14 November 2017
Global stock markets moved mostly higher in October, led by continued strength in the major US indices. The Dow Jones Industrial Average led the big three US indices higher, gaining 4.3%, while the S&P 500 rose by 2.2% and the Nasdaq Composite Index added 3.6%. October was the biggest monthly percentage gain for all three since February and the seventh straight positive month for both the Dow and the S&P 500, while the Nasdaq posted its fourth straight monthly gain to end the month at a record high.
US jobs hit by hurricanes
US economic data was affected by Hurricanes Harvey, Irma and Maria, as well as wildfires in California, but overall the picture was positive. Earlier in the month, the September jobs number disappointed, with the US economy losing 33,000 jobs compared to an average gain of 176,000 new jobs per month so far this year. This was the first time in seven years that the US monthly jobs total had shown a fall: economists’ consensus had predicted an 80,000-job gain. But rather than see the improving jobs market as suddenly reversing course, investors chose to treat the jobs figure as a weather-related anomaly.
This view was subsequently borne out when the third-quarter gross domestic product (GDP) number was released, showing the US economy growing at a robust 3% annual pace in the most recent quarter, beating forecasts of 2.5% annual growth. After the June quarter’s annual growth rate of 3.1%, the result saw the United States rack up back-to-back quarters of 3% growth for the first time in three years.
The third-quarter “print” raised hopes that the US was pulling out of its entrenched economic growth rate of about 2%. Consumer spending, which accounts for about 70% of US GDP, grew at 2.4% over the quarter—well short of the 3.3% recorded in the second quarter—but business spending was strong, with non-residential fixed investment growing at a 3.9% annual rate in the third quarter.
The Conference Board’s consumer confidence index increased 5.3 points to 125.9, the highest US consumer confidence reading since December 2000. With households optimistic about the jobs market and business conditions, hopes rose that this confidence could underpin consumer spending and boost the economy in the final three months of the year.
Eurozone humming, France picks up
In Europe, the Eurozone’s third-quarter GDP growth also came in stronger than expected despite slowing slightly in the September quarter from 0.7% growth to 0.6%, for an annual rate of 2.5%—its strongest growth rate since the March 2011 quarter. The unemployment rate for September dropped from 9% to 8.9%, representing the lowest joblessness rate since 2009.
At its October meeting, the European Central Bank (ECB) decided to rein in its quantitative easing policy by halving the pace of its bond purchases from €60 billion ($90.1 billion) a month to €30 billion ($45.5 billion), starting in January. Meanwhile, the Eurozone economic confidence indicator reached its highest level since January 2001.
France's economy expanded by 0.5%, a slowdown from 0.6% in the previous quarter but ahead of expectations, posting the fifth quarter of growth in a row. Over the past 12 months France's economy has grown by 2.2%, its healthiest rate since 2011.
In Germany, the forward-looking manufacturing purchasing managers’ index (PMI) remained steady at 60.6, its highest level since April 2011 (a reading above 50 indicates expansion). Unemployment fell for a third straight month in October, and has now dropped in all but two readings since June 2015. German industrial output surged by 2.6% month-on-month in August, well ahead of forecasts of 0.8% growth and the best monthly reading in six years.
German business sentiment unexpectedly surged in October, after falling for two months in a row, in the lead-up to the country’s general election. The economic data helped markets absorb the turmoil in Spain, where Catalonia threatened a unilateral declaration of independence. In fact Spain, despite its political worries, posted annual GDP growth of 3.1% in the third quarter.
In the UK, the 0.4% economic growth in the September quarter translated to a 1.5% annual rate. Manufacturing was a relative bright spot, growing by 1% during the quarter. However, the UK service sector—which makes up around three-quarters of the economy—grew by just 0.4%, and the construction sector suffered its second quarterly contraction in a row, officially entering recession.
In European markets, the STOXX Europe 600 Total Return Index rose 1.9%, closing October at its highest point since mid-May. The UK’s FTSE-100 index added 1.6% for the month, while France’s CAC 40 rose by 3.3% and the DAX 30 benchmark in Germany gained 3.1%.
China’s President, Japan’s Prime Minister big winners
In Asia, events were dominated by the 19th Congress of the Chinese Communist Party, and in Japan, the snap election called in September by Prime Minister Shinzo Abe. The former saw the biggest shakeup in Chinese politics since the cultural revolution, and the enshrinement of Chinese President Xi Jinping as, in effect, China’s leader-for-life. President Xi laid out an ambitious plan not just for the next five years, but out to 2050, when China will become “a great modern socialist country” and a global leader.
China’s official PMI for October came in at 51.6, slowing from a five-year high of 52.4 in September. The gauge slowed from a five-year high of 52.4 in September and missed the median estimate of 52 in a Bloomberg poll of economists. A separate PMI released on the same day showed the nation’s service industry also slowed, confirming that China’s clampdown on shadow banking and leverage since the beginning of the year was cutting into activity.
Across in Japan, the gamble to go to an early poll paid off for Prime Minister Abe, whose ruling coalition won a two-thirds ‘super-majority’ in the lower house of the Diet, allowing Abe to press for the continuation of his economic reforms and the amendment of Japan’s pacifist constitution, which he says is needed to respond to the North Korean situation. The stock market liked the election outcome, with the Nikkei index pushing through 22,000 for the first time since 1996, and gaining 6.7% in October. At one point, the Nikkei posted 16 consecutive rising days, the longest such sequence in its nearly 70-year history.
Upgraded company earnings expectations also boosted the Japanese market ahead of the third-quarter reporting season. In the second quarter, pre-tax profits at Japanese companies, excluding financial firms, grew by 23% from a year earlier to a record ¥22 trillion ($255 billion), according to the Ministry of Finance.
On other Asian bourses, the Shanghai Composite Index added 1.3% for the month, while the Hang Seng Index in Hong Kong gained 2.5%. In Korea, the benchmark KOSPI Index gained 5.4%, closing October at an all-time high.
Iron ore fall fails to derail Aussie market
In Australia, the S&P/ASX 200 rose by 4% in October, its best monthly performance for the year, with the resources stocks generating 4.6%—despite a 5.7% fall in the iron ore price—and their industrial counterparts 3.9%. The broader S&P/All Ordinaries index pushed through 6,000 points for the first time since the GFC.
Gold lost 0.4%, its second straight monthly loss, but Brent crude oil surged 6.7%, West Texas Intermediate (WTI) oil was up 5.2%, copper rose 5.3% and nickel surged almost 14% to its highest level since June 2015.
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