The Weekly Stock Market Report (07 - 13 November 2015)Contributor JPMAM UK
US: Dollar rises with rate expectations
- US stocks fell sharply in the week ended 13 November as signs of slowing global growth and speculation that the Federal Reserve (the Fed) was preparing to raise US interest rates hit sentiment. The S&P 500 closed down 3.6%, while the tech-heavy NASDAQ was 4.3% lower.
- Concerns over global growth rose as the latest batch of Chinese economic data missed expectations, helping to send commodity prices to new lows. Energy stocks pulled the market down as the Brent crude oil price slipped below USD 44 per barrel for the first time since the China-related market volatility of late August.
- Technology stocks also struggled, hit by poor earnings news (Cisco's orders and guidance disappointed), while nervousness over demand for the new iPhone model hit Apple. However, retail stocks were among the weakest following disappointing retail sales data for October and some weak earnings announcements, particularly among clothing chains, where the unseasonably warm weather and strong dollar have hit demand.
- Dollar strength was a key theme last week as the US currency was boosted by rising expectations that the Fed will raise US interest rates next month. With Fed officials again hinting that rates could rise this year, the futures market is pricing in around a 70% chance of interest rate "lift off" in December.
- The dollar has been particularly strong against the euro as monetary policy in the US and Europe diverges, with the European Central Bank expected to announce a boost to its quantitative easing programme as the Fed tightens. Investors are concerned that policy divergence could spark disruptions in credit and currency markets.
- Economic data was mixed. An increase in wholesale inventories in September and an upward revision to the August data suggest that the correction in inventories will hold back third-quarter GDP growth less than originally feared.
- Retail sales fell short of expectations in October, suggesting that lower oil prices have yet to provide a significant boost to consumption. However, consumer sentiment recorded a solid rise in November according to the University of Michigan survey, which, along with rising income expectations, should bode well for future increases in consumer spending.
Europe: Portugal's pro-austerity government falls
- European stocks fell in the week to 13 November as weak Chinese data rekindled global growth concerns. The MSCI Europe Index lost 3.1%.
- Commodity prices slumped on China worries and investors took profits on metals and energy stocks following the sharp rebound in October. Copper hit a six-year low in the week, while Brent crude fell below USD 44 a barrel for the first time since August.
- The UK's mining-heavy FTSE 100 was down 3.7%, while the French CAC 40 dropped 3.5% and the German DAX slid 2.5%. Spain's IBEX and Italy's FTSE MIB ended the week 3.3% and 3.1% lower, respectively.
- Portugal's PSI 20 was the biggest faller, plunging 6.0% as the country's minority centre-right government collapsed less than two weeks after taking power, following the loss of a key vote in parliament. A new alliance of left-wing parties voted 123 to 107 against the ruling coalition's policy programme, in a move that could potentially bring about an end to austerity in the country.
- Expectations mounted that the European Central Bank (ECB) would take further action before the end of the year to shore up the regional economy, after growth data disappointed. Eurozone gross domestic product (GDP) grew 0.3% quarter on quarter in the third quarter of the year, down from 0.4% in the March-June period.
- Speaking in Brussels on Thursday, the ECB's president, Mario Draghi, said the risks to the eurozone economy are "clearly visible" and reiterated that the current stimulus programme will be reviewed at the December meeting. Media reports suggested that policymakers may be planning to cut the deposit rate from the current level of -0.15%, in addition to the widely anticipated extension to the quantitative easing programme.
- Economic news in the UK was more positive, with the unemployment rate falling to 5.3% in the three months to September, from 5.4% in the three months to August. Average weekly earnings including bonuses increased 3% year on year (y/y).
- With consumer price inflation at -0.1% y/y, UK households are benefiting from strong real wage growth. Inflation should pick up once the drop in the oil price falls out of the year-on-year comparison, but even core inflation (which excludes food and energy prices) is currently only rising by 1% y/y. The outlook for UK consumer demand therefore appears strong.
Pacific: Japan hopes for more stimulus
- The MSCI Pacific Index was unchanged in the week to 13 November as regional markets diverged.
- Japan's Topix was the strongest performer among major global markets, returning 1.4% as corporate earnings showed unexpected resilience and investors anticipated further stimulus measures from the Bank of Japan.
- Japanese economic data was mixed, with the Reuters Tankan survey pointing to a sharp decline in manufacturing confidence, but machinery orders rebounding in September and the government's economy watchers' survey – a measure of service sector sentiment – rising for the first time in three months in October.
- Other Pacific markets were hurt by the latest batch of disappointing Chinese economic news. Australia's mining-rich All Ordinaries slid 3.0% as metal prices slumped. The Australian Bureau of Statistics reported that almost 60,000 jobs were created on a net basis in October – around four times the expected level – reducing expectations of an interest rate cut this year.
- Hong Kong's Hang Seng was down 2.1%, while Singapore's Straits Times lost 2.8%. Hong Kong's economy grew 2.3% year on year in the third quarter, ahead of expectations, as domestic demand surged.
Emerging Markets: Oil price fall hits Russia
- The MSCI Emerging Markets Index was down 3.0%, as weak commodity prices and renewed concerns over Chinese growth undermined sentiment.
- Russia's RTS was among the worst hit, down 4.6% as oil prices fell to near three-month lows.
- Taiwan's TAIEX was 4.2% lower as worries over demand for the iPhone hit Taiwanese components suppliers, while Korea's KOSPI fell 3.3%.
- The MSCI China Index fell 2.9% as October's economic data releases painted a mixed picture for growth. Industrial production rose 5.6% year-on-year (y/y), which was much weaker than expected as power production and mining output slowed. In contrast, retail sales continued to accelerate, with a rise of 11% y/y.
- China's two-speed economy looks set to continue, with the industrial and manufacturing sector slowing and the domestic demand side expanding in line with the Chinese government's rebalancing plans.
- In India, the SENSEX fell 2.5% in a holiday-shortened week as disappointing industrial production data and worries over a US interest rate increase weighed on sentiment.
- Turkey's BIST 100 held up better, falling just 0.1% in the week on hopes that the ruling Justice and Development Party's recent general election victory will help calm political instability and provide an impetus for economic reform.
- Hungary's BUX, meanwhile, gained 0.5%. Moody's raised its sovereign outlook for Hungary to positive, from stable, suggesting that a credit rating upgrade could be on the cards.
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