Market Review September 2015

Transcription

1 Market Review September 2015 Markets remained volatile in September, impacted by the ongoing concerns over slower growth in China and other emerging markets and fears over possible contagion to the global economy. Confusing messages and commentary from global central banks regarding the extent of the potential risks posed to developed economies by slowing growth in emerging markets added to investor uncertainties and contributed to further derisking and selling pressure in equities but in contrast, was supportive of bond markets. While economic data in developed markets, particularly in the Eurozone and the US, remained relatively resilient and consistent with growth of 1.5/2% in the Eurozone and 2/2.5% in the US, a continuation of generally weaker economic news flow across emerging markets in general and mixed releases in China contributed to ongoing fears and uncertainties over the global economy due to concerns over possible contagion from emerging markets. In particular, the fall in the Caixin China manufacturing PMI to a seven year low on weaker orders and output data and rising inventories added to concerns over a possible hard economic landing in China, despite some improvement in industrial production, retail sales, infrastructure spend and the property market during the month. Softer industrial production and export data in many Asian countries added to the fears over the extent of the economic slowdown across emerging markets while the credit rating downgrade of Brazil posed additional funding difficulties and growth constraints in that economy and raised concerns over possible downgrades in other emerging market countries. The expected support to markets from more the increased likelihood of more accommodative monetary policies being maintained for longer across developed markets was negated somewhat when investors were unnerved by the greater than expected concerns expressed by the Fed about emerging market growth when deciding to delay the first US interest rate rise. While markets had discounted the decision not to raise rates in September, the explanation that the decision was taken due to the recent global economic and financial developments unsettled investors as it was perceived as being more indicative of greater underling threats to the US economy than previously suspected. The Fed subsequently tried to ease these fears by confirming that the first rate rise is still expected later this year given the strong domestic fundamentals with the Fed merely delaying the decision because it wanted more time to ensure there are no negative spillovers to the US from developments in emerging markets. In Europe, the ECB suggested in early September that it could shortly expand its asset purchases in response to increasing downside risks to inflation but later downplayed the likelihood of an imminent change to policy when saying it needed more time and evidence to judge the impact of slowing emerging market growth on the Eurozone economy. In the 1

2 UK, while the Bank of England (BoE) left rates unchanged, there were opposing views expressed by BoE members in subsequent speeches regarding the possible path of UK interest rates and the risks posed by emerging markets. Some argued for even lower rates than currently due to the risks to growth in China and other emerging markets while others spoke of domestic inflation pressures justifying an early rate rise. Elections in Greece and Spain were completed without any apparent negative impact on markets with the previous Greek coalition being returned to power without the more extreme left wing of the Syriza party. The new government appears willing to implement the recently agreed bailout programme. In Spain, while the main pro-independence party won the largest share of votes in the Catalan regional elections, they failed to win an overall majority on their own and given the toning down of pre-election rhetoric, the risks of a disruptive secession debate in Catalonia were viewed as having been reduced. Over the month the FTSE All World equity index fell -3.3% (-3.2% in ). Japanese equities fell -7.7% (-6.2% in ) given disappointing economic news flow. European equities fell -4.2% (-4.3% in ), impacted by the weakness in Volkswagen and auto shares given the controversy over diesel emissions. Emerging market and Pacific Basin equities outperformed, falling only -1.7% (-2.6% in ) and -1.5% (-2.0% in ) respectively. Eurozone > 5 year bonds rose 2.0% given growth concerns and lowered inflation expectations with the German 10 year bond yield falling to 0.59% and peripheral spreads narrowing between 2/6bps in Spain and Italy. Commodity prices fell -5.6% given global growth concerns with Brent oil down -10.7% given the ongoing excess of supply over demand. The Euro weakened slightly to against the US dollar as some further easing of monetary policy is expected by the ECB at some point in coming months while the US Fed is expected to raise interest rates before the end of Q Markets In September Markets YTD Local Returns Euro Return Local Returns Euro Return Ireland Ireland UK UK US US North America North America Europe Europe Japan Japan Pacific Pacific Emerging Markets Emerging Markets World World EMU Govt Bonds >5yr EMU Govt Bonds >5yr Commodities Commodities

