23 December Movers and shakers. Currencies (vs. USD)

Transcription

1 23 December 2013 US Federal Reserve (Fed) decides on modest tapering of quantitative easing (QE), but also emphasises interest rates to stay low for a long time US Q4 GDP revised further upwards, eurozone PMI survey points to continued growth in region, but divergence between France and Germany Reserve Bank of India (RBI) and Bank of Japan (BoJ) leave monetary policy unchanged Data light over next two weeks, but are expected to confirm ongoing recovery in US and other developed markets Movers and shakers Equity markets generally resilient despite Fed tapering, China weaker on spike in interbank rates Equities Commodities Bonds (%) MSCI ACWI S&P 500 Euro Stoxx FTSE 100 Nikkei 225 MSCI EM India Sensex Shanghai Comp WTI Crude oil Gold GlobalAgg Global EM Global HY US Corp Asian IG Equities Bonds (10-year) Weekly change (%) Best Italy Germany France Argentina Worst China Turkey Weekly yield change (bp) Indonesia Best India Mexico China Worst UK Turkey Weekly index change in local currency for G20 markets. Weekly change for G20 markets (10 yr bond yields). Currencies (vs. USD) Most currencies decline versus USD as Fed announced tapering of QE 0.5 Developed Asia Emerging (%) GBP EUR JPY CAD AUD CNY INR IDR KRW BRL MXN RUB ZAR TRY All the above charts relate to 16/12/ /12/2013. Past performance is not an indicator of future returns.

2 Macro Data and Key Events Past Week (16-20 December) Date Country Indicator Data as of Survey Actual Prior Monday 16 December Eurozone PMI flash composite Dec P China HSBC/Markit Manufacturing PMI Dec P Tuesday 17 December Germany ZEW Survey Expectations Dec US CPI Inflation (y-o-y) Nov 1.3% 1.2% 1.0% Wednesday 18 December India RBI Interest rate decision Dec 8.00% 7.75% 7.75% Germany IFO Business Climate Dec US Building Permits (mom) Nov -4.7% -3.1% 6.7% US FOMC Monetary Policy Decision Dec 0.25% 0.25% 0.25% Thursday 19 December US Existing Home Sales (mom) Nov -2.0% -4.3% -3.2% Friday 20 December US GDP annualised (q-o-q) Q3 F 3.5% 4.1% 3.6% Japan P Preliminary, Q Quarter, F Final Bank of Japan Monetary Policy Decision At the conclusion of its two-day policy setting meeting, the Fed announced the scaling back of its bond-buying program from USD85 billion per month to USD75 billion, lowering mortgage-backed security purchases by USD5 billion to USD35 billion and long term Treasuries also by USD5 billion to USD40 billion. This decision reflected the cumulative progress and the improved outlook for the job market. Going forward, the pace of tapering will remain data dependent, especially data on inflation and employment. As was expected, the Fed also highlighted a stronger commitment to keep its policy rates at low levels, well past the time that the unemployment rate declines below 6.5%, especially if projected inflation continues to run below the Committee s 2.0% longer-run goal. The Fed also revised down its core personal consumption expenditure inflation forecast, to remain below 2.0% until US Q3 GDP growth was revised up to 4.1% annualised q-o-q from a previous estimate of 3.6%, the strongest growth since Q4 2011, as spending on services such as healthcare and corporate investment was revised up. Indeed, overall consumer spending growth was revised up to 2.0% annualised q-o-q from a previous estimate of 1.4%. US headline CPI inflation was flat in November (consensus +0.1%), due to a 1.0% decline in seasonallyadjusted energy prices. Core prices rose 0.15% on an unrounded basis (vs. consensus +0.1%), slightly above the % range seen over the past three months. Lodging away from home (i.e., hotel stay) prices rose a large 2.9%, reversing most of the 3.1% drop in October and contributing to the firmer core reading. Over the past year, headline consumer prices rose 1.2% and core prices rose 1.7%. In China, the preliminary estimate of the HSBC manufacturing PMI survey for December unexpectedly fell, down from 50.8 in November to 50.5 (the consensus foresaw 50.9), suggesting a decelerating momentum in Q4 compared to Q3. Most of the decline resulted from the drop in the production component (from 52.2 to 51.8), while the order components of the survey rose marginally. In terms of inflation pressures, the input price and output price sub-indices both retreated over the month, with output prices falling below 50 (i.e., contracting). If cost push inflation looks benign for now, it comes at the expense of profit margins, which seem under pressure in the manufacturing sector. The eurozone flash composite PMI rose from 51.7 to 52.1 in December, above the consensus expectation of 51.9, after falling for two months. In addition to the eurozone aggregate, Flash PMIs were also released for Germany and France. The data showed increasing divergence between the two countries. Developments disappointed again in France after an already weak print in November. The French Composite Flash PMI declined 1 point in December (to 47.0), while its German counterpart remained broadly stable (-0.2 points to 55.2). The German ZEW investor expectations index jumped to 62.0 in December from 54.6 in November (consensus 55.0), hitting the highest level since April Current conditions improved from 28.7 to 32.8 points, an 18-month high. Expectations (68.3 vs in November) and current conditions (-54.4 vs in November) for the eurozone increased even more. India's November WPI inflation increased to 7.5% y-o-y from 7.0% y-o-y in October, significantly above consensus expectations of 7.0%. The increase was mostly driven by a sharp jump in food prices in November. Non-manufactured food prices rose 20% y-o-y. Within this, vegetable prices rose 95% y-o-y due to supply disruptions, which have continued for the past few months. Fuel inflation increased 11.1% y-o-y, although in sequential terms, there was some reduction to 0.9% m-o-m from 1.2% in October. September headline WPI inflation was also revised higher by 50bps to 7.0% y-o-y. Overall, the data suggests upside risks to RBI s end-march 2014 WPI inflation forecast of a central tendency of 6.5%. While there could be some downside pressure on food prices in the near term, the recent upside surprises, elevated inflation expectations and rising rural wages suggest that inflation may remain elevated in the first half of Despite this, the RBI took the market by surprise and decided to keep its policy rates unchanged. In the press conference that followed the meeting, the Governor made clear that the RBI is waiting for more data before acting, i.e., Indian monetary policy still has a tightening bias. The RBI hopes a softening in core inflation will materialise in the coming months even though RBI Governer Raghuram Rajan said he isn't comfortable with the current level. But the RBI "won't react to every spike in inflation that is temporary," Rajan told journalists. As was expected, the BoJ decided unanimously to maintain its policy unchanged, i.e., keep the current pace of JPY60 to 70 trillion annual increase in monetary base unchanged. The yen has been declining since the decision of the Fed to scale back its own QE program and consumer price indicators are all gathering pace, gradually converging towards the 2% target set by the BoJ in April. However, the Bank also made a clear reference to the potential volatility of domestic demand resulting from the upcoming VAT rate hike in April 2014, both before and after this date. 23/12/2013 Investment Weekly 2

