Asia Pacific was the strongest performing region in the week ending 31 October, with the MSCI Pacific rising 5.5%.
Much of the gain was attributable to the impressive 7.4% return of Japan’s TOPIX, which reached multi-year highs following the Bank of Japan’s (BoJ’s) surprise announcement that it was expanding its monetary easing programme. Coinciding with the US Federal Reserve’s withdrawal of its quantitative easing, the BoJ increased its purchases of Japanese government bonds by JPY 30 trillion, to a monthly JPY 80 trillion, which boosted risk assets globally. At current exchange rates, this amounts to a monetary injection of around USD 710 billion per year.
One reason for the BoJ’s latest monetary actions is to counter the effects of April’s consumption tax rise, which has weighed on domestic demand and led to subdued price pressures in Japan. Following years of deflation, the BoJ has been making good progress towards reaching its 2% target for consumer price inflation (CPI)—the year-on-year rate of increase in CPI has strengthened since 2013, hovering at around 1.25% in October.
Also supportive of Japanese equity returns was the long-awaited announcement by the Government Pension Investment Fund (GPIF) that it would increase its target allocation to domestic equities in its portfolio to 25%, while reducing its allocation Japanese government bonds to 35%. The shift in the portfolio allocations will have a direct market impact, and is also likely to guide the allocation decisions of domestic investors.
Elsewhere in the region, Hong Kong’s Hang Seng gained 3.0%, Australia’s All Ordinaries returned 2.0%, Singapore’s Straits Times rose 1.6% and New Zealand’s NZX 50 was up 1.0%.
US stocks rose in the week to 31 October, as sentiment was buoyed by solid economic data releases confirming that the US economy is on a strong path to recovery. The S&P 500 rose 2.7%, while the Dow Jones Industrial Average was up 3.5% and the technology-biased Nasdaq returned 3.3%.
At its policy board meeting on Wednesday, the Federal Reserve (the Fed) announced an end to its quantitative easing stimulus programme, as was widely expected. The Fed’s unprecedented monetary stimulus, which has included three rounds of bond purchases since the global financial crisis, has had a positive effect on the US stock market in recent years.
In its announcement, the central bank gave an upbeat assessment of the US labour market, and said that it was confident the US economic recovery would continue. Policymakers reiterated that interest rates would remain low for a “considerable time,” due to ongoing concerns about below-target inflation, but suggested rates could rise earlier if the economy improves faster than expected.
The reaction of the US stock market to the Fed’s announcement was fairly muted—stocks moved higher in the lead-up to Wednesday’s announcement, but closed the day with slight losses.
Meanwhile, sentiment was buoyed by stronger-than-expected economic data. Data released in the week confirmed that the US economy grew at an annualised rate of 3.5% in the three months to September, compared with 4.6% in the previous quarter. The reading came in ahead of analyst expectations for 3% growth.
US consumer confidence hit its highest level in seven years, with the University of Michigan consumer sentiment survey headline revised up from 86.4 to 86.9 between the preliminary and final October reports. Consumer confidence is being supported by a stronger labour market. Wages and salaries rose 0.8% in the third quarter, marking the largest increase in more than six years.
However, US consumer spending fell for the first time since January in September, slipping 0.2% after rising 0.5% in August month on month.
Meanwhile, better-than-expected third-quarter corporate earnings continued to be supportive for share prices in the week. Of the 221 S&P 500 companies that have reported earnings, 160—or 72%—have beaten analysts’ estimates.
European equity returns were positive in the week ending 31 October, with the MSCI Europe Index rising 2.8%. Risk assets staged a broad-based rally towards the end of the week, sparked by the Bank of Japan’s surprise announcement that it would significantly increase the size of its asset purchase programme.
Sweden’s OMX Stockholm 30 was among the region’s top performing markets, gaining 4.0% as the country’s central bank, the Rijksbank, cut its main interest rate to zero. Germany and Switzerland also saw strong returns, with the DAX up 3.8% and the SPI returning 3.4%. The FTSE 100 and the French CAC both rose 2.5%, while Italy’s FTSE MIB and Spain’s IBEX 35 delivered respective returns of 1.5% and 1.3%.
Investors welcomed the results of the European Central Bank’s (ECB’s) comprehensive assessment of the financial health of eurozone banks, with no big bank that could be viewed systemically important failing the stress tests. Banks with the largest capital shortfall, or relatively weak balance sheets, were primarily from the bloc’s southern countries, including Italy, Greece and Cyprus. The performance of European bank stocks was mixed over the week.
Taking a longer-term point of view, the conclusion of the comprehensive assessment paves the way for the ECB to assume its position as the regulator of the eurozone banking system. Combined with the ECB’s measures to support growth and ward off deflation, including its programme of cheap loans and purchases of private assets, the groundwork has been laid for the improved flow of credit in the eurozone and a recovery in economic growth.
While recent economic data has been disappointing, eurozone consumer price inflation was reported to have increased slightly, rising by 0.1% to 0.4% in October. This was despite Germany registering a small easing in price pressures over the month.
Germany also registered a decline in exports to Russia, with export volumes down by over a quarter in August on the same month the previous year. German vehicle and machinery exports have been hardest hit by Russia’s restrictions on foreign imports, which it introduced following US and European Union (EU) sanctions on Russia.
There were some signs of an easing in the tensions between Russia and Ukraine during the week, as the EU was able to broker a deal that will see Russia resume the supply of gas to Ukraine over the winter, and which also ensures that gas supplies to EU countries via Ukraine are safe.
Global Emerging Markets
The MSCI EM Index recorded a strong 3.6% gain in the week ending 31 October.
Brazil’s Bovespa was among the best performing markets, up 5.2%. Stocks initially fell sharply following the re-election of president Dilma Rousseff, whose interventionist policies have been blamed by many investors for the sharp slowdown in the Brazilian economy. However, sentiment was boosted by hopes for a change in economic policy direction to boost growth. In particular, investors hope that Rousseff will appoint a more market-friendly finance minister following the decision of current finance minister Guido Mantega to step down.
Investors were also taken by surprise by the decision of the Brazilian central bank to raise interest rates by a quarter of a percentage point to 11.25% in the wake of the election result. The central bank said it was taking action to anchor inflation expectations with the balance of inflation risks becoming less favourable.
Russia’s RTS (+5.3%) also made strong gains, as currency weakness boosted Russian energy exporters. The rouble has devalued by nearly 25% against the dollar this year and is at its lowest level ever against the euro despite the efforts of the Russian central bank to support the currency. The Bank of Russia took markets by surprise with a move to raise its key interest rate from 8% to 9.5% in the week. Investors also hope that a gas supply agreement between Russia and Ukraine signals a step towards de-escalation of the conflict in eastern Ukraine.
Hungary’s BUX underperformed, rising 0.1% as investors reacted negatively to the government’s new tax plans, including a controversial internet tax, which could further slow consumption growth.
The MSCI China Index rose 3.5%, with sentiment lifted by news of further infrastructure projects from the government, and by speculation over further monetary policy easing from the People’s Bank of China. Hopes for lower interest rates also boosted India’s Sensex, which ended the week 3.8% higher.
Bonds & Currency
As the Federal Reserve’s quantitative easing drew to a close, the two-year Treasury yield rose by 8 basis points (bps), while 10- and 30-year yields rose by 6 bps and 1 bp, respectively.
Emerging market debt outperformed the broader credit markets, extending the previous week’s modest rally as spreads compressed.
Meanwhile, peripheral eurozone bonds rallied on hopes for further European Central Bank policy support.
*Source: J.P. Morgan Asset Management