Market Watch – January 2014
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Market and economic overview
- Inflation rose by 0.8% in January, taking the annual rate of inflation to 2.7%. This is well past the mid-point in the RBA’s 2% to 3% target range.
- It now seems likely that the RBA Board will remove its easing bias and revise-up its near inflation forecasts in its Statement of Monetary Policy on 7 February.
- The Westpac-Melbourne Institute Consumer Confidence Index fell by 1.7% in January to a six-month low, with the weak employment market weighing on sentiment.
- Employment decreased by 22,600 in December, but the unemployment rate remained flat at a 4½ year high of 5.8%.
- Retail sales exceeded expectations for a fourth consecutive month, rising by 0.7% in November, led by a 2.2% increase in cafes and restaurants.
- The Fed’s policy statement was similar to its December 2013 announcement, although perhaps a little more upbeat.
- The US recorded mixed economic data in January. December quarter GDP growth increased by an annualized rate of 3.2%. The key drivers of output were consumer spending (+2.3%) and investment (+0.6%). Trade added +1.3%, but Government spending (due to the recent Government shutdown) subtracted 0.9%.
- The December employment report was impacted by poor weather.
- Retail sales rose by 0.2% for the month, while the ex-autos measure increased by the most since February 2013 at +0.7%.
- Housing activity was adversely affected by the cold weather, with housing starts (-9.8%), building permits (-3.0%) and new home sales (-7.0%) all weaker in December.
- The European Central Bank (ECB) left its monetary policy settings unchanged at its 9 January meeting, as widely expected.
- At the World Economic Forum in Davos, President Draghi confirmed that the ECB would consider buying packages of bank loans as a tool to fight-off deflation.
- Estimated Euro zone January CPI inflation was weaker-than-expected at 0.7%/year, driven by lower energy prices. The last time inflation was this low, the ECB cut rates.
- Retail sales increased by 1.4% in December to its highest level in 12 years (equal to December 2009), lifting hopes for a revival in the Euro zone.
- Unemployment remained ‘sticky’, unchanged at 12.0% in December, but better than expectations for 12.1%.
- The Bank of England Monetary Policy Committee (MPC) left its policy settings unaltered at the January meeting. The MPC minutes revealed an unchanged 9-0 vote to leave the bank rate at 0.5% and the asset purchase target at £375bn.
- Economic activity continued to gain momentum, with December 2013 GDP growth (0.7% for the quarter and 2.8% for the year) surging to its best level since 2007.
- The November employment report was stronger than expected. The unemployment rate fell to 7.1% from 7.4% in October.
- UK consumer confidence increased sharply in January, after three consecutive months of decline.
- December retail sales increased sharply by 2.8% to 6.1% for the year, driven by a surge in December department store sales (+8.7%).
- Core CPI inflation (excluding fresh food) was +1.3% for the year in December, up slightly from +1.2% in November.
- Japanese retail sales declined by 1.1% in December after a revised 2.0% gain in November. Annual sales decelerated to 2.6% from a revised 4.1% in November.
- The Chinese economy grew by 1.8% in the December after a revised 2.0% gain in November. Annual sales decelerated to 2.6% from a revised 4.1% in November.
- The Chinese economy grew by 1.8% in the December quarter of 2013, down from 2.2% in the previous quarter. This lowered the annual growth rate to 7.7% from 7.8%. Consumption and property construction were the bright spots, while production and investment disappointed.
- CPI inflation eased to 2.5% for the year in December, down from 3.0% for the year in November. Food prices rose by 4.1%, the largest contributor to inflation at 1.3%/pts.
- The Australian dollar (AUD) declined by 1.9% to finish January at $US0.8756. The weak domestic employment report, a rebound in the US dollar (USD), capital flows out of emerging markets, slightly weaker overall Chinese economic activity data weighed on the AUD.
- Commodities prices started 2014 on a subdued note due to low crude oil prices, and poor manufacturing data from China.
- A stronger USD and expectations of increasing Libyan supply contributed to a decline in the oil price (-4.0%) at the beginning of 2014.
- Iron ore prices fell to a six-month low on 30 January, pressured by weaker steel prices in China as trading activity wound down in the lead-up to the Lunar New Year.
- The S&P/ASX 200 Accumulation Index declined by 3.0% in January, weighed down by concerns over slowing Chinese economic growth momentum, emerging market turmoil and the gradual withdrawal of liquidity by the gradual withdrawal of liquidity by the Fed.
- Arguably the most significant company news released during the month was Twenty First Century Fox’s (-8.1%) announcement that it intends to delist from the ASX. The company is currently dual-listed in Australia and the US. Shareholders will vote on the Australian delisting in late March and, if the vote is successful, the delisting will occur in May.
- In other news, it emerged that department store operator Myer (-8.0%) had approached rival David Jones (-1.0%) regarding a potential merger in October 2013. This approach was rejected by David Jones at the time, but there is now some speculation as to whether a tie-up of the two companies is a possibility.
- The Australian listed property sector, as represented by the S&P/ASX 200 Property Accumulation Index, increased by 0.5% in January, outperforming the broader market by 3.5%. Share-market volatility, triggered by emerging market concerns, led to increased demand for stable, income generating assets such as property securities.
- In local currency terms, returns from global property markets rose by 2.1% in January. The US and Canada led global peers with an increase of 4.1% for the month, followed by the UK which rose by 4.0%. Japan under-performed, falling 1.0% during the month.
- Global share-markets came under pressure in January as emerging market concerns resurfaced, while economic data releases were mixed.
- The MSCI World Developed Markets Index decreased by 3.8% in USD terms and 1.8% in AUD terms over the month, its worst monthly outcome since May 2012. The US S&P500 Index fared little better, down by 3.6%.
- A mixed start to the European corporate earnings season also weighed on the Euro Stoxx 50 Index (-3.1%), while in London the FTSE100 Index was dragged 3.5% lower.
- In Asia, the Japanese Nikkei 225 Index plunged by 8.5%, more than reversing the 4.0% gain in December.
Global emerging markets
- The MSCI World Emerging Markets (‘EM’) Index declined by 6.6% in USD terms and by 4.7% in AUD terms in January.
- The MSCI EM Asia Index fell by 4.9% in USD terms and by 3.0% in AUD terms during the month.
- Indonesian shares were a strong performer with foreign investors purchasing net $US197m of shares. This was the first monthly increase since April 2013. The Indonesian Rupiah was fairly stable over the month at $US12,213 unlike its emerging market counterparts.
- China was the poorest performer, on concerns over an easing of economic momentum and rising credit risk. A Chinese trust firm negotiated a last-minute agreement to resolve a troubled high yield investment product, avoiding a default of nearly $US500m.
- The MSCI Emerging Markets EMEA Index declined by 7.5% in AUD terms over the month.
- The South African Rand (-5.6%) fell to a 10- year low, despite a surprise 50bp rate hike by the South African Reserve Bank.
- Latin American equity markets followed suit, with the MSCI Emerging Markets LatAm Index falling by 7.7% in AUD terms during the month. The MSCI Argentina Index (-23.9%) was the poorest performer in the region during January.
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