All Investor Update – 07 November 2014

Another positive performance from developed market equities 

Some spots of better economic data and more from the “lower for longer” camp drove the FTSE 100, Dow Jones and many European indices higher this week, further reversing the losses sustained throughout late September and October.

In detail, better economic data emerging from the US formed the key driver of positive sentiment for the week after the ISM Manufacturing PMI for October topped expectations on Tuesday. The actual reading for the index came in at 59.0 as opposed to the official projection of 56.5.

This was while the unemployment rate was revealed to have fallen further during the month of October, with the headline rate now standing at 5.8%; its lowest level since August 2008.  

In addition to better US data, UK manufacturing figures also beat forecasts when the Markit Manufacturing PMI printed a reading of 53.2 against projections for a much lower figure of 51.5; although this was later overshadowed by poorer than expected construction and services numbers.

The net effect of the week’s UK data was louder discussions over whether or not the BOE will be forced to hold off on its first interest rate increase until after the general election, potentially as late as Q2.

Over on the continent, October Spanish manufacturing and services PMI’s were better than expectations, so too was EU wide manufacturing; although activity in Italy disappointed.

Despite what has largely been a positive performance on the periphery of late, French and German data continues to provide cause for concern. This morning’s industrial production data for the month of September highlights this.

While growth in German output was slower than expected at 1.4%, as opposed to the 2.1% forecast; French industrial production barely managed to prevent another contraction – with the official reading for output growth coming in at 0.0% following an August reading of -0.1%.

Given the persistent under-performance of the continent’s core economies, there is now a strengthening consensus among economists, analysts and general observers that the European economy probably contracted during Q3.

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EU commission downgrades continental growth outlook as the ECB clears the way for all out QE

The European Commission downgraded its growth forecasts for the bloc as a whole, as well as for some of its individual member states this week.  

The commission released its three times yearly economic forecasts report on Tuesday, where it described continental growth as “particularly weak”.

This was before it singled out both France and Germany for the most significant downgrades, with the German forecast for 2015 confirmed as having been revised down to just 1.1%, while expectations of the French economy were for growth of just 0.7% for the same period.

The forecasts from the commission came just a day ahead of the ECB press conference for November.

Here, Mario Draghi made it clear that the ECB stands ready to do more the continental economies by announcing that it had instructed individual central bankers to prepare to launch further monetary policy measures, without specifying exactly what they will be.

These comments are now seen by many to be the precursor to all out QE by the ECB, the strongest signal yet that it is becoming unhinged by the inflation outlook for the bloc as a whole.

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The rumble of tanks and artillery shatter Ukrainian peace once again

Following an extended ceasefire in eastern Ukraine, the tentative peace was shattered on Wednesday this week when Ukrainian tanks were reported to have opened fire on rebel positions around the separatist controlled area of Donetsk.

These reports were denied by Kiev when the newly elected government for the pro-Europe side of the nation announced that newly drafted laws granting rebel regions a generous level of autonomy were to be repealed in response to “illegitimate” elections held in the eastern half of the country last weekend.

The initial reports of violence were followed by further statements from both Kiev and Russia on Friday.

Here, Kiev alleged that columns of Russian armoured vehicles had crossed into Ukraine during the early hours of the morning. Government officials in the capital also reported, late this afternoon, that an estimated 200 rebels had been killed as fresh fighting escalated.

The Russian response to the renewed crisis has been to urge Kiev based officials to observe the Minsk ceasefire agreement which was negotiated in September.

While the fighting appears to be contained to a narrow stretch of eastern Ukraine at the present time, it now appears that the ceasefire has failed.

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Markets; looking ahead

Although loosening policy across Europe and better economic data from the US has managed to buoy markets over the last fortnight, offering scope for equities to close the year with a bang; this week’s events in Ukraine threaten to place geopolitical tension right back on the table.

While it is not clear what the final outcome of recent events will be, it is reasonable to suggest that the conflict in Ukraine could be about to escalate once again.

This holds negative connotations for equity markets at the open on Monday and moving on toward the close of the year.

FTSE 100

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Dow Jones Industrial Average

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EU Indices // (Dax, Black), (CAC 40, Red), (IBEX 35, Blue)

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