Cat: Market commentary
01 Dec

Market Commentary Q3 December 2014

Global equity markets ended the quarter with a mix of positive and negative returns, alongside an assortment of economic data.

US markets benefited from a sharp upward reversal in economic growth over the second quarter, alongside strong retail sales and housing data. In Europe, economic growth stagnated and the central bank surprised markets with a further reduction in interest rates to help boost growth. In the UK, investors were hesitant in the lead up to the Scottish referendum, which resulted in a majority vote to keep Scotland part of the Union. Asian markets were dragged lower towards the end of the quarter as protests across Hong Kong brought large parts of the city to a standstill. Emerging markets saw swinging sentiment from events between Russia and Ukraine, including multiple sanctions to and from Russia. Fixed income markets were broadly positive, given lower bond yields, particularly in Europe following central bank action.

US equity markets surpassed all-time highs over the quarter and ended marginally positive. Second quarter GDP was revised up to   4.6% in its final estimate, which was largely due to an increase in non-residential fixed investment and exports. The US Federal Reserve announced two further cuts to its quantitative easing program, reducing monthly bond purchases from $35bn to $15bn, as expected by the wider market. The central bank’s latest forecasts indicated the timing of rising interest rates, would be faster than initially anticipated. Retail sales were announced higher than expected in August, led by a sales increase in automobiles and building material/garden supplies. US unemployment fell to 6.1% in August, meeting expectations of a 0.1% fall over the month. The number of new home sales experienced their biggest monthly increase since 1992, with sales increasing to an annual rate of 504,000 in August.

European equity markets were flat over the quarter, recovering from a dip in early August. Equity markets tumbled as industrial production data in both France and Italy was announced significantly below expectations, as well as Portugal’s second largest bank missing debt repayments. Second quarter GDP remained at 0% in its second estimate, as rising household consumption was not high enough to offset lower investment and inventories. Italy entered technical recession following negative economic growth figures announced in the second quarter, severely impacting the Italian stock market. The European Central Bank announced a 0.10% cut in interest rates to 0.05% and deposit rates by 0.10% to -0.20%, taking market participants by surprise. President Mario Draghi added that the central bank would be initiating a ‘private quantitative easing package’ to help boost lending and liquidity. The announcement had a positive initial reaction within equity markets. The latest inflation figure was announced at 0.3% in September, well below the central bank’s target rate and the lowest level recorded in 5 years. Both manufacturing and services sector data came in lower than expectations in August. Unemployment was left unchanged at 11.5% in August.

UK equity markets were broadly flat over the quarter as markets were nervous approaching the results of the Scottish referendum, particularly following weekend poll results showing a majority in favour of a ‘yes vote’. The referendum ended with a 55% majority voting against the country becoming an independent nation. The result provided an instant boost to equity markets and the sterling currency. The Bank of England minutes showed that in two of the latest meetings, 2 out of 9 members voted for a 0.25% increase in interest rates. This marked the first time since July 2011 that all members did not vote unanimously. Second quarter GDP was revised up to 0.9% in its final estimate and CPI inflation fell to 1.5% in August, which was led by lower fuel and food & non-alcoholic drink prices. Unemployment fell to 6.2% in July, lower than the previous month’s figure and surpassing consensus expectations. Retail sales figures rose by 3.9% year-on-year in August, driven by a sales increase for household goods. Latest housing data provided by Nationwide revealed that UK house prices rose 11% over the year in August, surpassing consensus expectations.

Asian equity markets incurred marginal losses in broad terms, with some disparity of data across the region. The People’s Bank of China reported it would be injecting ¥500bn of stimulus into the five largest banks in China in order to boost growth. This was following announced foreign direct investment which came in at its lowest level in 4 years. Indian equity markets led the broader market higher following election results, where investors are expecting greater support for businesses from the Indian government. Conversely, in Hong Kong, thousands protested against planned changes to the democratic elections system, causing stock market and currency weakness. The central bank was forced to announce liquidity measures to support markets. In Japan, second quarter GDP fell to       -1.8% in its final reading. The data was misleading as consumers made significant purchases in the first quarter, ahead of the impending consumption tax increase, which negatively impacted second quarter data. Japanese unemployment fell to 3.5% in August, from 3.8% in the previous month.

