The Weekly Stock Market Report (03 - 09 October)Contributor JPMAM UK
US: Commodity rally boosts stocks
- A jump in commodity prices and receding expectations that a US interest rate rise was imminent boosted Wall Street in the week to 10 October. The S&P 500 delivered its biggest weekly gain of the year, rising 3.3%, while the Dow Jones returned 3.7%and the technology-focused Nasdaq was up 2.6%.
- Minutes of the Federal Reserve’s (Fed’s) September meeting, released on Thursday, showed that policymakers are cautious about raising interest rates given worries that China’s slowdown may spread to other emerging market economies.
- Since the Fed’s decision to leave rates on hold in September, investors have pushed back their expectations for the timing of the first increase into next year, with traders now assigning only a 39% probability to a December lift-off, with a 62% chance of a March 2016 rise. A weaker-than-expected September employment report, released at the start of October, was seen as reinforcing the case for a delayed start to the tightening cycle.
- Data releases last week supported the view that global weakness may weigh on the US economy. Service-sector growth slowed in September, according to the Institute for Supply Management’s index of non-manufacturing activity, which fell to 56.9 in the month, down from 59.0 in August, although still well above the 50 level that separates expansion from contraction.
- The US trade deficit widened in August as shipments of the new iPhone 6S from China pushed up imports, while exports fell to the lowest level since October 2012, held back by dollar strength and muted overseas demand.
- As rate rise expectations have faded, the dollar has weakened, contributing to stronger commodity prices. Energy and materials stocks performed strongly last week as better sentiment on China also helped to push up industrial metals prices, while Brent crude gained on expectations of lower US production and geopolitical uncertainty as Russia launched missile attacks on Syria.
- The third-quarter results season kicked off on Thursday with disappointing sales and profits at Alcoa, the aluminium producer that is traditionally the first to report quarterly earnings. Banking stocks fell towards the end of last week, reflecting pessimistic expectations before some of the US’s largest lenders report their results in the coming days.
- Overall, earnings at S&P 500 companies are projected to fall 5.1% compared with the third quarter of 2014, according to S&P Capital IQ, with energy and materials companies seeing the steepest drop.
Europe: ECB policy speculation rises
- Hopes for further central bank stimulus and greater optimism over commodity prices helped drive the MSCI Europe Index 4.6% higher in the week ended 9 October.
- Among the major markets, Germany’s DAX rose 5.7% as auto stocks rebounded, led by a jump in Volkswagen shares as new chief executive Matthias Müller provided details on how the carmaker intends to respond to the ongoing emissions-testing scandal.
- The French CAC 40 rose 5.6%, supported by signs of a pickup in domestic economic data, while the UK’s FTSE 100 was up 4.7%, thanks largely to mining sector strength as Glencore shares continued to recover from the sharp losses suffered in September.
- Peripheral markets rose sharply as risk appetite improved, with Spain’s IBEX 35 up 7.4% and Italy’s FTSE MIB 4.0% higher. However, Switzerland’s SPI (+2.2%) lagged other markets, held back by its more defensive characteristics.
- Mining and oil stocks, which had led markets lower over the previous six weeks, were among the biggest gainers as commodity prices surged. Brent crude oil prices rose around 9%, boosted by Middle East instability and expectations of a decline in US shale production, while industrial metal prices surged, led by gains for copper and zinc, as China growth worries eased.
- Sentiment was also boosted by hopes that global central banks would keep interest rates at record lows for longer than previously anticipated. A more dovish tone to interest rate guidance from the US Federal Reserve was supportive, while there were growing expectations in the week that the European Central Bank (ECB) may be preparing to provide further stimulus.
- Speculation that the ECB may ease policy intensified as weak German economic data raised doubts over the sustainability of the eurozone’s fragile recovery. German economic growth forecasts were trimmed as August data revealed a 1.2% dip in industrial production and a worrying 5.2% plunge in exports. However, there was better news from France, where industrial output unexpectedly rose 1.6% in August—the strongest gain in two years.
- The minutes from the ECB’s latest meeting, which were released towards the end of the week, suggested that policymakers had been in no hurry to ease policy when they met last month. However, if economic data remains weak and the ECB does decide to act, an extension to its quantitative easing programme beyond September 2016 is seen as the most likely mechanism.
Pacific: Bank of Japan expected to loosen further
- The MSCI Pacific Index surged 5.0% last week as worries over China eased and investors hoped central banks would maintain very loose monetary policy for some time.
- Japan’s Topix gained 4.9%. The Bank of Japan (BoJ) kept its policy stance unchanged when it met on Wednesday, but expectations mounted that it may increase its asset purchase programme at its next meeting on 30 October amid continued signs of faltering growth.
- Japan’s machinery orders unexpectedly fell for a third consecutive month in August, suggesting capital expenditure (capex) may be weaker than policymakers believe. Core machinery orders, which are viewed as a leading indicator for capital investment, fell 5.7% in August, vs. forecasts of a 3.2% gain. The BoJ has cited rising capex as one reason it expects inflation to pick up.
- In a positive week for commodity prices, the mining-heavy All Ordinaries returned 4.3%. The Reserve Bank of Australia also left interest rates unchanged at its meeting on Tuesday, as widely expected. However, the accompanying statement was less dovish than investors had expected, indicating that “in Australia, the available information suggests that modest expansion in the economy continues.”
- Singapore’s Straits Times jumped 7.4%, while Hong Kong’s Hang Seng rose 4.4%.
Emerging markets: Russia jumps on oil price surge
- The MSCI Emerging Markets Index rose 4.5% in the week ended 9 October, as stronger commodity prices, hopes that US interest rates would remain on hold for longer than previously expected, and easing concerns over the Chinese economy all combined to boost investor sentiment towards emerging market equities.
- Commodity-driven markets were among the strongest. Russia’s RTS, which is heavily weighted towards oil and mining stocks, surged 15.8% as commodity prices rose sharply on the back of supply cuts and reduced fears of a slowdown in Chinese demand. Brent crude oil prices hit a six-week high.
- Emerging market gains were also supported by stronger local currencies amid growing speculation that US interest rates would remain on hold well into 2016. Indonesia’s rupiah was among the strongest currencies in the week, and is now up more than 8% against the US dollar this month alone. The MSCI Indonesia Index ended the week 13.9% higher.
- The health of the Chinese economy remained a key driver of emerging market returns in the week. The MSCI China Index rose 4.9% as slowdown fears faded ahead of the latest monthly economic data releases.
- India’s BSE SENSEX rose 3.3% ahead of the third-quarter reporting season, with share prices boosted by expectations for a healthy rise in Indian corporate profits.
- Brazil’s BOVESPA rose 4.9%, supported by stronger commodity prices. Possible impeachment proceedings against president Dilma Rousseff moved closer in the week as the country’s budget watchdog rejected the government’s 2014 public accounts, while the country’s election watchdog opened an investigation into alleged illegal campaign funding.
- Elsewhere, South Korea’s KOSPI lagged slightly with a 2.5% gain, while Taiwan’s TAIEX gained 1.7%.
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