Market Bulletin - Taking the lead
Comments by Janet Yellen and the latest batch of US jobs data make a December rate rise look increasingly likely.
Sometimes it is indecision, rather than action, that keeps audiences on the edge of their seats. So it has been for markets watching the Fed in recent months; until Wednesday, the US central bank had displayed a level of indecision worthy of Hamlet.
Last week, however, markets finally saw a denouement approaching. On Wednesday, Fed Chair Janet Yellen described a December hike in interest rates as a “live possibility”. Pointing to the positive performance of the US economy, she underlined that “domestic spending has been growing at a solid pace… some of the downside risks [have] diminished relating to global economic and financial developments… under-utilisation of labour resources [has] diminished significantly”.
Where Yellen pointed, data followed. On Friday, US payroll numbers were published. Job numbers increased by 271,000 in October, a record for the year and far ahead of the 180,000 expected. Unemployment is not far above the 4.9% level the Fed favours as a long-term norm. Yellen also made clear on Wednesday that she did not expect inflation to reach the Fed’s 2% target before the medium term and said this was why the Fed “will be able to move at a more gradual pace”. But the bigger news is that, after nine-and-a-half years without one, a December rise is now firmly expected on markets.
Having risen early in the week, the S&P 500 tracked in the opposite direction following Yellen’s press conference, although some positive results offered counterbalance – Facebook announced it had beaten revenue expectations in the third quarter, as user figures reached one billion for the first time.
The index dipped on payroll news due to rate hike expectations, but recovered most of its lost ground the same day, ending the week up 0.55%. The quick recovery may also reflect an earlier shift in market concerns away from US interest rate policy. A Barclays survey published last week showed that market concern over Fed interest rate policy has dipped dramatically in recent weeks.
In marked contrast to Janet Yellen’s Wednesday statement of intent, the Bank of England’s Mark Carney used Britain’s announcement-heavy ‘Super Thursday’ to plot a more dovish course than anticipated. The headline event, the Monetary Policy Committee’s (MPC) vote, went just as expected; members elected (by the usual eight votes to one) to leave rates unchanged at 0.5%. The MPC voted unanimously to leave its £375 billion stock of quantitative easing assets untouched.
The surprise came in Carney’s extended timescales. The Inflation Report published the same day indicated that the Bank’s 2% inflation target would not be reached for two years. Inflation would therefore remain sufficiently subdued, it said, even if there were no rate rises until 2017. Commentators disagreed on whether this meant rates would stay as low as 0.5% for quite that long. The FTSE 100 ended the week down a marginal 0.11%, its midweek movements largely reflecting the changing fortunes of energy and mining stocks.
In the eurozone, markets were caught between a number of healthy leading indicators announced during the week – and ongoing problems both at Volkswagen and in German manufacturing more broadly. The European Commission cuts its eurozone growth and inflation outlook for 2016, citing global pressures, cheap oil and a weak euro. Despite this, the FTSEurofirst 300 Index finished the week up 0.98%.
German manufacturing has driven eurozone growth; but data released by the Federal Ministry for Economic Affairs and Energy in Berlin on Friday showed that German manufacturing output in September fell 1.1% from its August levels (when it had dropped 0.6%). This was in addition to the news earlier in the week that Volkswagen had still not disclosed the full extent of its ‘defeat device’ pollution subterfuge – it also emerged that Porsches, Audis, SEATs and Skodas had been fitted with defeat devices.
There were brighter spots elsewhere. On Monday Commerzbank announced its first dividend payments since 2007, and eurozone factory data indicated expansion, while a declining euro boosted exporters on the FTSEurofirst 300. While manufacturing data looked more negative, the leading services indicator showed encouraging growth. Moreover, third-quarter results were strong for both Société Générale and Crédit Agricole, two of France’s largest banks, with retail banking providing the biggest tailwinds.
The unpredictability of China’s economy has, in recent months, been exceeded only by the unpredictability of the Shanghai Composite index. Last week the index opened the week with a slight dip, as both official and private purchasing managers’ indices for Chinese manufacturing delivered results below expectations. But the gloom was short-lived.
Hopes that gains in services are making up for losses in manufacturing were revived on Wednesday, as the non-manufacturing Purchasing Managers’ Index hit a four-month high. The Shanghai Composite index duly vaulted to an 11-week high; it is now technically a bull market once more. It was up a stunning 7.3% over the five-day period.
After the impact of China’s August stock market fall, last week provided further evidence that the country’s mix of dynamism and volatility makes its economic and financial ripples all the stronger. According to a Barclay’s survey released last week, 35% of investors polled said China – not Federal Reserve policy – is the chief risk to markets over the next 12 months.
As China fears persist, important policy shifts often get ignored, among them the Chinese central bank’s decision to increase the currency’s trading range, as part of the renminbi’s internationalisation process. “We still expect the renminbi will be managed to be on a stable path and any free movement going forward will have to be on the premise that there’s no heavy one-way flow – especially depreciation,” said Hugh Young of Aberdeen Asset Management. “The government will welcome and tolerate mild depreciation of the renminbi.”
Post Office privatisations are usually controversial, but last week’s listing of Japan Post followed 20 years of public debate and was the largest initial public offering (IPO) of 2015 – at $11.5 billion, it was more than double the value of the year’s next-biggest IPO.
“The good news is that this appears to be a successful issue, which should encourage more investment in the overall equity market by individuals,” said Robert White of Oldfield Partners. “With individual investors focused on companies and higher shareholder return, there will be greater pressure on managements to consider improving their shareholder return profile.”
Indeed, four fifths of the funds were provided by retail investors, among whom the great majority were individuals attracted by the 3% dividend yield. Nevertheless, the company’s vintage status is double-edged – Japan Post’s corporate culture remains a concern. “We would prefer to see trading calm down before considering the possibility of long-term investment,” said White. “Moreover, it is unclear how much flexibility the managements of the newly listed companies will have while the government retains such a large percentage of the shares. It may be a number of years before restrictions are lifted and they are able to compete fully with their sector peers.”
The listing itself was much more than mere metaphor for Shinzo Abe’s economic liberalisation package. Japan Post is the largest writer of life insurance in the country, looks after trillions of yen in savings, employs 240,000 full-time staff, and manages a distribution network of 24,000 post offices around Japan, which enable it to deliver 18 billion letters and parcels each year. It has a stronger claim than most to be the national bellwether. The successful listing makes it all the more encouraging that, despite China fears, the Nikkei rose 0.96% over the course of the week.
Aberdeen Asset Management and Oldfield Partners are fund managers for St. James’s Place.
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