The Weekly Stock Market Report (10-16 October)Contributor JPMAM UK
US: Rate speculation continues
- US stocks delivered positive returns in the week to 16 October, with sentiment buoyed by optimism that the Federal Reserve (Fed) could hold off from raising interest rates until next year. The S&P 500 was up 0.9%, while the Dow Jones Industrial Average rose 0.8% and the technology-biased Nasdaq ended the week 1.2% higher.
- Investors continued to focus on any clues to the timing and pace of interest rate rises over the coming months. Fed vice chair Stanley Fischer commented that he expected US interest rates to rise before the end of 2015, but reiterated that any move remained dependent on data releases.
- A mixed batch of US economic data and corporate earnings results reinforced the view that the central bank may keep interest rates at their record low for a prolonged period.
- In particular, weaker-than-expected retail sales and regional manufacturing data were viewed as reducing the probability of a rate rise at the Fed’s October meeting. Headline US retail sales rose a lower-than-expected 0.1% in September, while August’s 0.2% increase was revised down to zero. The Empire State and Philadelphia Fed manufacturing surveys - reflecting general business activity - both increased modestly at the headline level for October, but the underlying details were poor, with new order components in both surveys dropping sharply.
- However, inflation and jobs data was encouraging. Core inflation, which excludes food and energy, rose to 1.9% year on year from 1.8% in August, just below the central bank’s 2% target. Meanwhile, initial jobless claims fell 7,000 to 255,000 in the week ending 10 October, marking the lowest level since 1973.
- Consumer sentiment also picked up, with the University of Michigan’s consumer sentiment index increasing 4.9 points to 92.1 in the preliminary October report, ending a run of three consecutive monthly declines.
- Attention was also focused on the quarterly corporate earnings season. With 11% of S&P 500 companies having reported earnings so far, 75% of companies have beaten on earnings-per-share expectations, by an average of 2.7%, while around 50% have beaten revenue expectations.
- As we move further into the corporate earnings season, investors are most cautious on banks, as a low interest rate environment challenges the ability of lenders to generate attractive returns for investors.
Europe: Markets flat as data disappoints
- Disappointing economic news at home and abroad halted the fourth-quarter rally on European stock markets. The MSCI Europe Index lost 0.3% in the week to 16 October.
- Most major markets were little changed as investors awaited direction from policymakers and from corporate earnings releases. Italy’s FTSE MIB gained 0.4%, the German DAX was up 0.1% and the French CAC 40 was flat. Spain’s IBEX lost 0.4%, while the UK’s FTSE 100 was down 0.6%.
- Eurozone industrial production fell 0.5% month on month in August, following a 0.8% rise the previous month. German production slid 1.1%, while French production grew 1.6%.
- The drop in German industrial output came even before the Volkswagen emissions scandal broke in mid September, raising concerns about the impact of the crisis at the world’s biggest carmaker on an already faltering economy. A sharp decline in the German Zew index of investor sentiment in September suggested confidence has been hit hard by the scandal.
- Meanwhile, a sharp decline in Chinese imports in September added to worries about slowing emerging market demand for European goods and services. Expectations mounted that the EuropeanCentral Bank (ECB) will soon boost its asset-purchasing programme to stimulate growth, with the December meeting being viewed as the most likely time for an increase.
- In the UK, the economy slipped back into deflation in September, with consumer prices falling 0.1% year on year as clothing price gains slowed and the cost of petrol declined. Consumer price inflation has been at or close to zero for most of this year, and last dipped into negative territory in April.
- However, jobs data was encouraging, with unemployment falling to a seven-year low of 5.4% in the three months to August and wages (excluding bonuses) growing 2.8% compared with the same period.
- a year earlier. Given the lack of inflation at present, growth in earnings will boost living standards and should allow consumption to support the economy in the coming months, despite the global headwinds.
Pacific: Japanese government more negative on economy
- The MSCI Pacific Index fell 0.1% in the week to 16 October. In a week shortened by a public holiday on Monday, Japan’s Topix lost 0.6%. In a monthly report, the Japanese government downgraded its assessment of the economy, saying that a “gradual recovery trend” was underway, but there were “some pockets of weakness.” It also said industrial production was weakening. Investors are now expecting further support for growth from the government and the Bank of Japan.
- Australia’s All Ordinaries slid 0.1%. Westpac Banking Corp, one of the country’s biggest lenders, announced that it would raise rates on some of its mortgage products to offset the cost of higher regulatory capital requirements. With other banks expected to follow suit, speculation grew that the Reserve Bank of Australia would cut interest rates in November to support consumer confidence ahead of the crucial holiday shopping season.
- Hong Kong’s Hang Seng was the strongest performer, gaining 2.7% as expectations of further stimulus from the mainland Chinese authorities boosted sentiment. Singapore’s Straits Times was up 1.1%.
Emerging markets: Hopes for further china stimulus lifts mood
- The MSCI Emerging Markets Index was up 0.3% in the week ending 16 October.
- The MSCI China rose 2.4%, as sentiment was buoyed by growing hopes that Chinese authorities will introduce further stimulus measures to boost the domestic economy, as trade data disappointed. Exports fell 3.7% in the year to September, while imports dropped a larger-than-expected 20.4%, raising concerns over the outlook for Chinese growth.
- Investors reacted positively to the announcement that the People’s Bank of China (PBoC) would expand a programme that allows lenders to borrow from the central bank using loan assets as collateral. The mood was further lifted by comments from the PBoC’s deputy governor that China’s stock market correction was “almost over.”
- Elsewhere in emerging Asia, India’s Sensex was up 0.5%. Industrial production grew 1.5% month on month in August to a 34-month high, led by a surge in consumer goods production.
- South Korea’s Kospi returned 0.5%. The labour market improved further in September, with the jobless rate falling for the third consecutive month, to 3.5% from its peak of 3.9% in June. As widely expected, the Bank of Korea kept its base rate unchanged at 1.5% and trimmed its growth and inflation forecasts for 2015, largely as a result of a disappointing second quarter.
- Taiwan’s Taiex ended the week 1.9% higher, helped by gains for Apple suppliers, such as TSMC and Largan Precision, ahead of their quarterly earnings releases.
- In Latin America, Mexico’s IPC delivered a flat return. Industrial production rose 1% in August compared with a year earlier, in line with expectations. Brazil’s Bovespa fell 4.3% as sentiment was dampened by news that the central bank’s IBC-Br economic activity index fell at a faster-than-expected rate in August.
- In emerging Europe, Russia’s RTS slipped 0.5%. The Russian ruble fell sharply vs. the US dollar after the price of Brent crude oil tumbled the most since 1 September. Hungary’s BUX and Poland’s WIG were down 0.4% and 0.6%, respectively.
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