Market Commentary January 2014
Global equity markets delivered strong returns in an end of year market rally. Much attention was drawn to the US central bank which announced it would start to reduce its monetary support of the US economy from January.
The accompanying comments that policy will remain focused on keeping interest rates low for a long time to come saw equity markets react positively. Emerging market equities and fixed interest markets reacted negatively to the announcements. Macroeconomic data was mixed although economic growth and unemployment data were largely positive within developed economies.
US equity markets surpassed all-time highs over the month ending the year with strong market gains. The US Federal Reserve agreed to reduce its asset purchase programme by $10bn per month from January. The central bank added that interest rates are expected to stay close to zero for some time past when the unemployment rate falls to 6.5%. The US Congress reached agreement on the federal budget ensuring government funding for 2 years and targeting deficit reductions of up to $23 billion. The second reading of US third quarter GDP was announced at 3.6%, higher than the initial estimate. US unemployment was announced at 7% in November, its lowest level in 5 years.
European equity markets finished higher over the month with corporate earnings generally showing improvement. Eurozone third quarter GDP was announced at 0.1%, narrowly avoiding economic contraction. Manufacturing data was however positive in line with market expectations for expansion in the sector. The credit ratings agency Standard & Poor’s observed that the Eurozone’s outlook would be upgraded if planned structural reforms can be successfully implemented.
UK equity markets performed strongly in December, partly in response to positive sentiment in the US markets. The final reading of third quarter GDP was announced at 0.8% which was broadly in line with market consensus. Minutes from the Bank of England meeting highlighted some concern that further strengthening of the pound could hamper economic growth. The CPI inflation figure was announced at 2.1% for November. Food and utility prices provided the largest downward contribution which was partially offset by rises in the transport, recreation and culture sectors. UK unemployment was announced at 7.4%, the lowest level since April 2009.
Asian equity markets saw minor falls over the month as investors considered the consequences of the announcement of stimulus withdrawal in the US. Markets in Thailand and the Philippines lagged the broader market while India outperformed. In China, inter-bank lending rates experienced another strong spike amid concerns over bad debts and the fragility of the banking sector. Japanese markets experienced another strong month ending the year with substantial market gains. Positive returns were seen across every market sector over the month. Retail sales and industrial production data continue to suggest conditions are improving, although reported third quarter GDP growth was revised lower with a less optimistic outlook for business investment and a build-up of inventories.
Emerging market equities produced negative returns with those countries having current account deficits experiencing the greatest falls. In Turkey, a corruption scandal involving family members of cabinet ministers put further downward pressure on the domestic market. In Mexico, government reforms aimed at tackling oil monopolisation provided markets with a boost. The country also received a credit rating upgrade by Standard & Poor’s. Russian equity markets were positive over the month encouraged by strong labour data and real wage growth.
In fixed interest markets, core government bond yields rose leading to negative total returns over the month. Lower credit quality bonds outperformed as a result of both their higher income yield and the tightening of credit spreads. The announcement of stimulus withdrawal in the US placed downward pressure on government bond prices with the rate of monthly bond purchases set to decrease from January.