3 US Economics and Rates US economic was mixed but generally consistent with growth of 2/2.5% in the second half of the year. Q2 GDP was revised up 0.2% to 3.9% annualized with personal consumption up from 3.1% to 3.6%, equipment spending up from -0.4% q/q to +0.3% with upward revisions to structural spending in the quarter also evident. Inventories were revised down to $114bn from $121bn which should provide a relative benefit to Q3 growth. ISM manufacturing fell -1.6 to 51.1, services fell -1.3 to 59.0 while the composite PMI fell -0.4 to Small business confidence rose 0.5 to Industrial production fell -0.4% m/m while factory orders rose 0.4% m/m. Non-farm payrolls rose 140,000, slightly below expectations while the unemployment rate fell 0.2% to 5.1%. Average hourly earnings rose 2.2% y/y from 2.1% previously. Headline retail sales rose 0.2% m/m while consumer confidence rose 1.7 to Personal income rose 0.4% m/m while personal consumption rose 0.3% m/m. Headline durable goods orders fell -2.0% m/m after strong growth in previous months although orders ex transport were flat m/m while capital goods orders and shipments both declined - 0.2% m/m. Housing data remained mixed but was generally positive. House prices in the top 20 cities fell -0.2% m/m but were up 5.0% y/y. Housing starts fell -3.0% m/m while building permits rose 3.5% m/m. New home sales rose 5.7% m/m although existing home sales fell -4.8% m/m. House builder sentiment rose 1 to 62, a high for the current recovery. CPI fell -0.1% m/m and was up 0.2% y/y. Core CPI ex food and energy rose 0.1% m/m and was unchanged at 1.8% y/y. The Fed left policy unchanged at the September meeting. Expectations for an interest rate rise at the September meeting had faded since early August given concerns over the outlook for Chinese growth and comments from some Fed members that the case for a rate rise in September had become less compelling since the previous Fed meeting in July. The Fed indicated that while domestic fundamentals were close to justifying an interest rate rise, recent global economic and financial developments contributed to the decision not to raise rates at this time. Members believed they needed a little bit more time to be sure no spillovers from developments in international economies threatened the US economy. The Fed appeared to be less confident in achieving its 2% inflation target over the medium term and highlighted softening inflation expectations and suggested some slack still remains in the labour market despite the significant improvements already made. Despite deciding not to raise rates in September, the majority of Fed members still believed an interest rate rise would be appropriate before year end. Forecasts for the level of the Fed funds rate at the end of 2016 and 2017 were reduced to 1.375% and 2.625% respectively while the end 2018 forecast was set at 3.375% and the estimate for the long term neutral rate was reduced to 3.5%. 3

4 The GDP forecast for 2015 was revised slightly higher to 2.1% while forecasts for 2016 and 2017 were reduced slightly to 2.3% and 2.2% respectively. Unemployment was estimated to stabilize at 4.8% through 2016/17/18, just below the long term equilibrium of 4.9%. The Fed commentary at the meeting was significantly more dovish than the market had been expecting and contributed to expectations for the first US rate rise being delayed further until Q In subsequent commentary, Fed Chairperson Janet Yellen rowed back a little on some of the more dovish commentary and apparent concerns over the potential impact on US growth from international developments at the time of the Fed meeting. Yellen highlighted that both she and the Fed still expected it would be appropriate to raise interest rates before the end of 2015 and she downplayed to some extent the risks posed to the US economy from easing growth elsewhere. By month end, market expectations were that the first US rate rise would occur early in European Economics and Rates European data was mixed both across hard data and sentiment surveys but generally was consistent with a continuation of an improvement in the recent growth trend. Eurozone Q2 GDP was revised up 0.1% to 0.4% q/q and 1.5% y/y with consumption and trade being the main contributors to growth. Q1 growth was also revised higher to 2.1% annualized resulting in growth in the first half of the year of 1.8%. The Eurozone composite PMI slipped -0.4 from a four year high to 53.9 with services down -0.4 to 54.0 and manufacturing down -0.3 to ZEW expectations fell to 33.3 and Sentix business sentiment fell -4.8 to Economic confidence rose 1.5 to 105.6, a postrecession high, industrial confidence rose 1.5 to -2.2, services confidence rose 2.2 to 12.4 and the overall business climate indicator rose 0.13 to Industrial production rose 0.6% m/m and 1.9% y/y while construction output rose 1.0% m/m and 1.8% y/y. Retail sales rose 0.4% m/m and 2.7% y/y while consumer confidence fell -0.2 to Employment across the Eurozone grew 0.3% q/q and 0.8% y/y while unemployment was unchanged at 11.0%. Money supply growth slipped a little with M3 growing 4.8% y/y from 5.3% previously. Headline inflation was down -0.1% y/y while core inflation was unchanged at 0.9% y/y. The German composite PMI fell -0.7 to The IFO business climate gained 0.2 to although ZEW expectations fell to 12.1 despite the ZEW current situation index rising 2.2 to Retail sales fell -0.4% m/m but were up 2.5% y/y while consumer confidence slipped -0.2 to 9.6. Industrial production rose 0.7% m/m and 0.5% y/y although factory orders fell -1.4% m/m. The French composite PMI rose 1.2 to Business confidence was unchanged at 100 while consumer confidence rose 4.0 to 97 and consumer spending was flat m/m but rose 1.6% y/y. Industrial production fell -0.8% both m/m and y/y. In Spain, the composite PMI rose 0.5 to 58.8, industrial 4

