Market Commentary October 2014
Global equity markets suffered losses led by weakness in Asian and emerging markets. Poor data in China as well as protests in Hong Kong caused some disruption.
Broader emerging markets were impacted by falling commodity prices which have seen increased supply combined with weaker demand from China. The European Central Bank surprised markets with a further cut in interest rates, while the US Federal Reserve continued to tighten monetary stimulus. In the UK, markets failed to gain traction by month end following nervousness around the referendum vote. Fixed income markets suffered but later offset some losses as investors sought after safety from global events.
US equity markets fell over the month, with the broader market brought lower by cyclical sectors including energy, consumer discretionary and IT. Second quarter GDP rose to 4.6% in its final estimate, mostly attributable to increasing business investment and exports. The US Federal Reserve announced further reductions to its quantitative easing program, reducing monthly purchases from $25bn to $15bn. Unemployment fell to 6.1% in August, in line with expectations. Retail sales rose to 0.6% in August, led by a sales increase in automobiles and building materials & garden supplies. US new home sales rose to 504,000 in August, highlighting the biggest one month jump since 1992.
European equity markets were marginally positive over the month. The European Central Bank announced an interest rate cut to 0.05% and further lowered its negative deposit rate. The bank added that it would initiate a private quantitative easing package to help boost lending and liquidity. The euro was adversely impacted by the news, having a favourable outcome for export companies. Eurozone industrial production surpassed expectations, rising to 2.2% in July, higher than the previous months’ figure of nil growth.
UK equity markets ended the month lower, following market nervousness ahead of the referendum vote. The Scottish referendum ended with a 55% majority voting against the country becoming an independent nation. The latest Bank of England minutes revealed that 2 members (out of 9) again voted for an increase in the interest rate, taking the view that wage inflation may rise soon. Unemployment fell to 6.2% in July, lower than 6.4% the previous month. CPI inflation fell to 1.5% in August, attributable to lower fuel and food & non-alcoholic drink prices. UK retail sales rose 3.9% in August, driven by a sales increase for household goods.
Asian equity markets experienced sharp falls over the month, following a period of poor macroeconomic data and lower commodity prices. Chinese industrial production, retail sales and fixed asset investment all fell short of expectations. In Hong Kong, thousands protested against planned changes to the country’s democratic elections system, causing stock market and currency weakness. The central bank later announced liquidity measures to support markets. The People’s Bank of China also reported it would be injecting 500bn yuan stimulus into the five biggest banks, in the form of low duration, low interest rate loans. Japanese equity markets gained with export companies benefitting from yen depreciation. No changes were announced at the Bank of Japan meeting.
Emerging market equities were negatively impacted by commodity losses and poor data in China, as well as a number of adverse market events. Brazilian markets suffered as a result of election opinion polls showing Dilma Rousseff gaining momentum as the country’s future President. In Russia, President Putin outlined plans for ceasefire in eastern Ukraine, although the Ukrainian Prime Minister dismissed the proposal. The US and EU later implemented a new round of sanctions targeting Russia’s financial, energy and defence sectors. Turkish markets suffered following weaker second quarter GDP and higher inflation.
Fixed income markets were initially hindered by investors bringing forward interest rate rise expectations, leading to higher government bond yields. The bond market was later supported by investors seeking safety from global events. Investment grade corporate bonds generally outperformed government bonds over the month.