The Weekly Stock Market Report (2-8 May 2015)Contributor JPMAM UK
US: Jobs report boosts sentiment
- US equities ended a volatile week modestly higher as investors responded positively to Friday’s employment report. The Dow Jones returned 0.9% in the week ending 8 May, while the S&P 500 gained 0.4%. The technology-focused NASDAQ was broadly unchanged.
- Turbulence in bond markets continued, with the benchmark 10-year Treasury yield hitting a five-month high of 2.31% on Thursday, prompted in part by a sell-off in German Bunds, before pulling back to end the week at 2.14%.
- Poor March trade data raised concerns that the US economy may have made an even weaker start to 2015 than previously thought. Imports surged 7.7% vs. the previous month as trade resumed at west-coast ports following the resolution of a nine-month labour dispute. Exports also benefited from the improved flow of goods, but rose just 0.9% over the month, suggesting a stronger dollar is putting downward pressure on overseas demand.
- As a result, the trade deficit widened to a six-year high, suggesting that the initial US first-quarter GDP growth estimate of 0.2% annualised is likely to be revised down. However, the week’s data releases painted a healthier picture of current conditions.
- The Institute for Supply Management’s index of non-manufacturing activity showed that service industries grew at a faster pace in April as the recent plunge in oil prices gave consumers additional disposable income. The index rose to 57.8, the highest level since November 2014, from 56.5 in March. Readings above 50 signal expansion.
- The April non-farm payrolls report, released on Friday, was widely viewed as favourable for stock markets, suggesting jobs growth is accelerating, but not quickly enough to trigger an imminent rise in interest rates. Hiring rebounded from March’s unexpectedly weak reading, with 223,000 jobs created in the month. The unemployment rate fell to 5.4%, the lowest since May 2008.
- In April, the Federal Reserve (Fed) put in place a meeting-by-meeting approach to rate setting that, in theory, made it possible for a rise to come at the next policy meeting, scheduled for late June. However, with the latest batch of data providing little reason for expectations to change, market consensus remains that the first increase in US interest rates since 2006 will come in September.
- At a conference in Washington, Fed chair Janet Yellen highlighted the importance policymakers are placing on communicating their intentions clearly to markets.
- Although she assessed the overall risk level on markets as “not elevated at this point”, she noted that equity valuations are “generally quite high” and warned of the risk that long-term bond yields could move up sharply when interest rates begin to rise.
EUROPE: Conservatives win UK election
- The MSCI Europe Index rose 0.6%, boosted by rising expectations for regional growth. Germany’s DAX outperformed, rising 2.2%, while Italy’s FTSE MIB (+1.2%) and the French CAC 40 (+0.9%) made solid gains. The UK’s FTSE 100 also rose 0.9%, thanks to a sharp rise at the end of the week as the Conservative Party’s victory in the country’s general election ended short-term political uncertainty. Elsewhere, Spain’s IBEX 35 was up 0.3%, Switzerland’s SPI was flat and Sweden’s OMX Stockholm 30 suffered a 0.7% decline.
- Trading on European stock markets was volatile amid further gyrations on bond markets. Markets fell heavily early in the week as bond yields continued to surge higher. Germany’s 10-year yield rose as high as 0.8% mid week, up from just 0.05% in mid April.
- However, stock markets rebounded in the second half of the week as bond yields fell back sharply, suggesting the worst of the bond sell-off may have passed. German 10-year yields were back down at 0.54% by the end of the week. A concurrent drop in the value of the euro against the US dollar further contributed to improved investor sentiment - particularly towards exporters. The euro had reached a two-month high against the dollar mid week.
- The unexpected victory of David Cameron’s Conservative Party in the UK general election sparked strong gains for UK stocks and a sharp rise for sterling on currency markets. The polls had suggested a hung parliament, raising the prospect of a prolonged period of political uncertainty and the potential formation of a left-leaning coalition committed to higher taxes and higher government spending.
- A surge in support for the secessionist Scottish National Party and the promise of an “in/out” referendum on European Union membership are potential concerns for UK investors, but the most important factors shaping the course of the UK economy and monetary policy are productivity growth, which continues to lag many other developed countries, and the state of global demand.
- UK economic data released in the last week has continued to paint a positive picture. The services purchasing managers’ index (PMI) for April was the strongest since August 2014, pointing to a rebound in UK economic activity after a softer first quarter.
- Positive eurozone economic data also continues to suggest a much improved growth and inflation outlook for the region. Last week, the final release of the eurozone composite services and manufacturing PMI for April confirmed strong momentum in peripheral countries and Germany, although weakness in France remains a key concern.
PACIFIC: Australia cuts rates to record low
- The MSCI Pacific Index fell 0.9% in the week ending 8 May.
- Australia’s All Ordinaries dropped 2.8%. The Reserve Bank of Australia cut its benchmark interest to a record low of 2%, the second cut of the year, as the country’s economy continued to face the twin headwinds of commodity price weakness and Australian dollar strength. Markets viewed the reduction as the last in the cycle as the central bank removed language indicating the possibility of further easing from the accompanying statement.
- Japan’s TOPIX ended a week shortened by a three-day national holiday up 0.1%. Japan’s bond market suffered a sharp sell-off when it reopened on Thursday 6 May, following similar moves for German Bunds and US Treasuries.
- Hong Kong’s Hang Seng lost 2.0% as concerns about weaker Chinese growth brought a pause in the rally that has resulted from strong inflows from the mainland since the introduction of the Shanghai-Hong Kong Stock Connect programme - a trading link with Shanghai that opened last year. Singapore’s Straits Times was down 1.0%.
EMERGING MARKETS: Margin increase hits China
- The MSCI Emerging Markets Index fell 1.0% in the week ending 8 May.
- Chinese stocks underperformed, with the MSCI China Index down 2.8% on the week, as reports that brokerages were introducing tougher margin requirements to control risks added to concerns over market liquidity amid a flow of new share offerings.
- Chinese economic data also weakened, with exports falling 6.4% in April compared to a year earlier and manufacturing activity continuing to contract, according to the Markit purchasing managers’ index (PMI).
- South Africa’s JSE All Share was also lower on the week, down 1.2%, as sentiment was hit by some disappointing corporate results announcements.
- Brazil’s BOVESPA rose 1.6% to a near seven-month high, boosted by hopes that President Dilma would get crucial austerity measures passed by the Brazilian Congress. Russia’s RTS gained 2.9%, supported by higher oil prices and a stronger currency. The price of Brent crude rose to USD 69 per barrel, the highest level so far in 2015.
- India’s Sensex rose 0.3% from a six-month low as the government announced that it would delay plans to issue new tax demands through its controversial minimum alternate tax.
- Meanwhile, South Korea’s Kospi dropped 2.0%. Concerns over the health of the Korean economy were exacerbated by a disappointing manufacturing PMI, which fell for the second successive month in April to levels consistent with a contraction in activity.
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