The Weekly Stock Market Report (26 Sep - 02 Oct) - J.P. Morgan Asset Management

The Weekly Stock Market Report (26 Sep - 02 Oct)

Contributor JPMAM UK
US: Jobs data points to slowing growth
  • Wall Street stocks ended the week to 2 October higher as a softer-than-expected employment report caused investors to push back expectations of an interest rate rise from the Federal Reserve (Fed). The Dow Jones and the broad S&P 500 each gained 1.0%, while the technology-focused Nasdaq added 0.5%.
  • The US economy created 142,000 jobs in September, well short of the forecast 201,000 new roles, while August’s figure was revised down sharply, from 173,000 to 136,000. Wage growth stagnated, with average hourly earnings unchanged month on month.
  • Following the release of the employment report, the interest rate futures market reflected just a 29% chance of a rate rise at the Fed’s December meeting, down from 43% the previous day. The implied probability of a move this month fell to only 8%.
  • Financial stocks, which stand to benefit from higher interest rates, were among the weakest performers, while energy and raw materials stocks rallied, as did companies that source a significant proportion of their earnings overseas and therefore benefit from a weaker dollar.
  • As well as reducing the likelihood of a rate rise this year, the weak jobs data cast doubts over the outlook for US growth in the second half of the year. Manufacturing data released in the week added to the picture of slowing economic momentum.
  • The Institute for Supply Management’s index of manufacturing activity fell to its lowest level since May 2013 in September, with only seven of the 18 industries covered by the survey growing in the month. Industries exposed to the US consumer, such as construction and autos, held up better than those with heavy overseas exposure.
  • The Conference Board’s index of consumer confidence also highlighted the relative strength of US households, reaching its highest level since January in September as cheap petrol prices and rising home values boosted sentiment.
  • Despite the better mood on markets last week, US equities delivered their worst quarterly performance since 2011 in the July-September quarter, as slowing growth in China and uncertainty over Fed policy weighed on markets.
  • Expectations for the upcoming quarterly earnings season have been scaled back sharply, with the consensus now forecasting a 5% decline overall vs. the third quarter of 2014. While this projection may be unduly pessimistic, weak earnings are likely to limit the potential for share price gains.
Europe: Autos and commodities hit sentiment
  • The MSCI Europe Index fell 0.1% in the week ending 2 October as concerns over global growth and Volkswagen’s emissions scandal continued to hit investor sentiment.
  • Among the major European markets, Spain’s IBEX 35 was up 0.9%, Italy’s FTSE MIB and the UK’s FTSE 100 were both 0.3% higher, and Switzerland’s SPI rose 0.1%, while Sweden’s OMX 30 dropped 0.4%, the French CAC 40 was down 0.5% and Germany’s DAX was 1.4% lower.
  • The autos sector was again among the worst performers as the Volkswagen emissions scandal spluttered on. Volkswagen, which has set aside EUR 6.5 billion to fix emissions cheating software fitted to millions of its diesel cars, saw its shares fall by another 15%. There are also concerns that other major European car makers may have duped emissions tests, while investors fear the scandal will lead to tougher testing standards and lower demand for diesel cars.
  • Concerns over global growth, particularly a slowdown in Chinese demand, continued to hit mining stocks as Chinese industrial data again disappointed. Shares in Glencore, a London-listed commodities trading company, collapsed 30% on Monday as worries over the company’s spiraling debt costs intensified amid continued severe weakness in commodity prices.
  • Glencore’s sophisticated commodity trading operations and its high borrowings have raised concerns over the market impact should the company collapse. However, Glencore’s shares recovered almost all of their losses later in the week as management released details of the company’s trading contracts and reassured investors that a plan to significantly reduce the company’s debts remained on track.
  • Economic news was mixed. In the eurozone, a stronger retail sales report for August suggested that consumer confidence is continuing to improve. However, the region unexpectedly fell back into deflation in September as the headline eurozone consumer price index fell 0.1% compared to a year earlier.
  • In the UK, the manufacturing purchasing managers’ index (PMI) edged lower in September but remained consistent with a modest expansion in manufacturing output. An easing in the PMI’s employment component, along with weaker global growth, led investors to further push back expectations for the timing of the first UK interest rate increase.
  • The continuation of low borrowing costs – both in the UK and in the eurozone – along with the low price of oil, should help to boost consumer spending and lift corporate profits. Against this backdrop, reasonable share price valuations should help to provide support to stock markets from here.
Pacific: Industrial data points to Japan recession
  • The MSCI Pacific Index was down 0.5%in the week ended 2 October.
  • Japan’s TOPIX fell 0.6%. Economic data was weak, with industrial production unexpectedly falling 0.5% month on month in August. After a sharp drop in July, August’s further contraction in industrial output led to forecasts that the Japanese economy may have slipped back into recession in the third quarter.
  • The disappointing economic backdrop led to growing expectations that the Bank of Japan, which meets later this week, will need to expand its quantitative easing programme to boost growth and meet inflation targets.
  • In Hong Kong, the Hang Seng was up 1.5%, supported by strong Chinese markets. Australia’s All Ordinaries closed the week up 0.2%, just off a two-year low as resource stocks remained highly sensitive to the latest Chinese economic data releases.
  • Singapore’s Straits Times was down 1.4%. Although recent economic data suggests that Singapore’s economy is heading back into recession, there is uncertainty over whether the country’s central bank, the Monetary Authority of Singapore, will act to boost growth at its October meeting.
Emerging markets: India slashes interest rates
  • Emerging market stocks rallied last week as receding expectations of an imminent US interest rate rise boosted currencies and commodity prices. The MSCI Emerging Markets Index rose 1.5%, outperforming the MSCI World, which returned 0.5%.
  • In a week shortened by the first two days of a seven-day public holiday, the MSCI China was up 2.3%. China’s official manufacturing purchasing managers’ index crept up to 49.8 in September from 49.7 in August – still below the 50 level that indicates expansion rather than contraction. Industrial profits fell at their fastest annual pace in almost four years in August, marking a third straight month of decline.
  • India’s Sensex added 1.4%. The Reserve Bank of India cut its main interest rate by a larger-than-expected 50 basis points to 6.75% amid feats that growth may be slowing in Asia’s third-largest economy. The central bank’s governor noted that inflation hit a nine-month low in August as the government’s supply-management policies succeeded in containing food prices despite a monsoon shortfall.
  • Brazil’s Bovespa gained 4.9%, boosted by hopes currency weakness will lift exports and help to reduce the country’s current account deficit. Brazil’s currency, the real, fell to an all-time low against the US dollar at the end of September, reflecting bearishness on emerging market growth and worries over the ability of President Dilma Rousseff’s administration to tackle Brazil’s fiscal issues.
  • Last week, Tony Volpon, a senior official at Brazil’s central bank, said policymakers were prepared to do whatever is necessary to rein in inflation as the country seeks to bring its public finances under control.
  • Russia’s RTS was hit by geopolitical concerns, falling 3.0% as Russian air strikes in Syria added to tensions between Moscow and Washington.
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The Weekly Stock Market Report (26 Sep - 02 Oct)

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