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.