Cat: Market commentary
09 Sep

Market Commentary Q4 2014

Global equity markets ended the quarter broadly positive, following a period of increased volatility due to a number of adverse events.

Markets were nervous over the escalation of the Ebola virus and the potential severity, once it had spread to countries outside of West Africa. The IMF downgraded its global growth forecast slightly across 2014 and 2015.On a country-specific basis, there were sharp downgrades in Russia, Japan and the Middle East, while the US experienced a sharp forecast upgrade. The falling oil price was a headline topic with crude oil (Brent) falling around 40% over the quarter. The impact has been severe for many oil and resource sector companies as well as countries which are heavily reliant on oil revenues. Conversely, the falling price has led to lower fuel costs for consumers, which will contribute to economic growth within many developed economies.

US equity markets delivered strong returns and surpassed all-time highs over the quarter. Third quarter GDP rose to 5% q/q in its final estimate, beating market expectations. This was the highest level recorded since the third quarter in 2003 and was led by consumer spending, investment and lower imports. The US Federal Reserve announced the end to its quantitative easing program, reducing monthly bond purchases from $15bn to nil. Unemployment was unchanged at 5.8% in November, in line with expectations and around the lowest level in 6 years. Industrial production rose significantly to 5.2% y/y in November, as consumers spent more on cars, electronics, furniture as well as other goods given an increase in discretionary income. Inflation fell to 1.3% y/y in November, experiencing the greatest monthly decrease in 6 years. Lower energy costs was the largest downward contributing factor.

European equity markets were flat over the quarter, amongst a period of high market activity. The European Central Bank unveiled plans for its ‘private quantitative easing package’ early in the quarter. This included purchases of asset-backed securities and covered bonds which will be purchased over at least a 2 year period. Third quarter GDP rose to 0.2% q/q in its second estimate, in line with expectations. Household and government expenditure boosted the overall economy, while investment and external trade pulled the rate lower. Inflation fell to 0.3% y/y in November, in line with expectations. The fall was led by lower energy prices where deflation was recorded in 4 member states. Unemployment was constant at 11.5% in October, at around the lowest level in 2 years. Ministers in Europe approved a request from Greece for a 2 month extension to its bailout program, which was prepared to end on 31st December. The Greek Prime Minister, Antonis Samaras, announced that the country’s presidential elections would take place on 17th December. As the country’s new President was not elected, further elections will take place in late January.

UK equity markets were flat overall, buoyed by stronger returns from medium-sized companies. UK third quarter GDP remained unchanged at 0.7% q/q in its final estimate, in line with expectations. Household and government consumption were the largest contributors to economic growth. Inflation fell to 1% y/y in November, a 12 year low. The fall in inflation was largely a result of lower motor fuel costs as well as falling food prices. Wage growth increased to 1.4% y/y in the third quarter, outstripping inflation for the first time since March. The ONS announced UK house prices increased 12.1% y/y in September, with an 18.8% y/y rise recorded in London markets. This was the highest annual growth rate since 2007, although house price appreciation has reduced more recently.

Asian equity markets were higher encouraged by a surge in Chinese markets, as well as strong returns registered in Japan. Chinese third quarter GDP fell to 7.3% y/y, although was slightly ahead of expectations. The growth rate marked a 5 year low, driven by lower property investment, industrial production and credit growth. The Chinese central bank cut interest rates by 0.4% to 5.6%, to help boost economic growth. Inflation fell to 1.4% y/y in November which was a near 5 year low, well below the government’s inflation target for the year. Chinese authorities confirmed the integration of the Shanghai and Hong Kong stock exchange, improving trading and access for international investors.

The Bank of Japan announced significant increases to the scale of its quantitative easing program with the purchase of various assets. Japanese third quarter GDP rose to -0.5% q/q, slightly below expectations. The announcement placed the country in technical recession. Prime Minister Shinzo Abe immediately proposed postponing the planned second round VAT hike until April 2017, to ensure economic recovery. Abe then called for a snap election to secure support for his economic reforms, which he won with a two-thirds majority vote. Inflation fell to 2.4% y/y in November, an 8 month low, driven by falling oil prices and slower consumer spending. The rate was 0.7% y/y, when stripping out the impact of April’s consumption tax increase. Unemployment remained at 3.5% in November, unchanged from the previous month’s figure.

