December Market Commentary

Although major equity markets generally rose over November, investor sentiment was undermined by mounting geopolitical tensions. In particular, the terrorist atrocities that took place mid-month in Paris shook investor confidence, with share prices in travel and tourism companies especially affected. Nevertheless, France’s benchmark CAC 40 index rose b 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. The eurozone’s rate of inflation increased at an annualised rate of 0.1% during October. European Central Bank president Mario Draghi indicated policymakers were poised to expand monetary stimulus measures, pledging they will “do what (they) must to raise inflation as quickly as possible”.

Investors continued to scrutinise US economic data closely during November ahead of the monetary policy meeting of the Federal Open Market Committee (FOMC) in December. Expectations of an increase in the Federal Reserve’s key interest rate were fuelled by better-than-expected employment data and signs of a rebound in consumer price inflation. Meanwhile, minutes from the FOMC’s October meeting suggested the criteria required to bring about tighter rates “could well be met” by the committee’s next meeting. Over November as a whole, the Dow Jones Industrial Average index edged 0.3% higher.

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.