The MSCI Pacific Index suffered a 2.3% decline in the week ending 10 October.
Japan’s TOPIX was down 3.1% as prospects for global economic growth continued to dim. Along with a weaker US dollar, forecasts for a slowdown in global demand hit the earnings outlook for Japan’s exporters, with car makers down sharply on the week. Japanese data was mixed—a rise in machinery orders in August suggest business investment is improving, but consumer sentiment worsened significantly in September.
In Hong Kong, the Hang Seng was up 0.1%, rebounding from the losses of the previous week as the Chinese government vowed to provide more stimulus to support the Chinese economy if needed. Beijing also showed continued restraint in the face of ongoing pro-democracy protests, reducing fears of a crackdown.
Wall Street fell sharply in the week ended 10 October, as risk aversion took hold amid increasing concerns about global economic growth. The S&P 500 fell 3.1% to end the week at its lowest level since late May. The Dow Jones was 2.7% lower, while the technology-biased Nasdaq slumped 4.5%.
Many factors have conspired to increase market volatility and push stocks lower over the last several weeks. Chief among them have been nervousness over the timing of Federal Reserve (Fed) interest rate increases, worries over the outlook for the Chinese and eurozone economies, the escalating Ebola epidemic in Africa, and rising geopolitical instability—particularly in the Middle East.
Last week, investor confidence was hit by signs that the global economy was slowing, as the International Monetary Fund cut its global growth forecasts for 2014 and warned that the eurozone in particular was in danger of slipping back into recession.
The impact of the renewed economic weakness in the eurozone on the US is clearly a concern for American policymakers. The minutes from the Fed’s September policy board meeting suggested that Europe’s economic malaise was a threat to the US recovery, along with recent US dollar strength. US Treasury yields fell sharply as expectations for when the Fed might start raising rates were pushed back, while the dollar weakened—ending a 12-week run of gains for the US currency against a basket of other leading global currencies.
The stock market sell-off was exacerbated by nervousness over the strength of upcoming corporate profit reports for the July-to-September period, as a number of companies began to guide expectations lower. Technology stocks were particularly weak, with semiconductor stocks down sharply as a profit warning from specialist chipmaker Microchip Technology Inc. sparked concerns over a slowdown in the sector.
Economic news was light, although a further drop in weekly jobless claims added to the weight of evidence suggesting that conditions are improving rapidly in the US labour market. Initial claims for unemployment benefits fell by 1,000 in the week ending 4 October to 287,000—the fourth successive week that claims have been below the 300,000 level.
In the short term, volatility is likely to remain high as investors continue to react to good or bad news from the global economy. However, the Fed should provide support for share prices by keeping US interest rates low for an extended period if global headwinds worsen. Also, with expectations for the upcoming corporate reporting season very subdued, any positive surprises in the form of higher-than-expected quarterly profits could provide a welcome boost to sentiment.
A deteriorating outlook for the eurozone economy led to sharp falls for European share prices in the week ending 10 October. The MSCI Europe Index was down 3.8%.
Among the major European stock markets, the French CAC 40, Italian FTSE MIB and Swedish OMX suffered the biggest falls, each recording a -4.9% return for the week. Germany’s DAX was down 4.4%, the Spanish IBEX 35 fell 3.9% and the Swiss SPI was 3.7% lower. The UK’s FTSE 100 outperformed, but was still down 2.9%.
Signs of a sharp reversal in the outlook for the German economy drove the sell-off, as investors confronted the prospect that the eurozone economy could be heading back towards recession. German exports and industrial output both fell in August at their fastest rate since January 2009, when the country was in recession and reeling from the global financial crisis.
Germany is the eurozone’s largest economy, so a significant weakening in German growth would have serious repercussions for the already fragile regional economy. The International Monetary Fund cut its forecast for eurozone growth to just 0.8% in 2014 (down from 1.1%) and warned that there was a chance that low inflation could turn into deflation if growth stalled.
Ongoing weak growth makes it more difficult for the most indebted eurozone countries to cut borrowing and stabilise ballooning debt-to-GDP ratios. Deflation would make the task of debt reduction significantly harder still, raising the prospect of a renewed crisis in investor confidence towards the region.
The European Central Bank (ECB) is acutely aware of these concerns and has put in place a range of measures to try to support growth and counter disinflationary pressures in the eurozone economy. These measures include cutting interest rates to just 0.05%, providing commercial lenders with unlimited cheap funding and boosting stimulus to the economy by purchasing loans from Europe’s banks.
Many investors would like the ECB to go further with its efforts to kickstart the eurozone economy by purchasing government bonds, similar to the quantitative easing (QE) programmes used by the Federal Reserve and the Bank of England to support asset prices and drive down borrowing costs in the US and UK.
So far, the ECB has been constrained by significant opposition to QE in Germany. Last week, Jens Weidmann, president of Germany’s Bundesbank and ECB council member, confirmed his opposition to QE, while Germany’s finance minister, Wolfgang Schäuble, said such a move was unnecessary. However, a significant reversal in German growth could lead to a change in attitudes.
This week brings the ZEW survey of German business confidence and a fresh round of German inflation data. A weak reading on both will suggest the German economy is losing further ground, placing the emphasis on policymakers both in the Bundestag and the ECB to act.
Global Emerging Markets
The MSCI Emerging Markets Index fell 1.2% in the week ending 10 October, outperforming developed markets as the MSCI World Index suffered a 3.3% loss.
In Latin America, Brazil’s Bovespa rose 1.4%. The first round of the country’s presidential elections produced a stronger-than-expected showing for Aécio Neves, the main centre-right opposition candidate, raising hopes that he may challenge left-wing incumbent Dilma Rousseff whose interventionist economic policies have been blamed for constraining Brazilian growth.
In contrast, Argentina’s Merval slumped 12.1% amid speculation that the government was putting pressure on local investors to stop selling shares abroad for dollars, in an attempt to stem the peso’s decline.
In emerging Europe, Russia’s RTS was down 2.5% as falling oil prices added to worries about the impact of western sanctions on economic growth. Brent crude hit a four-year low in the week below USD 90 per barrel.
Worries over instability in Russia, as well as a slowdown in the German economy, hit central Europe. The Czech PX-50 fell 2.5%, Poland’s WIG was 1.9% lower and Hungary’s BUX was down 1.1%. Poland’s central bank reacted to stalling growth and low inflation by cutting interest rates sharply to a record low of 2.0%.
In emerging Asia, the MSCI China Index fell 0.1%, boosted in relative terms by a pledge from Chinese premier Li Keqiang to provide further economic stimulus. The Chinese government is planning to launch several infrastructure investment projects before the end of the year to help the country meet its growth targets.
Eleswhere, India’s BSE Sensex dropped 1.0% on profit taking, while South Korea’s Kospi was down 1.8% and Taiwan’s Taiex dropped 1.5%. Taiwan’s exports were lower than expected in September on weaker demand from Europe and China.
Bonds & Currency
Developed market government bond yields fell in the week, as the minutes from the Federal Reserve’s latest policy board meeting suggested US interest rates may stay on hold at record lows for longer than expected, while weaker than expected economic data—particularly from Germany—suggested the pace of global growth may be slowing.
*Source: J.P. Morgan Asset Management