5 production rose 5.2% y/y and retail sales rose 3.1% y/y. Mortgage approvals rose 21.8% y/y while mortgage lending grew 47.8% y/y. The Italian composite PMI rose 1.5 to 55.0 while industrial production rose 1.1% m/m. Retail sales rose 0.4% m/m m/m while consumer confidence rose 3.4 to and business confidence rose 1.5 to Unemployment fell 0.1% to 11.9%. The ECB left policy unchanged at the September meeting. There were significant changes to the inflation forecasts with inflation now expected to be 0.1% in 2015, 1.1% in 2016 and 1.7% in 2017 with the risks to these said to be to the downside. GDP forecasts were set at 1.4% in 2015, 1.7% in 2016 and 1.8% in While highlighting the positive impact on growth and inflation of monetary actions already undertaken, the overall tone of the meeting and subsequent press conference was dovish. The ECB highlighted it is ready, willing and able to adjust the size, composition and duration of its current asset purchase programme if required and announced an increase in the self-imposed limit on the amount of each bond in issuance that it can purchase within the asset purchase programme from 25% to 33%. These comments were believed to suggest that an expansion of the ECB s asset purchase programme was likely in coming months. In a subsequent speech to the European parliament ECB President Draghi however appeared to downplay the possibility of an immediate expansion of the asset purchase programme when highlighting that despite increased risks to growth and inflation due to the emerging market slowdown, the ECB needed more evidence and time to determine the actual impact of the slowdown on the Eurozone economy. UK Economics and Rates UK data, while mixed was generally better. Q2 GDP was confirmed at 0.7% q/q and while the growth rate was revised down to 2.4% y/y from 2.6%, this was due to revisions to GDP for previous quarters and years. Final demand remained strong, up 0.8% q/q with household spending and business investment rising 0.8% q/q and 1.6% q/q respectively. Net trade was surprisingly strong, with the current a/c deficit falling from 5.2% to 3.6% of GDP. Elsewhere, the composite PMI fell -1.5 to 55.1 with services down -1.8 to 55.6, manufacturing down -0.4 to 51.5 while construction rose 0.2 to Headline retail sales rose 0.2% m/m and 3.7% y/y while consumer confidence fell -4 to 3. Unemployment fell 0.1% to 5.5% with numbers employed up 42,000 over three months from a fall of -63,000 previously. Average weekly earnings ex bonuses rose 2.9% y/y from 2.8% previously. Industrial production fell -0.4% m/m but was up 0.8% y/y while construction output fell - 1.0% m/m and -0.7% y/y. CPI rose 0.2% m/m and was flat y/y. The Halifax house price index rose 2.7% m/m and was up 9.0% annualised over 3 months compared to 7.8% previously while mortgage approvals rose 1,200 to 71,000 per month. 5

