On 6 November 2014, the ECB strengthened its active balance sheet
management language. The post-meeting language maintained reference
to 2012 balance sheet size and keeps our base case as significant balance
sheet expansion over coming months. We continue to expect the ECB to
consider a wider range of assets for purchase, including government
bonds, by late-2014 or early-2015. In addition to Japan’s aggressive easing
steps announced on Oct 31st 2014, the ECB’s further easing may likely be a
clear positive for risky assets providing liquidity into financial markets.
On 10 November 2014, China approved the launch of the awaited
Shanghai-HK Stock Connect, a pilot program to provide mutual trading
access between the Shanghai and Hong Kong stock markets. Trading will
commence on November 17. The mutual access may likely pave the way
for China to be added to international benchmark indices.
Data out of Europe looks to be holding up
Citi Economic Surprise Index
Source: Bloomberg as of 7 November 2014
Government bonds underperform Credits
Accumulated 3-month Bond Index Returns
Source: Bloomberg as of 7 November 2014
EM continues to underperform DM
Accumulated 3-month Equity Index Returns
Source: Bloomberg as of 7 November 2014
Source: Bloomberg as of 7 November 2014
Performance
Global equities were slightly lower last week with MSCI World index losing
0.36% with equities in Europe and EM underperforming across the board.
The outperformance of US and Japan mainly came from divergence in
macro outlook and monetary policy.
US equities grinded higher with the DJIA and S&P up 1.1% and 0.7%
respectively supported by better than expected earnings reports. Japanese
equities saw sharp rebounds with the Nikkei and Topix gaining 2.8% and
2.3% respectively on the back of further stimulus. Meanwhile, Europe
finished the week lower with the Stoxx Europe 600 down 0.5%.
EM equities continued to underperform with the MSCI Latam and MSCI
Emerging Europe plummeting 4.1% and 5.8% respectively losing more than
last week’s gains.
Asset Allocation
Equities — We remain constructive on global equities with earnings growth
to be the key driver of markets.
Credit — The outlook depends on central banks’ policies and whether credit
funds will suffer outflows. We see spreads mostly tightening to end-2015.
Rates — Medium term, we forecast higher yields across the major
government bond markets. On a relative basis, EMU bonds and JGBs
outperform.
Commodities — We foresee a generally weak price environment in 2015,
although recent sell-offs open opportunities for a price rebound in certain
markets.
