Markets took a short-lived pause at the beginning of November after a prolonged period of positive returns and low volatility. By the end of the month, sentiment was buoyed by further evidence of a solid macro backdrop.
Developed market equities closed the month 1.6% higher, with the year-to-date return still strong at +17.8%. Emerging markets lost 0.8% in November however the year-to-date return remains at an impressive 27.7%. Commodities posted a 0.5% loss for the month and are now down 1.2% year to date.
Exhibit 1: Asset class and style returns (local currency)
Source: Barclays, Bloomberg, FactSet, FTSE, MSCI, J.P. Morgan Asset Management. REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSCI World Small Cap. All indices are total return in local currency. Data as of 30th November 2017.
Eurozone economic momentum accelerated. Preliminary third-quarter GDP growth was revised up to 2.5%, largely due to the German economy’s impressive 2.8% growth, but also as a result of improving conditions in France and Italy, which confirmed that the recovery is being felt more evenly across countries. The manufacturing Purchasing Managers’ Index (PMI) for the eurozone hit a new record high of 60.1, which is consistent with a growth rate of more than 3%. Labour dynamics improved, with the unemployment rate falling below 9% and consumer confidence reached a 16-year high. The flash estimate of November headline inflation picked up by 10 basis points to 1.5% but core inflation remained unchanged at 0.9%. Nevertheless, improving labour markets and rising private incomes are expected to feed through into higher inflation at some point down the line.
The minutes of the European Central Bank’s (ECB’s) October meeting (when it announced an extension to its quantitative easing programme) revealed a high degree of conviction on the economic outlook, but not on wages and inflation, which are still subdued. Bond scarcity was not mentioned but probably played a role in the decision to halve asset purchases from January 2018. The dovish message of the ECB is consistent with expectations that new purchases under quantitative easing programme will be tapered further over the course of the year, and rates will be raised, in 2019.
November has seen a return of political uncertainty. In Germany the announcement of a new coalition still seems far away. In Italy the electoral campaign for next year’s general election has revealed a fragmented picture and growing support for anti-establishment parties. In Spain the turmoil created by the referendum in Catalonia could also lead to new regional elections soon. This increased political noise was probably the key reason for the correction of the MSCI Europe (ex-UK) Index, which ended the month with a -1.7% return (although the benchmark is still up 15.1% year-to-date).
The UK budget revealed a slower pace of fiscal tightening to support the economy through the Brexit negotiations. Third-quarter GDP growth was confirmed at 1.5% and inflation remained unchanged at 3.0%. The Bank of England announced the first rate rise in a decade. The market anticipates roughly two more rises over the next three years to control inflation. Signs of progress in the EU Brexit negotiations supported the pound in the final days of the month. The FTSE 100 closed with decline of 1.8%, marginally reducing the year-to-date return to +6.6%
Exhibit 2: World stock market returns (local currency)
Source: FactSet, FTSE, MSCI, Standard & Poor's, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency. Data as of 30th November 2017.
The US macro picture was mixed but the economic cycle appears solid. New orders for durable goods fell mainly due to weakness in the aircraft and defence sectors. Initial jobless claims were volatile during the month, but the unemployment rate fell to 4.1%. Manufacturing production rebounded and the flash manufacturing PMI cooled to 53.8 (from 54.6) but remained well above 50. Headline inflation fell to 2.0%, confirming that the higher level seen in September was due to the effects of the hurricanes on energy prices. However, core inflation increased by 10 basis points to 1.8%, suggesting that conditions remained in place for inflation to gradually pick up.
The minutes of the last Federal Open Market Committee meeting reinforced expectations for a rate rise in December. Inflation remains the key statistic to monitor for predicting monetary moves in 2018. The nomination of Jerome Powell as the new chairman of the Federal Reserve could have created some uncertainty, but was seen as the choice for continuity.
The timetable for tax reform in the US is still uncertain, so progress could serve to support appetite for US equities. The S&P 500 Index gained 3.1% in November revising up the year-to-date return to 20.5%.
Exhibit 3: Fixed Income sector returns (local currency)
Source: Barclays, BofA/Merrill Lynch, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. IL: Barclays Global Inflation-Linked; Euro Treas: Barclays Euro Aggregate Government - Treasury; US Treas: Barclays US Aggregate Government - Treasury; Global IG: Barclays Global Aggregate - Corporates; US HY: BofA/Merrill Lynch US HY Constrained; Euro HY: BofA/Merrill Lynch Euro Non-Financial HY Constrained; EM Debt: J.P. Morgan EMBI+. All indices are total return in local currency. Data as of 30th November 2017.
In Japan, third-quarter GDP growth was revised down to a still elevated 1.4%. Exports and imports remained strong, while positive sentiment surveys and improving labour markets are increasing expectations for a rebound in consumption and inflation. The monthly return for the TOPIX Index (+1.5%) confirmed the appeal of the Japanese market this year, which is up 20.3% year to date.
In China, the authorities are trying to promote better quality growth without hurting the economy. The announcement of new credit tightening regulations has created some concern given initial signs of deceleration are already underway. Sectors such as infrastructure and housing could be hurt by credit restrictions, which may lead to softer GDP growth in the fourth quarter after the still solid 6.8% pace of the third quarter.
Despite Chinese uncertainty, the macro outlook for emerging markets appears resilient. Moody’s upgraded India’s sovereign rating thanks to its strong commitment to reforms and its strong GDP growth. Growth in Hong Kong and Taiwan rose in the third quarter, and exports accelerated.
The global third-quarter corporate earnings season ended with positive earnings growth. Earnings estimates for 2017 and 2018 remained stable, with emerging markets benefiting from a significant upgrade. The positive global macro picture and positive earnings momentum may continue to feed into an improving risk appetite.
The price of oil continued to increase thanks to a more balanced demand-supply outlook after production cuts by OPEC and non-OPEC producers started to work, with inventory levels also declining and global demand appearing to be growing.
Low inflation globally, and accommodative forward guidance from central banks, contributed to the positive returns in many fixed income markets, while the pause in some high yield and emerging bond markets may still offer opportunities for fixed income investors.
Exhibit 4: Fixed Income government bond returns (local currency)
Source: FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. All indices are J.P. Morgan GBIs (Government Bond Indices). All indices are total return in local currency.Data as of 30th November 2017.
Exhibit 5: Index returns in November (%)
Source: MSCI, FactSet, J.P. Morgan Economic Research, J.P. Morgan Asset Management. Data as of 30th November 2017.