3 This Week and next (23 December January 2014) Date Country Indicator Data as of Survey Prior Monday 23 December US University of Michigan Confidence Dec F Tuesday 24 December US Durable Goods Orders Nov 1.8% -1.6% US New Home Sales (m-o-m) Nov -1.4% 25.4% Wednesday 25 December Japan Markit/JMMA Manufacturing PMI Dec 55.1 Friday 27 December Japan National CPI Inflation (y-o-y) Nov 1.5% 1.1% Japan Industrial Production (y-o-y) Nov P 5.4% 5.4% Monday 30 December US Pending Home Sales (y-o-y) Nov -2.2% Tuesday 31 December US S&P/Case Shiller Composite-20 house prices (y-o-y) Oct 13.35% 13.29% Thursday 2 January Eurozone PMI Manufacturing Dec F China HSBC/Markit Manufacturing PMI Dec US ISM Manufacturing Dec Friday 3 January UK Mortgage Approvals Nov 69.7K 67.7K P Preliminary, Q Quarter, F Final This week and over the Christmas period, data releases will become thin on the ground. US Durable goods orders fell -1.6% in October, but a rebound is expected in November number as business confidence remains strong and a lot of uncertainty for businesses has been removed with the recent fiscal agreement between Democrats and Republicans in Congress. The University of Michigan consumer confidence survey is also expected to show an increase for similar reasons. Improving conditions in the labour market with growing employment and rising wages also should support consumer sentiment. The US ISM manufacturing survey is expected to remain close to its November level, which was the highest level since April Regional US manufacturing surveys such as the Chicago PMI and Richmond Fed manufacturing index should also provide some evidence of how the US industrial sector is performing in the last month of the year, though neither survey is expected to change much from November. Japanese inflation is expected to increase further towards the BoJ s 2% target and core inflation is forecast to rise above 1% for the first time since This should relieve any pressure on the BoJ to further increase the size of QE until the impact of the sales tax in April 2014 becomes clear. In China, the preliminary estimate of the HSBC manufacturing PMI survey for December is expected to be confirmed at 50.5 when the final number is released in January. Market Moves Equity Markets US and European equity markets were resilient to the announcement of tapering by the Fed. Indeed, the US S&P 500 reached a fresh all-time record high after tapering was announced on Wednesday, and European stocks also moved higher. Over the week as a whole, the S&P 500 Index was up 2.4% and Dow Jones Industrial Average up 3.0%. The Euro Stoxx 50 Index ended the week 4.4% higher at 3,049. Asia ex-china stocks advanced as the beginning of QE tapering reduced uncertainty and was already priced in. The Fed also insisted that monetary conditions will remain extremely accommodative with low policy rates for an extended period of time. Furthermore, during the week, the size of the Fed's balance sheet reached the USD4 trillion mark, confirming that the enormous amount of money injected over the past four years will remain in place even after QE tapering. The Nikkei-225 gained sharply (+3.0%), boosted by the depreciation of the yen. Indian stocks also grew faster than other markets in the region (+1.8%), while Korea's Kospi gained 1%. On the downside, Chinese stocks retreated quite sharply after the release of mild manufacturing PMI data for December and, later during the week, a rapid acceleration in money market rates. The 7-day Shanghai Interbank Offered Rate reached 7.65% Friday, its highest level since the end of June, resuscitating concerns of a liquidity crunch ahead of the end-year holiday and the resumption of IPOs in January. The Shanghai Composite lost 5.1%. Core government bond yields edge higher US Treasury yields and core eurozone bond yields edged modestly higher over the week, as the Fed announced it was slowly tapering QE and as the economic data from the developed world was broadly speaking encouraging (US Q3 GDP upward revision, eurozone flash PMI survey, German ZEW survey). Over the week, US 10-year Treasury yields were up 3bps, German 10-year yields up 4 bp and French and UK 10-year yields were also up modestly. Commodities Crude oil prices gained on the back of higher than expected demand and after the Fed decided to taper its QE program, a sign that the US economy is progressively gaining traction. Similarly, the eurozone seems to have stabilised, which is also a positive for crude oil. Gold declined over the week, at one point falling below USD1,200 per ounce for the first time since 2010, after the Fed announced the partial unwinding of its bond-buying program and as the inflation outlook remained benign, especially in the US, but also in the eurozone. 23/12/2013 Investment Weekly 3

