Weekly Markets Commentary - December 4, 2012
David Joy — Chief Market Strategist, Ameriprise Financial
Is the global economy on the mend?
While all the attention last week was on the fiscal cliff and the apparent lack of progress toward an agreement, a lot of global economic data was released that went largely unnoticed. And what it suggests is a global economy that, while still uneven, may be turning higher. And equity market performance reinforced that view.
China reported last week that its manufacturing sector grew in November for the second straight month, after contracting in August and September. Industrial earnings also grew year-over-year for the first time this year, and leading indicators rose for the fourth straight month in November. Coupled with recently solid data for retail sales, consumer prices, industrial production, and exports, it suggests the Chinese economy may have bottomed in the third quarter with a year-over-year growth rate of 7.4 percent. Many private forecasts are now anticipating an acceleration to 7.70 or higher in the fourth quarter.
In Japan, the latest round of data showed a similar improvement to start the fourth quarter. After shrinking at the annualized rate of 3.5 percent in the third quarter, in October the rate of decline in exports slowed, industrial production rose for the first time in four months, housing starts accelerated, and retail sales rose. In Japan, the latest reading on leading indicators from the Conference Board is from September, when the index declined for the sixth straight month.
In South Korea, exports grew for the second straight month in November, and the pace accelerated. Industrial production advanced in October for the second straight month, after having declined for three straight through August. And the pace of decline in the cyclical leading index slowed, as did activity in manufacturing. The Conference Board's leading indicators index rose sharply in September after five consecutive monthly declines.
In Brazil, third quarter growth year-over-year rose to 0.9 percent from 0.5 in the second, although it remains disappointing. Encouragingly, the manufacturing sector returned to growth in October.
The economic news from the Eurozone was less encouraging. The unemployment rate rose to a record high 11.7 percent in October. This comes after the Eurozone slid back into recession in the third quarter. Leading indicators also fell in October for the second straight month. If there was the faintest of bright spots among the recent data, it is that the pace of contraction in both manufacturing and business confidence moderated in November. Sentiment rose nevertheless in Europe on news of a deal on Greece.
World equity markets responded to the better news. In Europe, the Euro Stoxx 600 index climbed 0.9 percent last week, after rising 4.0 percent the prior week. The latest boost to sentiment came from an agreement to disburse the latest round of bailout funds to Greece. In the process, Greek ten-year yields fell 30 basis points on the week to their lowest level since August 2011. Spanish yields fell by the same amount to their lowest since March. Italian ten-year debt yield fell by a similar amount to their lowest level in two years. And the euro rose to its highest level in five weeks.
Domestic Chinese investors remain skeptics, as the Shanghai Composite fell another 2.3 percent last week, to its lowest level in almost four years. It is down 10 percent on the year, among the worst performing of all global equity averages, and among only a handful with losses. International investors feel differently, as the Hang Seng index is up 20 percent for the year, after rising 4.1 percent in the last two weeks.
In Japan, the Nikkei index has risen three weeks in a row for an 8 percent gain to its highest level since April. The yen has fallen almost 6 percent versus the dollar since the beginning of October on expectation of additional stimulus, giving a boost to export-related businesses. The South Korean KOSPI index rose 1 percent last week to move back above its 200 day moving average, after climbing 2.7 percent the previous week.
Brazil slid fractionally, shedding 0.2 percent last week, but retained most of the previous week's 3.9 percent gain, although the Bovespa remains below its 65 and 200 day moving averages.
In the aggregate, the MSCI World index rose 4.8 percent in the past two weeks, led by an 8.6 percent gain in the Eurozone, ironically less reflective of economic performance than the deal with Greece and rising confidence in the ECB.
Back home, the S&P 500 gained 0.5 percent last week, after rising 3.6 the prior week. At 1416 at the beginning of this week, it remained above its 200 day moving average of 1385, but below its 65 day at 1424. The recent economic data in the U.S. has been uneven. Housing activity has mostly accelerated, leading indicators rose for the second straight month, manufacturing activity edged higher, and payroll employment rose. But, industrial production declined in October, durable goods orders were flat and shipments fell. Retail sales slipped, as did consumer confidence, while personal income growth was flat
Of course, the U.S. economy cannot divorce itself from the uncertainty of the fiscal cliff, especially in terms of capital investment. Last week, third quarter GDP was revised upward to 2.7 percent from the 2.0 percent advance estimate. But the contribution from nonresidential fixed investment subtracted 0.2 percent from the total. It was the first time since the first quarter of 2011 that this category has declined.
Worldwide, a combination of better economic activity and policy actions has resulted in an upswing in sentiment. But there is also built into the returns of the past few weeks the expectation that the fiscal cliff problem will be resolved satisfactorily. Last week, Bloomberg published the results of its latest global investor poll. In it, three-quarters of respondents expect a deal to be reached to avert triggering the fiscal cliff. Let's hope they're right.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalisation companies across 18 countries of the European region.
The Shanghai Composite Index is a capitalization-weighted index of all stocks on China's Shanghai Stock Exchange.
The Hang Seng index is a market capitalization-weighted index of 40 of the largest companies that trade on the Hong Kong Exchange.
The Nikkei index is a price-weighted average of 225 stocks of the first section of the Tokyo Stock Exchange.
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