The Weekly Stock Market Report (25 April – 1 May 2015)Contributor JPMAM UK
US: Weak data fuels uncertainty
- Further signs of economic weakness, combined with a sell-off in bond markets and mixed corporate earnings reports, contributed to a modest 0.4% decline in the S&P 500 for the week ending 1 May. The Dow Jones fell 0.3%, while the NASDAQ suffered a bigger 1.7% decline as technology stocks came under pressure.
- Investors focused on the weakening US economy, as GDP growth for the first quarter slowed to an annual rate of 0.2% - down from 2.2% pace recorded in the final three months of 2014 and well below forecasts for 1.0% growth.
- Although economic activity in the first quarter was affected by the unusually bad winter weather, the weaker trend appears to have continued into the spring, with the Institute for Supply Management’s manufacturing index remaining steady at a near two-year low in April.
- The Federal Reserve (the Fed) acknowledged that growth had slowed following the latest meeting of the central bank’s monetary policy committee. In a statement, the Fed pointed to soft patches across the economy, although policymakers suggested that the poor performance was in part caused by transitory factors.
- In terms of interest rates, the Fed gave few clues to the timing of the first rate increase since 2006, stating once again that any decision would be dependent on the latest economic data. In particular, the Fed is looking for a further improvement in the labour market and for signs that inflation is moving back towards its 2% objective before making a move.
- The Fed did put in place a meeting-by-meeting approach to rate setting that, in theory, makes it possible that interest rates could rise at the next Fed policy meeting scheduled for late June. However, unless economic data improves significantly in the next six weeks, market consensus continues to expect the first rate increase to take place in September.
- Despite the weaker economic news and a fairly tame statement from the Fed on interest rates, US Treasury yields leapt higher in the week. The benchmark 10-year Treasury yield jumped from 1.92% to 2.11%, driven in part by a sharp sell-off in European bond markets.
- On the stock market, bond sensitive sectors, such as real estate and utilities, were among the hardest hit. Higher risk sectors, such as internet and biotechnology, were also down sharply on the week, with higher bond yields and some disappointing corporate earnings reports sparking profit taking. In contrast, energy stocks continued to rally on the back of a further rise in oil prices.
EUROPE: Sweden eases policy
- European stock markets suffered a reversal in the week ending 1 May, with the MSCI Europe Index down 2.3%.
- Sweden’s IMX Stockholm 30 was among the biggest fallers, down 4.1% for the week, as the country’s central bank (the Riksbank) announced an expansion to its quantitative easing programme to support Sweden’s struggling economy. However, the Riksbank kept interest rates on hold at -0.25%, disappointing hopes for a further reduction to what is already the world’s lowest lending rate.
- Elsewhere, Germany’s DAX and the French CAC 40 both fell 3.0%, while Switzerland’s SPI was 2.2% lower, Italy’s FTSE MIB declined 1.6%, the UK’s FTSE 100 dropped 1.2%, and Spain’s IBEX 35 ended 1.0% lower.
- Sentiment was hit by weaker economic news (both regionally and globally), a sharp rise in bond yields and a stronger euro. On the economic front, a disappointing 2.3% monthly drop in German retail sales for March and a slight pullback in the European Commission’s economic sentiment indicator suggested that the eurozone economic recovery may already be cooling.
- Despite the weaker regional economic data, the euro continued to make gains against the dollar on currency markets and is now up some 6% since mid April. The stronger trend in the euro dents prospects for eurozone exporters, and also suggests that the impact of the European Central Bank’s (ECB’s) quantitative easing programme may be waning. The euro was boosted last week by an easing of Greek debt concerns, on signs that the Greek government was moving towards an accord with its creditors, and by very disappointing US GDP data.
- As the euro rose, so did European bond yields, which continued to bounce back from the ultra low levels reached earlier in the year as the ECB began its bond purchases. Germany’s 10-year Bund yield jumped from 0.15% to 0.37%.
- In the UK, meanwhile, sentiment was hit by weaker economic data. First-quarter GDP growth of 0.3% was down sharply from the 0.6% rate recorded in the fourth quarter of 2014 and well below expectations for 0.5% growth. A sharp drop in the UK’s manufacturing purchasing managers’ index in April suggested that the weaker momentum had carried over into the second quarter.
- The UK general election campaign also stoked uncertainty on markets, as polls continued to suggest that both major parties (the Conservatives and Labour) could struggle to form a stable government following the vote on 7 May.
PACIFIC: Bank of Japan holds steady
- The MSCI Pacific Index fell 1.8% in the week ended 1 May.
- In Japan, the TOPIX fell 2.1% amid concerns over growth in Japan’s two largest export markets, the US and China. Despite these worries, the Bank of Japan kept its quantitative easing programme unchanged at its latest monetary policy meeting, targeting annual asset purchases worth JPY 80 trillion (USD 673 billion).
- The Japanese central bank also cut its forecasts for Japanese growth and warned that it won’t now hit its inflation targets until the middle of 2016. With US and Chinese growth faltering, many investors expect the Bank of Japan to announce further stimulus measures later in the year.
- Elsewhere, Australia’s All Ordinaries dropped 1.8%, as worries over slowing Chinese demand for commodities hit mining stocks, while banks struggled as speculation that the Reserve Bank of Australia may not cut interest rates at its next policy meeting hit high dividend paying stocks.
- Singapore’s Straits Times fell 0.7% amid regional growth concerns. However, Hong Kong’s Hang Seng was up 0.3% amid continued strong inflows from Chinese mainland investors.
EMERGING MARKETS: Russia cuts rates
- The MSCI Emerging Market Index fell 1.5% in the week ending 1 May.
- In emerging Europe, Hungary’s BUX ended the week 0.9% higher on hopes for a strengthening economic recovery, while Poland’s WIG was down just 0.1%.
- Russia’s RTS was 0.8% lower, as the country’s central bank cut its key interest rate by one and a half percentage points to 12.5%. The larger-than-expected move came as the rouble stabilised on foreign exchange markets.
- In emerging Asia, the MSCI China Index fell 0.6% as investors took profits following strong recent gains although locally traded mainland A shares ended the week slightly higher.
- India’s Sensex fell 1.6%, hit by sluggish corporate earnings reports and concerns over the potential extent of new taxes to be levied on foreign fund investors.
- Taiwan’s TAEIX was down 0.9%, while Korea’s Kospi dropped 1.5%, as the strength of the Korean currency (the won) contributed to some disappointing profit reports from Korean export stocks.
- Indonesian stocks fell sharply on concern over the impact of economic weakness on corporate profits following some weaker-than-expected quarterly earnings reports. The MSCI Indonesia Index was down 9.4%.
- In Latin America, Brazil’s Bovespa was 0.6% lower, as investors reacted to a disappointing earnings announcement from Index heavyweight Vale. The iron ore producer reported a net loss of USD 3.12 billion for the first quarter on falling Chinese demand and higher interest costs on its dollar-denominated debt.
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