Emerging markets were marginally lower, as continued geopolitical tensions weighed on markets. The conflict between Russia and Ukraine remained, with the uncertainty having an adverse impact on financial markets. The EU imposed further sanctions on Russian businesses including an arms embargo, restrictions on offshore energy exploration and curbs on Russian banks trading in European markets. President Putin reacted by announcing a ban on food imports coming from a number of countries for up to one year. It was feared the ban could have a relatively large impact, given that Russia is the 5th largest food importer in the world. The Bank of Russia raised interest rates from 7.5% to 8%, due to concerns around inflation, ongoing tensions and to protect the rouble.

President Obama sent air strikes to northern Iraq targeting ISIS terrorists, creating some aversion to risk-assets. Argentina defaulted on its debt after failing to make a $539m payment to a group of bond holders, marking the first default since 2001. Credit ratings agency Standard & Poor’s instantly downgraded the country’s rating to ‘selective default’.

In fixed interest markets, yields on government bonds fell, over a quarter of fairly rapid movements in either direction. The yield on the 10-year German bund fell below 1% for the first time on record, following the interest rate cut from the European Central Bank. Yields on the UK, German and US 10-year bond ended the quarter at 2.43%, 0.95% and 2.50% respectively. Yields across broader emerging market bonds (local currency) rose, following emerging market tensions and various rate rises.

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Cat: Market commentary
18 Nov

Market Commentary November 2014

 Global equity markets were mixed over the month. Earlier in the period markets reacted negatively to the IMF downgrading its global growth

forecast including sharp cuts in the Middle East, Russia and Japan, whilst sharply upgrading the US. Some markets came back to deliver positive returns for investors following a raft of more encouraging economic data and further stimulus measures announced by multiple central banks. Lower commodity prices adversely impacted selective emerging countries which are more reliant on revenues from materials and energy.

US equity markets provided strong relative returns over the month, as the market pulled back from an early dip. More defensive sectors including consumer staples and health care outperformed, while consumer discretionary and IT lagged the broader market. The US Federal Reserve announced it would be ending its stimulus program, which was widely anticipated by market participants. US unemployment fell to 5.9% in September, lower than expectations.

European equity markets ended the month lower, following worsening economic growth expectations. Industrial production in Germany experienced its greatest month-on-month decline since January 2009 in August. This was hindered by weak demand across Europe and China, as well as trade disruptions with Russia. Interest rates were left unchanged at the European Central Bank meeting. The bank however unveiled plans for its private quantitative easing package which included two years of asset purchases to stimulate the economy. The President later announced that the bank would consider additional stimulus measures if required. Eurozone inflation fell to 0.3% in September, the lowest level recorded in 5 years. 8 member states logged deflationary numbers. Unemployment was unchanged at 11.5% in August, in line with expectations.

UK equity markets suffered marginal losses over the month. UK third quarter GDP fell to 0.7% with the services sector showing the greatest contribution, slightly offset by decreases in mining and quarrying. UK CPI inflation fell to 1.2% in September, its lowest level in 5 years. The fall was largely attributable to lower transport costs and lower prices on recreational goods. Unemployment fell to 6% in August, falling lower than expected. Retail sales fell to -0.3% in September, largely impacted by significant falling clothing and footwear sales. The Bank of England announced no changes at its central bank meeting.

Asian equity markets performed well over the month, led by Hong Kong and Australian markets. Chinese third quarter GDP fell to 7.3%, driven by lower property investment, credit growth and industrial production. This marked the lowest annual growth rate in 5 years. CPI inflation fell to 1.6% in September, almost at a 5-year low. Chinese trade data surprised markets with import and export data much higher than expected. Japanese equity markets recovered early losses following the announcement of aggressive stimulus measures by the central bank. Japanese unemployment fell to 3.5% in August, lower than market expectations.

Emerging market equities ended marginally higher, led by the Emerging Asia region. Further falls in the oil price had a negative impact on more dependent countries, including Russia and UAE. The Russian central bank increased interest rates by 1.5% to 9.5%, in order to combat against currency falls. Poland cut rates by 0.5% to 2%, following more positive economic data. Dilma Rousseff narrowly won the Brazilian presidential election on behalf of the Workers’ Party. Equity markets suffered initially as Dilma was seen as less business orientated, compared to her opposition.

Fixed income markets delivered positive returns for investors, following lower bond yields, leading to higher prices in core government and corporate bonds. This came as central bank minutes generally supported a more hawkish view which pushed out expectations of an interest rate rise. The US central bank confirmed the end to its quantitative easing program, which will cease further bond purchases. Conversely, the Bank of Japan announced it would be buying more government bonds, as part of its additional stimulus program.

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Cat: Market commentary
10 Sep

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.

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