19 October 2016
September provided investors with the usual fare of hyped events to anticipate, in particular major central bank decisions by the Bank of Japan and the US Federal Reserve, with a return to centre stage by the Organisation of Petroleum Exporting Countries (OPEC) thrown in for good measure, in the form of an informal meeting to discuss oil output.
In the wash-up, the Federal Reserve was swayed by weak international growth to hold off lifting US interest rates and the Bank of Japan also disappointed investors when it failed to expand its current asset purchase program, but OPEC did provide some news, deciding to limit production to 32.5 million barrels a day, representing the organisation’s first output cut in eight years.
Led by Kingdom of Saudi Arabia, OPEC had been hoping it could push US shale producers into bankruptcy by flooding the oil market and pushing down the price, but in the end the Saudis’ own budget problems rendered that idea the definition of a pyrrhic victory, so the Kingdom – and thus OPEC – blinked first.
Mixed data stays Fed’s hand
As for the Fed, both patchy US data and subdued international growth clearly came into its decision. The final revision for second-quarter US gross domestic product (GDP) growth came in at 1.4 per cent, up from the first quarter’s 1.1 per cent.
US personal consumption spending was flat in August, in its weakest reading since March, after rising 0.4 per cent in July, but personal incomes rose 0.2 per cent, boosting the personal savings rate to 5.7 per cent. Durable goods orders were also flat in August, and new-home sales fell by 7.6 per cent – the biggest one-month decline in nearly a year – after surging by nearly 14 per cent in July.
The August US ISM Manufacturing Index, released in September, came in lower than expected at 49.4, below 50, indicating a contraction in US manufacturing, after six months of positive readings. On the other hand, the ISM Non-Manufacturing Index for August suggested growth in services activity, at 51.4, albeit a lower than expected figure.
The August non-farm jobs figure also came in lower than expected, at 151,000 versus expectations of 180,000, and US retail sales also disappointed, falling by 0.3 per cent. But both major gauges of consumer attitudes were higher in September: the Conference Board’s consumer confidence index rose more than two points to 104.1, its highest level since August 2007 – the start of the financial crisis – while the University of Michigan’s consumer sentiment index ended the month at 91.2, up from 89.8 in August.
Tech surge bolsters US market
On US markets, the broad S&P 500 was unchanged over September, while the Dow Jones Industrial Average fell by 0.4 per cent and the Nasdaq Composite gained 2 per cent. For the quarter, the S&P 500 gained 3.9 per cent, the Dow Jones was up 2.8 per cent and the Nasdaq surged 10 per cent. The Nasdaq Composite was powered by the big technology names – Apple, Alphabet (the Google holding company), Intel, Microsoft and Amazon – all of which posted double-digit gains.
According to investment firm CIBC Wood Gundy, the fourth quarter of the calendar year has historically been the S&P 500 Index’s strongest quarter, with its average return being 5% and there being a 50 per cent probability of the fourth quarter’s return being greater than the return in each of the first three quarters.
In Europe, the European Central Bank (ECB) did not change any interest rates at the 8 Sep meeting and confirmed that it intends to purchase €80 billion of assets a month. Markets mostly expect this quantitative easing (QE) program to be extended at the December meeting. Upgrades began to creep in to economic estimates for Europe, after signs that the effects of the UK’s Brexit decision might be slightly less significant than initially expected.
Deutsche woes hamper European markets, signs of expansion in China
Towards the end of the month, European markets were hit by concerns over Deutsche Bank and the health of its balance sheet and a possible run on the German giant, with worries mounting that the bank could require government assistance. The German DAX Index dropped 0.8 per cent in September, dragging the Euro STOXX 600 to a 2.2 per cent loss, but for the quarter the indices were up by 8.6 per cent and 4 per cent respectively – the latter gain the first quarterly gain for the Euro STOXX 600 this year.
The UK’s FTSE 100 Index gained 1.8 per cent in September and 7.1 per cent for the quarter, while the CAC-40 Index in Paris added 0.4 per cent for the month, on the way to a 5.2 per cent gain for the quarter.
In Japan, consumer prices and consumer spending both slipped more than anticipated, increasing pressure on the government and the Bank of Japan. But activity in Chinese industry appeared to pick up, according to the Caixin purchasing manager index (PMI), which edged from 50.0 in August to 50.1 in September, supported by government spending. It was the third straight month that the national factory PMI had stayed out of negative territory.
On the Asian markets, the Nikkei 225 lost 2.6 per cent in September, but gained 5.6 per cent for the quarter; Hong Kong’s Hang Seng index added 1.8 per cent for September, and an outstanding 12.9 per cent for the quarter; while the Shanghai Composite Index’s 2.6 per cent loss for September crimped its quarterly gain to 2.6 per cent.
In Australia the S&P/ASX 200 rose by 0.5 per cent in September, enabling the index to finish the quarter up 5.1 per cent.
The MSCI World Index gained 0.6 per cent in US dollar terms, and 5 per cent for the quarter.
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