Market Commentary February 2014
Global equity markets declined over the month with Asia and emerging markets experiencing the largest falls. The US central bank decided to further reduce stimulus which adversely affected equity markets, despite being widely expected by market participants.
A number of emerging market currencies were negatively impacted, prompting various central banks to raise interest rates. Economic data was broadly positive, particularly unemployment which has fallen further across core developed economies. Fixed interest markets produced positive returns as investors searched for safety on the back of equity market volatility.
US equity markets pulled back from all-time highs with a negative start to the year. The US Federal Reserve announced further reductions to monetary stimulus given an improved economic outlook. The bank reduced asset purchases by $10 billion to $65 billion per month. Fourth quarter GDP was announced at 3.2% with strong growth driven by increased consumer spending and business investment. US unemployment was announced at 6.7% in December, falling to the lowest level since October 2008. A large proportion of the reduction was attributable to the number of workers falling out of the labour force altogether. US pending home sales experienced a sharp fall of 8.7% in December. Economists have identified disruptive weather and rising property prices as being the main contributing factors.
European equity markets fell in line with global equity markets. Heathcare, utility and financial sectors avoided the largest falls while technology, consumer staples and energy underperformed the broader market. Eurozone unemployment was announced at 12% in December, falling marginally from the previous month. The number of people unemployed had its largest monthly fall since April 2007. Recent manufacturing data has been strong highlighting firm expansion within private sector companies.
UK equity market prices decreased over the month despite various positive announcements. UK unemployment was announced at 7.1% in November. The number of people employed experienced its largest quarterly rise since record began in 1971. Mark Carney reassured there would not be an imminent rise in interest rates, despite the rate of unemployment drawing closer to the central bank 7% target. CPI inflation was confirmed at 2% in December. Falling utility and food prices helped reduce the rate over recent months. UK house prices rose 1.4% in December according to data provided by Nationwide. This is the highest monthly increase in 4 years. Retail sales recently recorded the fastest annual sales growth in over 9 years following a strong boost over the Christmas period.
Asian equity markets were negatively impacted by US central bank action as well as country specific issues. The People’s Bank of China provided an unspecified amount of emergency cash directly to a number of banks through its short-term lending facility. This was to help boost market liquidity. Chinese economic growth was recorded at 7.7% over 2013. This is the slowest annual growth rate in 14 years. Recent Chinese manufacturing data has been confirmed in line with expectations, remaining in expansion.
Emerging market equities experienced losses with markets adopting a ‘risk-off’ approach. Countries with higher levels of debt, inflation and larger current account deficits were worst affected. Interest rates were increased across multiple central banks including Brazil, Turkey, South Africa and India in order to prevent further currency depreciation. Macroeconomic data from Mexico was positive with stronger than expected industrial production and retail sales, while data from Russia and Turkey was less encouraging.
Fixed interest markets were broadly positive over the month with investors seeking safety from equity markets. Core government bond yields reduced leading to positive total returns. Corporate bonds also delivered positive returns while high yield bonds underperformed, adopting aversion to risk.