4 Market Data 1-week 1-Month 3-Month 1-Year YTD 52-Week 52-Week Fwd Close Change Change Change Change Change High Low P/E Equity Indices (% ) (% ) (% ) (% ) (% ) (X) World MSCI AC World Index (USD) North America US Dow Jones Industrial Average 16, ,288 12, US S&P 500 Index 1, ,824 1, US NASDAQ Composite Index 4, ,112 2, Canada S&P/TSX Composite Index 13, ,517 11, Europe MSCI AC Europe (USD) Euro STOXX 50 Index 3, ,107 2, UK FTSE 100 Index 6, ,876 5, Germany DAX Index 9, ,425 7, France CAC-40 Index 4, ,356 3, Spain IBEX 35 Index 9, ,064 7, Asia Pacific MSCI AC Asia Pacific ex Japan (USD) Japan Nikkei-225 Stock Average 15, ,943 9, Australian Stock Exchange 200 5, ,457 4, Hong Kong Hang Seng Index 22, ,112 19, Shanghai Stock Exchange Composite Index 2, ,559 1, Hang Seng China Enterprises Index 10, ,354 8, Taiwan TAIEX Index 8, ,502 7, Korea KOSPI Index 1, ,063 1, India SENSEX 30 Index 21, ,484 17, Indonesia Jakarta Stock Price Index 4, ,251 3, Malaysia Kuala Lumpur Composite Index 1, ,852 1, Philippines Stock Exchange PSE Index 5, ,404 5, Singapore FTSE Straits Times Index 3, ,465 2, Thailand SET Index 1, ,650 1, Latam Argentina Merval Index 5, ,825 2, Brazil Bovespa Index 51, ,473 44,107 NA Chile IPSA Index 3, ,619 3, Colombia IGBC Index 13, ,264 12, Mexico Index 42, ,075 37, EEMEA Russia MICEX Index 1, ,566 1, South Africa JSE Index 44, ,286 37, Turkey ISE 100 Index 69, ,398 63, week 1-Month 3-Month 1-Year YTD Close Change Change Change Change Change Bond indices (%) (%) (%) (%) (%) BarCap GlobalAgg (Hedged in USD) JPM EMBI Global BarCap US Corporate Index (USD) BarCap Euro Corporate Index (Eur) BarCap Global High Yield (USD) JPM Asian Investment grade (USD) HSBC Asian Bond Index /12/2013 Investment Weekly 4

5 Market Data (cont.) 1-week 1-Month 3-Months 1-Year Year End Bonds Close Ago Ago Ago Ago 2012 US Treasury yields (%) 3-Month Year Year Year Year Developed market 10-year bond yields (%) Japan UK Germany France Italy Spain week 1-Month 3-Month 1-Year YTD 52-Week 52-Week Commodities Change Change Change Change Change High Low Close (% ) (% ) (% ) (% ) (% ) Gold 1, ,696 1,180 Brent Oil WTI Crude Oil R/J CRB Futures Index LME Copper 7, ,346 6,602 23/12/2013 Investment Weekly 5

6 Market Trends Government bond yields (%) Major currencies (vs. USD) US (lhs) Germany (lhs) Italy (rhs) Yields based on 10 y ear government bonds All v alues versus USD Eur ( lhs) GBP (lhs) JPY (rhs) Global equities Emerging Asian equities US Dow Jones Index (lhs) Euro Stoxx 50 Index (rhs) China Shanghai Index (lhs) Hong Kong Hang Seng (rhs ) India Sensex Index (rhs ) Other emerging equities Global credit indices Russia MICEX Index (lhs) Brazil Bovespa Index (rhs) BarCap EU corporate Index (lhs) BarCap US corporate Index (rhs) Emerging markets spreads (USD indices) Commodities (USD) USD USD HSBC Asian Bond Index (lhs) JP Morgan EMBI global spread index (rhs) Gold (lhs) Brent Oil (rhs) 23/12/2013 Investment Weekly 6

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