Emerging markets were marginally lower over the quarter, with much disparity among individual countries, largely driven by mixed reactions to lower oil prices. The fall in the oil price adversely impacted those emerging countries which are heavily reliant on revenues from energy exports. The fall has been subject to multiple factors including increased supply largely from the US and decreased demand from slowing economies. Over the period, OPEC agreed to maintain the supply of oil at current levels in the interest of restoring market equilibrium. This placed further downward pressure on the oil price, as many expected the organisation to cut supply and support prices.

Dilma Rousseff narrowly won the Brazilian presidential election on behalf of the Worker’s party. The Brazilian central bank raised interest rates by 0.5% to 11.75% in order to control inflation, which has been above its target range since June. The Russian central bank increased interest rates multiple times over the quarter including a 6.5% rise in a single day, to combat inflation and support the currency. The finance ministry later sold large quantities of its US dollar reserves for rubles in order to tackle further currency depreciation.

In fixed income markets, yields on government bonds fell leading to positive returns for investors. Yields on the UK, German and US 10 year bond ended the quarter at 1.79%, 0.55% and 2.21% respectively. The fall in bond yields was encouraged by lower inflation expectations, largely associated with lower energy costs. The increased expectation that the European Central Bank will eventually announce more aggressive quantitative easing measures helped drive bond yields lower in related markets.

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Cat: Market commentary
15 Aug

Market Commentary August 2014

Global equity markets experienced steady gains until the final day in July. Markets retreated following various adverse events including; further Russian sanctions,defaulted debt in Argentina and lower than expected Eurozone inflation.

 

 

Geopolitical tensions also intensified after a Malaysian Airline plane crashed on the Ukraine/Russia border. In fixed interest markets, government bonds were supported by market uncertainty, leading to positive returns for investors.

US equity markets ended marginally lower due to events at the end of the month disrupting sanguine markets. The US Federal Reserve announced plans to end its quantitative easing program in its June meeting, proposing October as the final month of stimulus. The central bank proceeded to reduce monthly purchases from $35bn to $25bn in its July meeting. Second quarter GDP was announced at 4%, higher than expectations and considerably higher than first quarter’s economic contraction. US unemployment was announced at 6.1% in June, lower than expectations and the lowest rate in 5.5 years.

European equity markets suffered fair losses over the month, with the broader index being dragged lower by the Portuguese equity market. First quarter GDP was confirmed at 0.2% in the final reading. Eurozone unemployment was announced at 11.6% in May, lower than the expected rate and the lowest rate recorded since December 2012. CPI inflation fell to 0.4% in July, the lowest rate recorded since October 2009. French and Italian industrial production data showed fair declines in the sector with data coming in significantly below expectations.

UK equity markets remained little changed by month end. The Bank of England agreed to maintain interest rates and its quantitative easing program at its July central bank meeting. Later at the Commonwealth Games business conference, Mark Carney said interest rate increases will be more restrained than in the past as the economy continues to face challenges. He added that rates would not rise until real wages rise consistently. UK second quarter GDP was announced at 0.8%, placing economic growth slightly ahead of its pre-crisis peak. Unemployment fell to 6.5% in May, the lowest rate since 2008. CPI inflation rose to 1.9% in June, higher than expectations led by higher clothing, food & drink and air transport costs. UK house prices recorded their highest annual growth rate since January 2005, with prices rising 11.8% year-on-year in June, according to data provided by Nationwide.

Asian equity markets were strong, led by China which benefited from various positive economic data announcements. Chinese second quarter GDP was announced at 7.5%, surpassing expectations and in line with the government’s target rate. Manufacturing data also showed expansion, recording the highest rate since December 2013. The recently appointed finance minister of Korea announced various stimulus measures to boost the economy, having a positive impact on markets. Japanese equity markets were boosted by the prospect of the government increasing its equity allocation within its sovereign pension fund.

