Cat: Market commentary
14 Feb

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.

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Cat: Market commentary
17 Jan

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.

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