Market Bulletin - Metal settle
Markets are starting to find their level as the commodities outlook brightens.
There was not much blue sky above markets this summer, but last week the clouds finally cleared and major equity markets enjoyed their best week for several months or, in some cases, years. Two drivers in particular lay behind the rally: greater confidence in the global commodities outlook, and a growing expectation that the US Federal Reserve will not be raising rates any time soon.
The most significant reversal in sentiment was towards commodities. Commodities have been one of the principal enemies of stocks this summer and of confidence in the global outlook more broadly. The drop in GDP growth figures in China was especially important in this regard; analysts report that China consumes more coal than, and almost as much in metals as, the rest of the world, while also accounting for approximately 10% of world oil demand. Yet fears over Chinese growth now appear to be priced in; and it is noteworthy that on Tuesday last week the IMF left its forecast of China’s 2015 GDP growth unchanged at 6.8% – hardly the stuff of crises.
Brent oil futures ended last week up 9.5%, copper was up 3.6% and zinc 9.8%, the latter helped by a Glencore announcement that it would be cutting zinc output by a third. Recent announcements of cuts by other miners, such as Freeport-McMoRan, have helped too.
Aside from the commodities reversal, the equity recovery reflected a more phlegmatic outlook for global growth in general and for US growth in particular. Fear of an imminent crisis is less prevalent than it was in August, but some disappointing figures from the US, and the release on Thursday last week of the minutes of the Fed’s September policy meeting, have persuaded many that the Federal Reserve will not raise rates until next year. The minutes showcased committee concern over the extreme stock market dips seen in August.
Arguably the most encouraging news for equity investors was the continued decline of the VIX, which tracks volatility on the S&P 500. On Monday last week, the index fell below 20 for the first time since August. (Above 20 implies severe market stress.) Growth expectations seem to be coalescing – coming months are expected to be merely unspectacular rather than disastrous. If that sentiment persists, equities should begin to stabilise, with potential for a comeback.
The S&P 500 rose 3.29% over the course of the week, its biggest weekly gain since December, having opened significantly higher on Monday. Aided by the oil price and expectations of a deferred Federal Reserve rate rise, gains were slightly chipped away at by concerns over technology companies.
Growing confidence in equities might have been even higher, were it not for the disappointing US payrolls data of two Fridays ago. Nevertheless, after two years of impressive job growth, it is perhaps unsurprising to see this begin to tail off – once the employment rate approaches the 5% mark, the squeezing of labour market slack begins to hit momentum.
Last week the US issued its first ever three-month Treasury bonds with a 0% coupon, implying that there is still market concern at prospects for both headline growth and corporate earnings. Nevertheless, yields on 10-year Treasuries ended the week up slightly at 2.12%, having opened on Monday at 2.07%.
Last week also saw the Trans-Pacific Partnership finally agreed between 12 Pacific Rim countries, who together account for 40% of global GDP. Expected to boost trade in the longer term, parties to the deal include the US and Japan, but not China.
While the S&P flagged slightly on Friday, the FTSE 100 completed its largest five-day gain since December 2011, rising 4.67%, supported by both interest rate expectations and its heavy weighting towards commodity stocks. Mining stocks enjoyed strong support, but so too did UK supermarkets. Despite its recent earnings announcement, Tesco rose a stunning 13.87% over the course of the week’s trading.
“Tesco has now completed the first year of a three-year turnaround of its business, and these changes are having a material impact on its profitability,” says Magellan’s chief executive Hamish Douglass, manager of the St. James’s Place International Equity fund. “It has made progress in restoring its balance sheet with the sale of its Korean business, closure of the UK defined benefit pension scheme and a substantial reduction in capital expenditure. Volume growth is encouraging, on-shelf availability metrics are at all-time highs and performance is improving at Tesco’s hypermarkets.”
News across the UK economy was more mixed. Figures released on Monday show the UK service sector Purchasing Managers’ Index (PMI) dropped to 53.3 in September, its lowest rate since April 2013 and far below the 56 that had been forecast. (PMI at 50 implies neither growth nor contraction.) Markit, which publishes this data, said that the latest figures suggested UK growth had slowed to just 0.3%.
On Wednesday, total UK industrial production was shown to be in a healthier state, rising 1.9% in August to a four-year high, although the figure has to be set in the context of UK oil and gas production surging 25.6% in 2015 thus far. Manufacturing output was more subdued, rising 0.5% versus the previous month but still down 0.8% compared to August 2014.
On Thursday the Bank of England’s Monetary Policy Committee voted 8–1 to leave interest rates unchanged at 0.5%, noting that the inflation outlook is weakening, the oil price remains low, German exports are down and that emerging markets are struggling but not in crisis.
On the upside, UK consumer figures were much improved. UBS noted that cash available for discretionary spending has risen 9% this year in the UK, while Visa reported that summer spending on leisure in Britain was its highest in six years of tracking the data.
Meanwhile, attention increasingly turned to the ‘Brexit’ referendum, and last week French President François Hollande warned that the UK needed to accept the principle of greater European integration if it was to remain in the union.
In France, industrial output rose 1.6% from the previous month, far in excess of expectations – the auto sector surged 6.5%.
Industrial data out of Spain and Germany earlier in the week was more disappointing. German industrial output fell 1.2% in August, having risen 1.2% in July. A much milder dip of around 0.2% had been expected. In Spain, output fell at the fastest pace since April 2003, dropping by 1.2%.
But disappointment in industry raised expectations of a further round of quantitative easing from the European Central Bank, giving stocks a boost on Wednesday and Thursday. The FTSEurofirst 300 enjoyed its strongest week since January, rising 4.44%. Despite the disappointing news from Germany (and from some European banks), the German 10-year government bond yield rose slightly, as investors continued to gain in confidence.
In Japan, the Nikkei 225 enjoyed its first weekly rise in a month, ending up an impressive 4.03%, after the Bank of Japan left its accommodative monetary policy unchanged on Wednesday.
In emerging Asia, expectation of a Fed rate rise deferral to 2016 buoyed stocks. The Shanghai Composite was closed for much of last week due to the public holiday, but ended strongly on Friday, rising 1.25% in a single day’s trading, indicating that the recent mega-correction might now be over.
Magellan is a fund manager for St. James’s Place.
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