The global economy's response to a month of escalated tension

21 December 2015

World stock markets had a lot to deal with in November, with the terror attacks in Paris, a downed Russian warplane threatening an escalation of the Syria conflict, the worst week for China's Shanghai composite index since August, and worrying signs that the global economic slowdown is crimping world trade.

But the major US indices managed back-to-back winning months, the first such follow-up since May. Not that it was a performance to shout from the rooftops: the Dow Jones Industrial Average ended the month up 0.3 per cent, the broader S&P 500 index managed a 0.1 per cent gain for November, while the technology-heavy Nasdaq Composite index gained a relatively emphatic 1.1 per cent for the month.

Revision lifts US spirits

US investors were at least looking at a growing economy – an outlook that improved in November. Where the month had started with US third-quarter gross domestic product (GDP) growth reading 1.5 per cent, the serial revisers at the Commerce Department took another look at the economy in November, and instead saw 2.1 per cent growth. That recalculated growth rate (which could itself be revised on December 22) would put the American economy on track for 2015 growth of about 2.5 per cent, a slight improvement on the 2.4 per cent recorded in 2014.

The upward revision for the US was backed by a strong jobs report at the start of November, which saw 271,000 jobs created and wages showing a long-overdue increase.

ECB ready (again) to do all it takes

Elsewhere, economic growth was hard to come by, with Europe still dragging the chain. The European markets continue to show a Pavlovian response to the likelihood of further stimulus in the form of monetary policy easing by the European Central Bank (ECB). On November 20, ECB President Mario Draghi reaffirmed the ECB’s willingness to ‘do what we must’ to raise inflation as quickly as possible. That commitment flowed into a second straight uptick month for the Stoxx Europe 600 index, which rose by 2.7% for November, powered mainly by the German DAX, which surged by 4.9 per cent: Germany’s exporters stand to gain the most from ECB policy that is indirectly aimed at weakening the euro. Also on the Continent, Paris’ CAC-40 index defied the terrorist attacks to finish 1.2 per cent higher, while a last-day downturn pushed the FTSE-100 in London to a loss of 0.1 per cent for the month.

In Asia, the Shanghai Composite managed a 1.9 per cent gain for November, helped by a fresh set of further stimulus measures from the People’s Bank of China. In Japan the benchmark Nikkei share index added a respectable 3.5 per cent for the month, despite seeing Japan's industrial production fall short of expectations in October, and the concerns that further slowing in China will continue to affect Japan's exports. In Hong Kong the Hang Seng Index lost 2.8 per cent in November.

Commodities drag Australian market lower, but jobs growth surprises

At home, the Australian share market under-performed, with the S&P/ASX 200 index down by 1.4 per cent over the month, dragged lower by the deteriorating outlook for commodity prices and disappointment that the Reserve Bank of Australia (RBA) did not cut interest rates. In November the iron ore price fell to a ten-year low, gold slid to a fresh five-year low and most of the base metal group also sank, with iron ore, oil, copper, nickel and gold all posting new post-GFC lows. Agricultural prices also weakened.

Poor commodity prices had the expected effect on Australian resources stocks, with the materials sector down 12.5 per cent over the month, driven mainly by a diabolical month for BHP Billiton (down 21 per cent), sold off after a disastrous tailings dam failure in Brazil, and Rio Tinto (off 9 per cent). The energy sector lost 1.1 per cent (after gaining 8 per cent in October) with Santos the major culprit, matching BHP with a 21 per cent slump as it raised deeply discounted capital.

In contrast, the defensive healthcare sector added 5.3 per cent and the banking sub-index was up 0.2 per cent in November. The yield-sensitive sectors – the real estate investment trusts (REITs), utilities and consumer Staples – were among the worst performers on the market, as the thwarted expectations of a rate cut flowed through into a higher Australian dollar and a lift in longer-term Government bond yields.

Domestic economic data for the month was mixed, with private capital spending falling the most since at least the 1980s – surprisingly, across both the mining and non-mining sectors – while employment surged, and the unemployment rate dropped to 5.9 per cent. The economy added 58,600 jobs in October, with 40,000 of them full-time.

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