US dollar. Policymakers are trying to weaken the won to maintain the competitiveness of Korean exports in the face of a falling Japanese yen. However, while the won was down 1.4% in the week against the dollar, the yen recorded a weekly loss of 2.3%.
Elsewhere, the aftermath of the Brazilian presidential election continued to affect share prices, with the Bovespa down 2.6% in the week and the Brazilian currency sliding to its weakest level against the US dollar since 2005. Investors fear that president Rousseff will continue with the same economic policies that pushed the Brazilian economy into recession in the first half of 2014.
In contrast to most other emerging markets, South Africa’s JSE All Share ended the week higher (+0.7%). Commodity producers, particularly gold and platinum miners, were boosted by a weaker currency, as the rand fell to a five-week low against the US dollar. A weaker currency lifts gold and platinum prices in rand terms.
Bonds & Currency
US Treasury yields fell slightly in the week, suggesting that the bond markets still expect US interest rates to remain low for some time to come. Benchmark 10-year yields ended the week at 2.30%, down from 2.34% a week earlier.
However, with the US labour market tightening and the unemployment rate continuing to fall, expectations for the first US interest rate increase are creeping forward to the middle of 2015.
In contrast, European sovereign yields remain anchored by the weak economic situation and the threat of deflation that hangs over the region. The European Central Bank is set to maintain its easy monetary stance and may yet be forced to introduce full quantitative easing next year in the event of further disappointments over growth or inflation.
*Source: J.P. Morgan Asset Management