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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Cat: Market commentary
19 Jun

Market Commentary June 2014

Global equity markets were strong over the month of May despite economic growth worldwide generally falling short of consensus.

 

Various equity markets reached new highs over the month including the US and the UK, the latter surpassing its 14-year high. Indian equity markets broke through their all-time high following the success of the BPJ party, winning the Indian general election. The friction between Russia and Ukraine improved, as the Russian president expressed an interest in discussing a way out of the crisis. In fixed interest markets, government bond yields fell and corporate bonds also provided a positive total return.

US equity markets performed well over the month with the majority of gains in the second half, following comments from the US central bank suggesting monetary policy may remain looser for longer. US first quarter GDP second reading was announced at -1.0%, revised lower largely due to a greater than estimated decline in private inventories. Unemployment was announced at 6.3% in March, lower than the previous month’s figure of 6.7% and lower than expectations. Retail sales in April improved marginally, although lagged consensus forecasts due to falling sales across online retailers, appliances, electronics and furniture.

European equity markets were largely driven by the expectation that the central bank would shortly announce further monetary stimulus. Eurozone first quarter GDP was announced at 0.2%, lower than consensus expectations following flat economic growth in France and contraction in Italy. Inflation increased to 0.7% in April as package holidays, tobacco and electricity consumption drove the broader rate of inflation higher. Improved services data was offset by slower growth in manufacturing. Eurozone unemployment was announced at 11.8% in March, lower than consensus forecasts.

UK equity markets were positive over the month in a fairly inactive market period. UK first quarter GDP was announced at 0.8%, improving on last quarter’s growth figure but still trailing expectations. Interest rates were left unchanged at 0.5% and the quantitative easing program was maintained at the Bank of England’s May meeting. The rate of unemployment was announced at 6.8% in March, in line with forecasts and lower than 6.9% in the previous month.

Asian equity markets were supported by strong gains in the Indian equity market. The election result marked the first time in 30 years where India had a government with an overall majority. In China, the State Council set a range of market reforms to increase foreign investment, promote more efficient capital allocation and improve market transparency. Credit rating’s agency Standard & Poor’s upgraded the Philippine’s rating to investment grade status, having a positive impact on markets. Japanese first quarter GDP was announced at an annualised rate of 5.9%. This was considerably higher than expected, led by a significant increase in purchases, ahead of the upcoming increase in consumption tax. CPI inflation was confirmed at 2.7% in April, although the figure was nearer 1% when stripping out the increase in consumption tax.

Emerging market equities were positively impacted by the raft of positive news across Asia. Emerging Europe outperformed following improvements in Ukraine given Vladimir Putin’s announcement. In addition, Russia secured a $400bn deal to supply gas to China, the world’s leading energy user. Interest rates were cut in Turkey by 0.5% to 9.5% as well as a 0.10% rate cut in Hungary. Latin America underperformed the broader market as Brazilian GDP was announced at 0.2% in the first quarter, lower than forecasts.

Fixed interest markets produced broadly positive returns amid a period of disappointing economic growth announcements. The potential of prolonged monetary stimulus in the US was also supportive of the market. Bond yields fell across Europe adopting the view that the central bank would either reduce interest rates further, or extend the banks easing programme. Corporate bonds outperformed government bonds marginally over the month.

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