The Weekly Stock Market Report (17 - 23 October 2015)Contributor JPMAM UK
US: Upbeat corporate earnings lift sentiment
- US stocks rose in the week ending 23 October, as sentiment was boosted by stronger-than-expected corporate earnings and easing worries over global growth. The S&P 500 rose 2.1%, while the Dow Jones Industrial Average was up 2.5% and the technology-biased Nasdaq ended the week 3.0% higher.
- The third-quarter corporate earnings season is now well underway. Of the S&P 500 companies that have reported so far, 100 have beaten analysts' estimates, while 28 have missed and 20 have met forecasts. This equates to 68% of companies beating expectations, vs. the historic average of 66%. Big name technology stocks, in particular Microsoft, Amazon and Alphabet (previously known as Google), were among the companies to report strong results last week.
- Data relating to the housing and labour markets painted a positive picture. A key measure of builder confidence rose to the strongest level in a decade in October. Existing home sales jumped more than expected in September.
- Manufacturing data also improved. The Markit manufacturing purchasing managers' index increased from 53.1 in September to 54.0 in October, the highest level since May and well ahead of expectations. The detail of the report was also positive, with increases in new orders, output, employment and exports
- Investors continue to hunt for clues to the timing and pace of interest rate rises from the Federal Reserve (Fed) over the coming months. Just a month ago, the odds were fairly equally weighted between a December or January rate rise, but the market has now pushed back its expectations to March. However, the Fed remains sensitive to global economic data, particularly out of China, and the recent stabilisation in the Chinese economy could put a December move back on the cards.
Europe: Markets surge on stimulus hopes
- Hopes for further stimulus from the European Central Bank (ECB) and a better mood on global markets helped the MSCI Europe Index to a 3.0% return in the week to 23 October.
- Germany's DAX was the strongest performer among the major eurozone markets, gaining 6.8%, while the French CAC 40 was up 4.7%, Spain's IBEX rose 2.4% and Italy's FTSE MIB was up 1.8%. Outside the eurozone, the UK's FTSE 100 added 1.0% and the Swiss SPI closed 2.3% higher.
- The ECB left policy unchanged at its meeting on Thursday, but comments by its president, Mario Draghi, were viewed as indicating that more easing was imminent. Draghi warned that stress in emerging markets and the resultant market volatility posed risks to growth, and said policymakers would therefore examine the EUR 60 billion a month asset purchase programme at the December meeting.
- An interest rate cut by the People's Bank of China was also viewed as positive as data suggested weaker Chinese growth is taking its toll on industry in Europe's economic powerhouse. The Markit manufacturing purchasing managers' index (PMI) for Germany slid to 51.6 this month, still above the 50 level that separates expansion from contraction, but down from 52.3 in September.
- The new orders component of the index fell to the lowest level since July, with companies attributing the decline to weaker demand from markets including China and Russia. Higher stocks of finished goods coupled with lower orders suggested factories may cut production in the coming months.
- 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.
- In contrast, the French manufacturing PMI pointed to accelerating activity, rising from 51.9 in September to 52.3 in September.
- The eurozone's quarterly lending survey suggested the ECB's existing support is already bearing fruit. Companies and households sought more loans in the third quarter of 2015 than in the previous three months, while banks relaxed their lending standards to businesses. A lack of lending has been one of the biggest problems holding back growth in the single currency area.
- In the UK, retail sales data suggested domestic demand held up well in the third quarter. Sales rose 0.9%, with food and drink sales jumping 2.3% by volume as consumers took advantage of promotions related to England's hosting of the Rugby World Cup.
Pacific: Weak Japan exports fuel easing expectations
- The MSCI Pacific Index rose 2.3% in the week to 23 October as an interest rate cut from the People's Bank of China eased fears over the impact of slowing Chinese growth.
- Japan's Topix was up 2.8% as weak trade data was viewed as increasing the likelihood of further easing from the Bank of Japan (BoJ). Haruhiko Kuroda, the governor of the BoJ, has stressed that additional stimulus is not needed, but recent data releases have raised concerns that the economy may slip back into recession.
- October's manufacturing purchasing managers' index for Japan was surprisingly strong, reaching its highest level in more than 18 months. However, exports grew at the slowest pace in more than a year in September, with shipments to China falling 3.5% from a year earlier.
- Australia's All Ordinaries returned 1.6%. The minutes of the Reserve Bank of Australia's most recent meeting were viewed as reducing the likelihood of the third interest rate cut this year. Policymakers highlighted risks resulting from the exposure of the country's banks to property developers and investors, but said the economy was adjusting well to the end of the housing boom.
- Hong Kong's Hang Seng added 0.4%, while Singapore's Straits Times gained 1.2%.
Emerging markets: China announces further easing
- The MSCI Emerging Markets Index rose 1.0% in the week to 23 October.
- The MSCI China rose 0.6%. Sentiment was boosted by news that the Chinese economy grew a bigger-than-expected 6.9% in the third quarter. Although it marks the slowest quarterly growth rate since the first quarter of 2009, the figure suggests that China remains on track to meet its full-year growth target of around 7%. China's National Bureau of Statistics said the economy was stable and moving in a positive direction, but that the pace of economic reform must be accelerated, leaving the door open for further stimulus measures.
- Chinese economic data was mixed. Retail sales grew at an annualised rate of 10.9% in September, better than forecast, while industrial production growth decelerated. On Friday, the People's Bank of China announced a 25 basis point (bp) cut to both its one year lending and deposit rates, and a 50bp reduction to reserve requirements for banks, in an attempt to shore up growth.
- Elsewhere in emerging Asia, South Korea's Kospi ended the week 0.5% higher, helped by news that the economy grew a faster-than-expected 1.2% quarter on quarter in the three months to September. The reading – which marks the fastest rate of growth since the second quarter of 2010 – was driven by domestic demand.
- Taiwan's Taiex rose 0.8%. Export orders beat expectations in September, after a decline in August. There was a notable gain in technology orders, reflecting the impact of new product launches.
- In Latin America, Mexico's IPC rose 1.5%. Inflation hit a new low in October, reinforcing expectations that the Bank of Mexico will keep interest rates at their record low until next year.
- In emerging Europe, Russia's RTS slipped 0.9%. Russia's current account surplus unexpectedly shrank to below 4% of gross domestic product in the third quarter as exports contracted substantially due to the decline in commodity prices. However, data releases for September surprised positively, with industrial production, construction and transport coming in stronger than expected. Hungary's BUX returned 0.1%, while Poland's WIG fell 0.5%.
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