Market Commentary – December 2013
November turned out to be a mixed month for markets with most developed markets being influenced by the tapering discussions. A number of FED officials expressed their views on the current state of the US economy and how best to implement the tapering process. During her confirmation hearing in front of the Senate Banking Committee Janet Yellen assured the markets that her view is to continue with the monetary policy initiated by Ben Bernanke. Her comments regarding the current level of unemployment was perceived as advocating for a continuation of loose monetary policy which is currently in place, ie postponing the tapering decision. Speculations surrounding the time of the first tapering decision drove asset returns across the globe with yields on government bonds again under pressure. The remainder of the year will see renewed US budget negotiations – this has the potential to cause market turmoil.
UK economic indicators continued to improve during November, with industrial output being at the highest level since 1995 according to the Confederation of British Industry, whilst unemployment dropped to 7.6%. Mark Carney announced that the Bank of England’s Funding for Lending scheme will no longer stimulate mortgage financing; instead it will refocus on financing small companies. All UK equity indices returned negative for the month, with small cap equities outperforming large caps once again on the downside.
The ECB reduced its key interest rate to 0.25%, the lowest level in the institution s history, as deflations concerns dominated the headlines. Overall continental equities performed in the same volatility regime as the US – following an upside trend. There were exceptions from the general trend: Spain, Italy and France had slightly negative performances. France saw its credit rating lowered by the S&P ratings agency by one notch to AA. Angela Merkel progressed on the path of creating a new governing coalition with the markets reacting positively due to concessions regarding increasing government spending
US equity performance in November was marked by tapering speculations and assumptions. The latest FOMC meeting minutes showed that the FED considered the partial government shutdown as having little impact on the economy and also that a potential decrease in interest rates on the deposits of commercial banks held with the Federal Reserve is desired in order to stimulate growth. Both S&P 500 and Nasdaq Composite reached new highs as equity markets seemed to adjust to the fact that tapering will take place and will follow a period of improved macroeconomic dynamic
The Japanese Topix closed the month up by more than 5% – being one of the top performers globally in November. Once again we saw increased volatility due to disappointing macroeconomic readings, especially the GDP reading, which made the market participants believe that an acceleration of QE is going to be implemented in order to further stimulate the economy.
Emerging Markets Summary
Emerging markets experienced negative performance with Chinese Communist Party’s Third Plenum holding the headlines. Market expectations were higher as actions taken during this meeting were viewed as positive for future economic development. Meanwhile tapering off discussions made yields of some emerging markets economies spike once again causing turmoil on those economies where budget deficits reappeared.