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.