Weekly Stock Market Report (19-25 September) - J.P. Morgan Asset Management

Weekly Stock Market Report (19-25 September)

Contributor JPMAM UK
US: Rate rise still on the cards for this year
  • US stocks fell in the week to 25 September, as renewed concerns over global growth and ongoing uncertainty over the timing of the first interest rate rise weighed on sentiment.
  • US stocks fell in the week to 25 September, as renewed concerns over global growth and ongoing uncertainty over the timing of the first interest rate rise weighed on sentiment. The S&P 500 was down 1.4%, while the Dow Jones Industrial Average slipped 0.4% and the technology-biased Nasdaq ended 2.9% lower.
  • Following the unexpected decision by the Federal Reserve (Fed) in the previous week to keep interest rates unchanged, attention was focused on any comments from Fed officials that would provide further clues over the path to policy normalisation. John Williams, president of the San Francisco Fed, said that the decision to keep rates at their record low was a “close call,” while Atlanta Fed chief Dennis Lockhart commented that rates were likely to rise before year end.
  • In a speech on Friday, Fed chair Janet Yellen confirmed that a rate rise was still on the cards for this year, but acknowledged that “economic surprises” could cause the central bank to change its strategy.
  • Economic data released in the week was mixed. The flash reading of the Markit manufacturing purchasing managers’ index (PMI) for September was unchanged from August, at 53.0, remaining in expansionary territory and above expectations for a slight decline. However, the services PMI declined by 0.5 points to 55.6, with the expectations index coming in at the lowest level since 2009.
  • Housing and employment data painted a positive picture. New home sales for August picked up further, building on July’s upward revision and confirming that the housing market is continuing to recover. Although existing home sales were lower than expected for August, the average pace of sales so far in the third quarter is above the second-quarter average. The Federal Housing Finance Agency House Price Index posted another solid gain for July.
  • Meanwhile, the labour market continued to strengthen. The four week average for initial jobless claims inched down to 272,000 in the week ending 19 September, while the figure for continuing claims declined to 2.5 million in the week ending 12 September.
  • The University of Michigan consumer sentiment index was revised up from 85.7 to 87.2 between the preliminary and final September reports. The two main subcomponents of the index-related to current conditions and expectations-were revised up, but remain lower than the figures reported for August.
Europe: VW emissions scandal hits autos
  • Worries over global growth and a scandal at German auto manufacturer Volkswagen weighed on European stocks in the week to 25 September, and the MSCI Europe Index closed 1.3% lower.
  • Among the major eurozone markets, Spain’s IBEX lost 3.3%, the German DAX dropped 2.3%, the French CAC 40 slid 1.2% and Italy’s FTSE MIB was down 0.8%. Outside the eurozone, the Swiss SPI fell 2.6%, while the UK’s FTSE 100 returned 0.1%.
  • Volkswagen’s share price plunged following revelations it had cheated on US emissions tests. The world’s second-biggest carmaker was ordered to recall almost half a million cars in the US, and faces billions of dollars in fines and warranty costs. Worries that other carmakers would also be implicated sparked sector-wide losses, while investors feared a slide in demand for German vehicles would hold back growth in the eurozone’s largest economy.
  • The “flash” (initial) reading of the September eurozone composite purchasing managers’ index painted a positive picture of the region’s economic health, coming in well above the 50 level that signals expansion rather than contraction. However, weak Chinese manufacturing data added to concerns that slowing global growth will hurt exports.
  • The European Central Bank’s (ECB’s) chief economist, Peter Praet, reiterated the bank’s readiness to modify its quantitative easing programme should global turbulence warrant additional action. However, in testimony to the European Parliament, ECB president Mario Draghi sounded a less dovish note, warning that more time was needed to assess the slowdown in emerging markets before any decision on further stimulus could be made.
  • An emphatic victory for the leftwing Syriza party in Greece’s general election thwarted hopes among the so-called troika of Greek creditors for a more compliant government to implement the terms of the latest bailout programme. Incumbent prime minister Alexis Tsipras lost only a few seats from his ruling coalition and freed himself of the more radical elements of Syriza, which broke away to form their own party but secured no seats.
  • Spain was hit by worries that an upcoming regional election could set Catalonia on a course towards secession. After attempts by Catalan leaders to hold a vote on independence were blocked by the central government, the separatist Junts pel Si (Together for Yes) coalition pledged to turn the election into a de facto referendum, indicating that it would begin the process of breaking away from Spain if it won a majority of seats.
Pacific: Japan slips back into deflation
  • The MSCI Pacific Index fell 1.4% in the week to 25 September.
  • In a week shortened by three days of public holidays, Japan’s TOPIX slipped 0.6%, with automakers leading the declines amid fears over the fallout from Volkswagen’s emissions scandal.
  • The Japanese economy fell back into deflation for the first time since 2013 in August, in a symbolic blow to prime minister Shinzo Abe’s stimulus efforts. Headline prices, excluding fresh food, slipped 0.1% from a year earlier as the decline in global energy prices outweighed higher domestic inflation.
  • The data presents a difficult challenge for the Bank of Japan (BoJ). Core prices excluding food and energy were up 0.8%—an encouraging sign that the central bank’s efforts to boost inflation are having an effect. However, the weak headline figure may lead the public to believe that the BoJ’s policies are failing, causing them to hold off on spending, so that this view becomes selffulfilling.
  • Manufacturing data also highlighted the drag on the Japanese recovery from a weak global environment. The Markit/Nikkei Japan flash purchasing managers’ index slid to 50.9 in September from 51.7 in August as new export orders fell the most in almost three years.
  • Elsewhere, Australia’s mining-heavy All Ordinaries lost 2.3% as weak Chinese manufacturing data weighed on metals prices. Singapore’s Straits Times dropped 1.6%, while Hong Kong’s Hang Seng was down 3.4%.
Emerging Markets: Global growth concerns weigh on returns
  • The MSCI Emerging Markets Index was down 3.3% in the week ending 25 September, underperforming the MSCI World, which fell 1.5%, as worries over global growth weighed on sentiment.
  • The MSCI China dropped 3.7% as weaker-than-expected manufacturing data added to concerns about the country’s slowing growth. The Caixin/Markit manufacturing purchasing managers’ index fell to 47.0 in September from 47.3 in August, the lowest level since April 2008, intensifying concerns around China’s near-term growth and posing risks to the country’s GDP growth forecasts for the second half of the year.
  • Elsewhere in emerging Asia, Taiwan’s Taiex ended the week 3.9% lower amid disappointing industrial production and export orders data for August, led largely by the non-technology sector. Taiwan’s central bank announced a surprise cut to its key policy rate, as expected, at its quarterly monetary policy meeting. South Korea’s Kospi fell 2.7%. Data released in the week showed that Korean export volumes had edged down in August.
  • India’s Sensex slipped 1.4%. Expectations are growing that the Reserve Bank of India (RBI) will announce a cut to its main lending rate at its upcoming meeting, despite RBI governor Raghuram Rajan saying that emerging markets face risks if they turn to rate cuts in order to help economic growth.
  • In Latin America, Brazil’s Bovespa was down 5.1%. The Brazilian real plummeted to an all-time low against the US dollar against a backdrop of growing pessimism over the outlook for global growth. Mexico’s IPC dropped 2.6%. The central bank kept interest rates unchanged at their record low of 3% to provide continued support for the weak domestic economy.
  • In emerging Europe, Hungary’s BUX slipped 1.4%. The National Bank of Hungary signalled that it will keep policy rates low for a very long time, likely until 2018.
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Weekly Stock Market Report (19-25 September)

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