6 The Bank of England (BoE) left policy unchanged in an 8:1 vote. The minutes noted the possibility of slowing global growth adding to the headwinds being experienced by the UK economy. The developments however were not viewed as being sufficient enough to change the overall view on the economic outlook, despite a slight lowering of the GDP forecast for Q3 to 0.6% q/q from 0.7% due to weakness in services. The improvements in the Eurozone and in developments relating to Greece were mentioned as counterbalances to developments in China and emerging markets. Debate continues over the outlook for inflation with a general expectation of a pick up towards year end with some members seeing upside risks to inflation relative to target. Following the meeting, expectations are that the first UK interest rate rise will occur in Q Opposing views in relation to the future path of UK interest rates were expressed by BoE members in individual speeches towards month end with the BoE economist, Andy Haldane, suggesting further interest rate cuts might be necessary to deal with any contagion from the slowdown in emerging markets while others argued risks of rising inflation from wage pressures and easing of deflationary pressures from previous strength in sterling could lead to early interest rate rises. Asian Economics and Rates Japanese data generally disappointed. Q2 GDP was revised slightly higher to -0.3% q/q from -0.4% although the reason for the upward revision was disappointing, mainly being due to increased inventory build with its contribution to growth rising to 0.3% from 0.1%. Business spending was revised down from -0.1% q/q to -0.9% while consumption was revised marginally higher to -0.7% q/q from -0.8%. Elsewhere, industrial production fell -0.5% m/m but was up 0.2% y/y while machine orders fell -3.6% m/m. Retail sales rose 0.8% m/m and were flat y/y while consumer confidence rose 1.4 to Exports rose 3.1% y/y while imports fell -3.1% y/y. The composite PMI rose 1.4 to 52.9 although the manufacturing PMI fell -0.8 to The Economy Watchers current reading fell to 49.3 while the outlook reading fell -3.7 to Small business confidence rose 0.2 to Bank lending growth improved to 2.8% y/y from 2.7% y/y. The tertiary index rose 0.2% m/m. Headline CPI rose 0.2% y/y while core CPI ex fresh food and energy was up 1.0% y/y. The Bank of Japan (BoJ) again left policy unchanged in an 8:1 vote. The BoJ did not change its view on the global growth outlook when noting that overseas economies, mainly developed economies, have continued to grow at a moderate pace despite the slowdown in emerging economies. Despite downgrading the outlook for Japanese exports and production, it maintained an upbeat view of the domestic economy when saying business investment continued to trend upwards with profits continuing to improve markedly while consumption was described as resilient. The BoJ believes the slowdown in emerging market economies will end relatively soon. A tightening output 6

7 gap, stable household inflation expectations and changes in corporates price setting behaviours were cited as reasons for believing price levels will continue to rise although it was recognized that the timing of the achievement of the 2% inflation target could be delayed by the path of oil prices. Despite the continued upbeat economic assessment, it is possible that following the recent weaker domestic economic news flow, the BoJ will have to downgrade its economic outlook at its October meetings. Chinese data was mixed with survey data being weak while hard data showed some improvement. Overall however, releases continued to show signs of a slowing growth environment. The Caixin manufacturing PMI fell -0.3 to 47.0, the lowest reading in seven years while services fell -2.3 to 51.5 and the composite index fell -1.4 to Official manufacturing PMI fell -0.3 to 49.7 while services fell -0.5 to Exports fell -5.5% y/y from -8.3% previously while imports fell -13.8% y/y from - 8.1% previously. Retail sales growth improved to 10.8% y/y from 10.5% previously, industrial production growth improved slightly to 6.1% y/y from 6.0% while fixed asset investment growth slipped to 10.9% y/y from 11.2%. Industrial profits fell -8.8% y/y from -2.9% y/y previously. Monthly new lending figures fell as distortions from measures to support the stock market fell out with new loans falling Rmb 770.4bn to Rmb bn during the month. Irish Economics Economic releases generally remained positive. Q2 GDP was ahead of expectations, rising 1.9% q/q or 6.7% y/y. Q1 was revised up to 2.1% y/y. In Q2, consumer spending grew 0.4% q/q or 2.8% y/y. Investment spending rose 19.2% q/q or 34.2% y/y. Exports rose 6.3% q/q or 13.6% y/y. The current account surplus rose to 2,704 m in Q2 or 5.2% of GDP, up from 1,625m in Q1. Numbers on the Live Register on a seasonally adjusted basis fell 1,700 to 341,400. The unemployment rate was down 0.1 to 9.4%. Retail sales fell -4.0% m/m post the July increase in auto sales but were up 9.3% y/y. Core retail sales ex autos rose 0.9% m/m and 7.6% y/y. Consumer confidence rose 1.4 to Industrial production was again volatile, rising 7.2% m/m and 17.9% y/y. The monthly seasonally adjusted trade surplus fell - 495m to 3,621m. Exports were down - 6.4% m/m while imports fell -2.0% m/m. Given the better trade data year to date, the trade surplus for the year should rise for the first time since Irish residential property prices rose 2.3% m/m and were up 9.5% y/y. Dublin prices rose 2.8% m/m and 8.2% y/y. Prices outside Dublin were up 1.9% m/m and rose 10.8% y/y. CPI rose 0.4% m/m and was flat y/y. The composite PMI fell -2.1 to a still relatively high level of 59.7, manufacturing PMI fell -3.1 to 53.6 while services fell -2.3 to Exchequer returns to the end of August remained positive. The budget deficit of 1,291m compares 7