Emerging market equities were positive, buoyed by encouraging Chinese economic data. On the downside, President Obama announced further sanctions on Russia which targeted a series of large banks, energy and defence companies. The EU imposed further sanctions on Russian businesses, including curbs on Russian banks trading in European markets. The Bank of Russia raised interest rates from 7.5% to 8%, due to concerns around inflation and geopolitical tensions. Argentina defaulted on its debt after failing to make a $539m payment to a group of bond holders. Credit rating’s agency Standard & Poor’s downgraded the country’s credit rating to ‘selective default’.

Fixed interest markets experienced broadly positive returns, largely due to investors seeking safety from unfavourable market events. Bonds with lower credit quality underperformed, along with a pick-up in volatility. Markets were uneasy following serious credit issues with one of Portugal’s largest banks. Peripheral Eurozone government bonds outperformed over the month.

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Cat: Market commentary
17 Jul

Market Commentary July 2014

Global equity markets were broadly positive over the month with emerging outperforming developed markets. Indian equities continued to experience buoyant returns from the recent election win.

 

In the UK, comments from the central bank governor escalated expectations of an interest rate rise, having an adverse effect on markets. The announcement of an interest rate cut in Europe had a positive impact on the market initially, although ended June in a loss. Fixed interest markets were mixed with corporate bonds generally outperforming government bonds due to their higher level of yield.

US equity markets surpassed all-time highs driven by returns from less economically sensitive companies. The final reading of US first quarter GDP was confirmed at -2.9%, with bad weather having a worse than expected impact. The Federal Reserve announced a further $10bn per month taper of asset purchases at the central bank’s monthly meeting. Interest rates were left unchanged at 0.25%. US unemployment remained unchanged at 6.3% in May, lower than expected. US inflation was confirmed at its highest rate in over 18 months in May, at 2.1%. Housing data revealed an increase in sales, but slowing price appreciation as well as a sharp reduction in mortgage applications.

European equity markets were marginally lower over the month, led by losses in the financials sector. The European Central Bank announced an interest rate cut from 0.25% to 0.15%, a new historic low. The deposit rate was cut from 0% to -0.1%, therefore costing banks to deposit money at the bank. Eurozone inflation fell to 0.5% in May, down from 0.7%. Manufacturing data remained positive, with most recent figures showing expansion. Economic confidence indicators revealed a drop, below consensus expectations. Unemployment fell to 11.7% in April but remained elevated relative to developed market peers.

UK equity markets failed to deliver positive returns, amid a period of low volatility. Markets were adversely affected by comments from Bank of England governor Mark Carney, who said an interest rate rise could happen sooner than markets currently expect. The bank later announced mortgage lending restrictions affecting those with lower income to mortgage values. First quarter GDP was confirmed at 0.8%, in line with previous estimates. UK CPI inflation was announced at 1.5% in May, lower than expected largely due to falling transport services costs. Unemployment fell to 6.6% in April, which was lower than expected and a five-year low. UK retail sales declined, although at a less than expected rate due to a boost from world cup kit sales.

Asian equity markets were buoyed by Indian election optimism, following the release of early policy decisions announced by the newly elected government. Indonesian markets ended lower with investors less confident on the results of the upcoming election. Chinese manufacturing data was announced higher than expected, showing expansion in the sector. Japanese equity market returns were strong over the month, with investors overlooking the consumption tax increase implemented in April. Japanese unemployment was announced at 3.5% in May, a sixteen-year low.

Emerging market equities ended the month higher, led by Latin America. The Brazilian government announced further stimulus measures to support the manufacturing sector. The Mexican central bank cut its interest rate to a record low of 3% and economic growth in Colombia was confirmed ahead of expectations. The Russian Federation Council revoked a resolution authorising military intervention in Ukraine at President Putin’s request. This led to a rally in equity and bond markets. Oil prices rose after forces in Iraq took control of a northern oil hub, restricting supply. Natural gas prices also escalated as Russia cut off supplies to Ukraine.

Fixed interest markets were mixed amid a period of varied central bank policy. German government bond yields ended lower largely due to a rate cut from the European Central Bank. US and UK government bond yields increased, in anticipation of interest rate rises sooner than expected.

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