The Weekly Stock Market Report (11-17 April 2015) - J.P. Morgan Asset Management

The Weekly Stock Market Report (11-17 April 2015)

Contributor JPMAM UK
US: Rate speculation continues

• US stocks fell in the week to 17 April, as mixed economic data - in particular disappointing retail sales - sparked further uncertainty over the timing of the Federal Reserve’s (the Fed’s) first interest rate rise. The S&P 500 was down 1.0%, while the Dow Jones Industrial Average and technology-biased Nasdaq both returned -1.3%.

• Retail sales increased 0.9% in March from the previous month - the first rise since November, but below forecasts. The increase was still down from November, when retail sales reached their highest level since the end of the recession, despite the recent boost from lower petrol prices.

• Meanwhile, the University of Michigan consumer confidence index rose slightly in March, but a drop in the income expectations index - an important signal regarding changes in consumption - suggested that consumer demand may continue to disappoint.

• The weaker-than-expected retail sales and consumer data led investors to delay expectations for when the Fed may begin to raise interest rates. However, higher US inflation data - released at the end of the week - strengthened the case for an earlier rate rise by the Fed. Core inflation edged up to 1.8% year on year in March, marking a five-month high.

• Other economic releases were mixed. A rise in the National Association of Home Builders sentiment index suggested that the US housing market is gaining momentum. However, housing starts increased just 2.0% to 926,000 in March, well below expectations. Regional manufacturing surveys from the New York and Philadelphia also disappointed expectations for a strong bounce in industrial activity.

• On the markets, investors were focused on the start of the first-quarter corporate earnings season, where analysts have cut their profit forecasts due to the stronger US dollar and struggling energy sector. Media giant Netflix was among the stocks to report strong results after posting subscriber metrics well above estimates.

• The outlook for the timing of interest rate rises looks set to continue to drive sentiment in the coming months. The first interest rate rise is now widely expected to take place in September, but further weak economic data could lead to the Fed slowing down the pace of any future interest rate increases.

EUROPE: Greek worries hit sentiment

• The MSCI Europe Index fell 2.6% in the week ended 17 April amid renewed worries over Greece as bailout talks stalled.

• Among the major markets, Germany’s DAX fell 5.5%, Italy’s FTSE MIB was 3.5% lower and Spain’s IBEX 35 was down 3.3%, while the Swiss SPI fell 2.3%, the French CAC 40 lost 1.9% and the UK’s FTSE 100 dropped 1.3%.

• Greece was a focal point for investors as concerns grew that the country is about to run out of money, with nearly EUR 1 billion due to be repaid to the International Monetary Fund (IMF) next month. Greece hopes that a deal can be reached with European finance ministers at a meeting in Riga on 23 April to unlock funds from a previously-agreed bailout package. If not, the country will likely default on its IMF payments.

• The new Greek government, which is committed to ending austerity measures, has so far shown little willingness to meet demands from its European creditors for economic reform and further spending cuts in return for the latest instalment of its bailout funds.

• Greek bond yields rose sharply, with two-year borrowing costs rising as high as 27%, while government bond yields also rose in other indebted eurozone countries. In contrast, safe haven flows pushed German 10-year Bund yields down to a record low of just 0.05%.

• Demand for German bonds has been boosted by the European Central Bank’s (ECB’s) quantitative easing programme, which is buying EUR 60 billion of eurozone bonds per month. Quantitative easing has made it harder for investors to find high quality bonds, with many prepared to effectively pay for the privilege of lending to the German government.

• Some commentators have suggested that the ECB may need to reduce its bond buying to alleviate pressure on high quality assets, or that it may soon exhaust its pool of available bonds (the ECB will only buy bonds with yields no lower than its -0.2% deposit rate, and it won’t buy more than 25% of a given issue or 33% of bonds from a single issuer).

• However, at a press conference following the ECB’s latest board meeting, the central bank’s president, Mario Draghi, made it clear that bond purchases will continue at the intended rate of EUR 60 billion per month until at least September 2016.

• On Europe’s stock markets, German stocks took the brunt of the selling as the Greek crisis sparked a reversal from the record highs reached earlier in the month. At the sector level, chemicals, banks and insurance stocks were among the main strugglers for the week, while energy stocks outperformed as oil prices rose sharply. This helped the UK market, with its high exposure to oil companies, to outperform.

• The immediate outlook remains clouded by questions over Greece. Although the ECB has worked hard to limit contagion from a Greek default and any subsequent exit from the eurozone, the potential impact on markets remains highly uncertain.

PACIFIC: China demand boosts HK

• The MSCI Pacific Index slipped 0.3% in the week to 17 April.

• Hong Kong’s Hang Seng continued its strong performance from the previous week, rising 1.4%, due to a continuation in elevated trading volumes via the Shanghai-Hong Kong Stock Connect programme - a trading link with Shanghai that opened last year.

• Singapore’s Straits Times was up 1.5%, boosted by a sharp rise in exports in March following an increase in demand from the US and Europe. On Tuesday, the Monetary Authority of Singapore surprised markets by keeping its monetary policy unchanged, stating that it expects Singapore’s economy to grow at a moderate pace this year.

• In Japan, the TOPIX fell 0.1%, despite comments from Bank of Japan governor Haruhiko Kuroda expressing confidence that Japan’s economic recovery was gaining momentum and that the central bank’s 2% inflation target would be met.

• Elsewhere, Australia’s resource-heavy All Ordinaries was down 1.4%, as falling iron ore prices caused weakness in mining stocks.

EMERGING MARKETS: China growth slows

• Emerging markets outperformed in the week ending 17 April, with the MSCI EM Index up 0.6%.

• The MSCI China Index rose 2.6% despite some worrying signs of a slowdown in the Chinese economy amid hopes for further stimulus measures. China’s economy grew at its slowest pace for six years in the first quarter of 2015, while factory output grew at its slowest ever rate in March. Stocks remained buoyant, however, driven by strong demand from retail investors.

• South Korea’s Kospi was up 2.7%, boosted by strong foreign fund flows attracted by cheap valuations and improving corporate earnings. However, India’s Sensex dropped 1.5%, hit by some disappointing results announcements as software developer Tata Consultancy Services - India’s biggest company - reported a drop in fourth-quarter profit.

• In Latin America, Mexico’s IPC recorded a small 0.3% gain, supported by positive corporate earnings reports, but Brazil’s Bovespa fell 0.5% as profit taking took its toll following recent gains.

• In emerging Europe, Hungary’s BUX and Poland’s WIG both rose 0.8%, while Russia’s RTS was unchanged on the week. Turkey’s ISE 100 fell 0.3% as political instability continued to unsettle investors.

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