Market update – December 2015

Stock Exchange web sitesAlthough major equity markets generally rose over November, investor sentiment was undermined by mounting geopolitical tensions. In particular, the terrorist atrocities that took place in Paris shook investor confidence, with share prices in travel and tourism companies especially affected.

Nevertheless, France’s benchmark CAC 40 index rose by 1.2% during the month as a whole, while Germany’s Dax index climbed 4.9%.In contrast, Portugal’s PSI-20 index fell 2.2% over November as a general election in the country resulted in an anti-austerity, left-wing coalition government.

Economic growth in the eurozone lost pace during the third quarter of 2015, dipping to a quarterly rate of 0.3%, compared with 0.4% in the second quarter. On an annualised basis, the euro area grew by 1.6% during the period. The news fuelled speculation the European Central Bank (ECB) would expand its programme of stimulus measures. Although France’s economy returned to growth, boosted by rebounding household consumption, Germany’s economic expansion decelerated, dampened by deteriorating export activity. Portugal’s economy stagnated during the third quarter while Finland’s and Greece’s economies contracted by 0.6% and 0.5% respectively.

ECB president Mario Draghi reconfirmed policymakers were poised to expand monetary stimulus measures if necessary. In a speech to the European Parliament, he said: “We have always said that our purchases would run beyond end-September 2016 in case we do not see a sustained adjustment in the path of inflation.” Later in the month, he stated that ECB policymakers would “do what (they) must to raise inflation as quickly as possible”. However, the president of Germany’s Bundesbank, Jens Weidmann, opposed Draghi’s stance, arguing there was “no reason to talk down the economic outlook”.

In the UK, the Autumn Statement saw Chancellor of the Exchequer George Osborne announce an unexpected moderation to austerity measures and his expectation the country will now achieve a budget surplus of £10.1bn by 2020. The FTSE 100 index remained broadly unchanged over November as a whole, edging 0.1% lower. The UK stayed in deflationary territory during October – the annualised rate of inflation remained at -0.1%, curbing expectations of any imminent increase in interest rates. Looking ahead, the Bank of England does not expect inflation to achieve its 2% target for another two years.

Japan tipped back into recession during the third quarter of 2015. Having already contracted in the second quarter, the country’s economy shrank by 0.8% in the three months to 30 September. Although private consumption rebounded, business investment fell by 1.3%. The news triggered fresh speculation that Japan’s leaders will have to take further action to shore up the economy. Nevertheless, the Nikkei 225 index rose 3.5% over November as a whole, supported by the positive effect of a weaker yen.

In the US, the Dow Jones Industrial Average index rose by an anaemic 0.3% during November, while the broader-based S&P 500 index edged higher by 0.1% over the month. In contrast, the technology-heavy Nasdaq index climbed by a comparatively substantial 1.1%. Having posted two months of decline, inflation showed signs of picking up, with the Consumer Price Index rising at a monthly rate of 0.2% during October. The country’s rate of unemployment eased to 5% – its lowest level since April 2008 – and the US economy added 271,000 jobs during October. Meanwhile, average hourly earnings rose at an annualised rate of 2.5%. In response, the Federal Reserve finally increased US interest rates for the first time since June 2006.

Closer to home, consultancy firm EY believes the Republic of Ireland’s economy is growing more than three times as fast as that of Northern Ireland. Its latest forecast predicts the Northern Ireland economy will have grown by 1.7% in 2015, while growth in the Republic of Ireland is forecast to be 5.8%.

EY’s forecast said austerity measures and a relatively small private sector is hampering growth in Northern Ireland. Stormont is facing at least three years of contractionary budgets following Chancellor George Osborne’s spending review, while the Republic of Ireland is now likely to have more expansionary public finances following years of austerity.

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