Cat: Market commentary
18 Nov

Market Commentary November 2014

 Global equity markets were mixed over the month. Earlier in the period markets reacted negatively to the IMF downgrading its global growth

forecast including sharp cuts in the Middle East, Russia and Japan, whilst sharply upgrading the US. Some markets came back to deliver positive returns for investors following a raft of more encouraging economic data and further stimulus measures announced by multiple central banks. Lower commodity prices adversely impacted selective emerging countries which are more reliant on revenues from materials and energy.

US equity markets provided strong relative returns over the month, as the market pulled back from an early dip. More defensive sectors including consumer staples and health care outperformed, while consumer discretionary and IT lagged the broader market. The US Federal Reserve announced it would be ending its stimulus program, which was widely anticipated by market participants. US unemployment fell to 5.9% in September, lower than expectations.

European equity markets ended the month lower, following worsening economic growth expectations. Industrial production in Germany experienced its greatest month-on-month decline since January 2009 in August. This was hindered by weak demand across Europe and China, as well as trade disruptions with Russia. Interest rates were left unchanged at the European Central Bank meeting. The bank however unveiled plans for its private quantitative easing package which included two years of asset purchases to stimulate the economy. The President later announced that the bank would consider additional stimulus measures if required. Eurozone inflation fell to 0.3% in September, the lowest level recorded in 5 years. 8 member states logged deflationary numbers. Unemployment was unchanged at 11.5% in August, in line with expectations.

UK equity markets suffered marginal losses over the month. UK third quarter GDP fell to 0.7% with the services sector showing the greatest contribution, slightly offset by decreases in mining and quarrying. UK CPI inflation fell to 1.2% in September, its lowest level in 5 years. The fall was largely attributable to lower transport costs and lower prices on recreational goods. Unemployment fell to 6% in August, falling lower than expected. Retail sales fell to -0.3% in September, largely impacted by significant falling clothing and footwear sales. The Bank of England announced no changes at its central bank meeting.

Asian equity markets performed well over the month, led by Hong Kong and Australian markets. Chinese third quarter GDP fell to 7.3%, driven by lower property investment, credit growth and industrial production. This marked the lowest annual growth rate in 5 years. CPI inflation fell to 1.6% in September, almost at a 5-year low. Chinese trade data surprised markets with import and export data much higher than expected. Japanese equity markets recovered early losses following the announcement of aggressive stimulus measures by the central bank. Japanese unemployment fell to 3.5% in August, lower than market expectations.

Emerging market equities ended marginally higher, led by the Emerging Asia region. Further falls in the oil price had a negative impact on more dependent countries, including Russia and UAE. The Russian central bank increased interest rates by 1.5% to 9.5%, in order to combat against currency falls. Poland cut rates by 0.5% to 2%, following more positive economic data. Dilma Rousseff narrowly won the Brazilian presidential election on behalf of the Workers’ Party. Equity markets suffered initially as Dilma was seen as less business orientated, compared to her opposition.

Fixed income markets delivered positive returns for investors, following lower bond yields, leading to higher prices in core government and corporate bonds. This came as central bank minutes generally supported a more hawkish view which pushed out expectations of an interest rate rise. The US central bank confirmed the end to its quantitative easing program, which will cease further bond purchases. Conversely, the Bank of Japan announced it would be buying more government bonds, as part of its additional stimulus program.

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Cat: Market commentary
10 Sep

Market Commentary September 2014

Global equity markets were positive over the month of August. US equity markets were boosted by generally positive macroeconomic data while conversely in Europe, economic growth deteriorated and deflationary fears remained.

Asian and emerging markets provided gains despite continued tensions between Russia and Ukraine. Fixed income markets were well grounded, following elevated demand for low risk assets. US equity markets surpassed all-time highs over the month, ending with strong gains. Consumer sentiment indicators rose showing greater optimism among high income households. Manufacturing data also rebounded with production firmly on track over the third quarter. Second quarter GDP was revised up to 4.2%, largely due to an increase in non-residential fixed investment. Unemployment rose to 6.2% in July, higher than expectations.

European equity markets were positive for the first month since May. Central bank President Mario Draghi provided a boost to markets as he hinted that the bank was ready to utilise additional stimulus measures if necessary. Italian second quarter GDP was announced at -0.2%, lower than expectations and placing the country’s economy in technical recession. Eurozone inflation estimates fell to 0.3% in August, from 0.4% in July. Italy announced inflation at -0.2%, entering deflation. Unemployment remained unchanged at 11.5% in July.

UK equity markets gained, despite a generally disappointing month of data announcements. The Bank of England maintained its QE program and interest rates at its central bank meeting. The minutes later revealed that two of the nine committee members voted for a rise in interest rates. This was the first time since July 2011 that all members did not vote unanimously. UK average wages recorded their lowest rise on record. Data was however distorted due to a high number of employees deferring their bonuses following more advantageous tax rules. CPI inflation fell to 1.6% in July, with falling clothing prices providing the largest downward contribution. UK retail sales were lower than expected in July, recording their lowest annual gain since November. Unemployment fell to 6.4% in June, the lowest rate since late 2008. UK house prices increased 10.6% year-on-year in July, with the rate decreasing from the previous month, according to data provided by Nationwide.

Asian equity markets were positive with gains across the majority of single country markets. Chinese manufacturing data (provided by HSBC) was recorded at its highest rate in 18 months in July with the sector demonstrating expansion. Indian equity markets were supported by higher than expected economic growth and the prospect of future support from the Indian government. Japanese second quarter GDP was announced at -6.8% annualised. Consumers made significant purchases in the first quarter, ahead of the impending consumption tax increase, which had a significantly negative impact on second quarter data. Japanese unemployment rose to 3.8% in July, higher than consensus expectations. No changes were announced at the Bank of Japan’s central bank meeting.

Emerging market equities posted another month of gains, supported by Latin America which was the strongest performing region, driven by the Brazilian stock market. The Chinese equity market was negatively impacted by poor data announcements. Interest rates were cut by 0.25% to 3.5% in Chile, while rates were raised in Colombia by 0.25% to 4.5%. In retaliation to recent sanctions on Russia, President Putin announced a ban on food imports coming from the EU, US, Canada, Australia and Norway for up to one year. This adversely impacted markets given that Russia is the 5th biggest food importer in the world.

Fixed income markets also performed well, led by a strong rally in core government bonds which outperformed higher credit risk markets. This was following further Russian/Ukraine tensions and lower inflationary pressures. Comments from the ECB president provided further support, while a divide between the Bank of England committee members showed greater pressure to raise interest rates.

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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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