8 to a deficit of 6,332m for the same period last year. Excluding some one off items, the improvement in the deficit is approx. 3.5bn. Tax revenues were up 9.8% at 27,334m and compare to a growth target for the year as a whole of 4.9%. Net voted current expenditure was down -1.2% at 25,839m. Year to date returns suggest the official fiscal deficit target of 2.3% of GDP for 2015 can be beaten. Bonds The Merrill Lynch Eurozone Government bond index >5 years posted a gain of 2.04% in September, bringing the return for the year to date to +1.56%. Bond markets continued to be volatile in line with other markets as fears of a hard landing in the Chinese economy continued as well as wider concerns over emerging market countries. European bond markets were mainly driven by international events during the month with minimal domestic news. At the start of the month, the ECB president, Mario Draghi indicated they would stand ready to increase monetary accommodation if there was a weakening in the outlook for growth and inflation. The markets are beginning to expect an extension to the European quantitative easing program. The Catalonian elections produced mixed results which had minimal impact on the sovereign in the short term. The elections had been viewed as a proxy with regard to gaining independence for the Spanish region. The Federal Reserve failed to raise interest rates from zero at its meeting in September. Going into the meeting the markets had priced it at a 30% likelihood of them raising. However, in the press conference after the announcement, Fed Chairperson Yellen spooked markets by highlighting how concerned the Fed was of events in EM and China. This led to significant market volatility in most markets. Oil prices remained weak with Brent crude at $49 a barrel. Leading indicators in China continue to show a slowdown in the economy. The higher level of volatility in markets is likely to persist over the coming months until investors can become comfortable that China is not in a hard landing and that the US economy can withstand higher interest rates without returning to recession. Emerging Markets Emerging Market (EM) equities fell -1.7% (-2.6% in ). Markets were impacted by the continued concerns over Chinese growth and possible contagion to other EM economies. Latin American markets fell -3.2% with Brazil down -3.7% following a downgrading of its credit rating to junk status 8

9 by S&P to BB+. European markets were down -4.1% while Asian markets outperformed despite some disappointing economic releases, falling only -1.0% with China down -1.7%. Corporate Bonds Eurozone corporate bonds fell -0.70% during the month, negatively impacted by concerns over the global growth outlook and the potential impact on corporate default rates. Specific issues related to Volkswagen and emissions in their diesel cars and Glencore and its exposure to the commodity sector contributed to significant falls in their corporate bonds and led to increased negative sentiment towards the corporate bond space. Sectors which outperformed included construction machinery and finance while those which underperformed included metal and mining, autos and supermarkets. Commodities Commodities fell -5.6% (-5.3% in ). Energy fell -10.0% with Brent oil down -10.7% given the continued excess of supply over demand with OPEC and non OPEC production outside the US continuing to rise and inventory levels at record highs. Industrial metal prices fell -1.4% with most metal prices declining during the month on continued China growth concerns. Precious metals fell - 1.4% with gold down -1.5% on hedge fund selling and lack of physical demand. Livestock prices fell -6.3% with cattle prices falling to multi year lows on increased supply levels. Agricultural prices were the exception among commodities during the month, rising 3.1%. Corn rose 3.1% as crop estimates were reduced while wheat rose 5.7% on reports of crop damage and dry weather in Russia. October 5th 2015 This is intended as a general review of investment market conditions. It does not constitute investment advice and has not been prepared based on the financial needs or objectives of any particular person, and does not take account of the specific needs or circumstances of any person. The author cannot make a personal recommendation for any person and you should seek personal investment advice as to the suitability of any investment decision or strategy to your own needs and circumstances. Any comments on specific stocks are intended as an objective, independent view in relation to that stock generally, and not in relation to its suitability to any specific person. ILIM may manage investment funds which may have holdings in stocks commented on in this document. Past performance may not be a reliable guide to future performance. Investments may go down as well as up. Funds may be affected by changes in currency exchange rates.. FTSE, "FT-SE, Footsie, FTSE 4Good are trademarks of the Exchange and the FT and are used by FTSE under license. 9