Global stocks produced mixed returns amid investor worries about sluggish economic growth and expectations for higher U.S. interest rates. European equities advanced on the promise of new monetary stimulus measures, however, U.S. stocks were flat and emerging markets retreated. Bonds also declined as Federal Reserve leaders indicated that a rate hike is likely in December. The dollar rose sharply against the euro and the yen.
Index Returns (Monthly)
U.S. stocks were flat in November amid lingering concerns about overseas growth and as investors appeared to take a wait-and-see approach on interest rates, with Federal Reserve officials signaling an imminent rate hike. The Standard & Poor’s 500 Composite Index and the Dow Jones Industrial Average both rose under 1%, stabilizing after October’s jump. The Nasdaq composite Index had a slightly larger gain due to strong returns among some technology stocks.
Returns for S&P 500 sectors were mixed. The rate-sensitive utilities and telecommunication services sectors again lagged the overall market, falling 2% and 1%, respectively. Energy gave back some of October’s double-digit advance, hurt by disappointing news regarding China’s growth and reports of big jumps in crude oil and natural gas inventories. Oil futures fell more than 10% and natural gas declined 11%. Materials gained 1% as industrial-gas companies were buoyed by French-based Air Liquide’s move to acquire AirGas for $10 billion in cash and stock, which lifted AirGas shares by nearly 44%. But China woes continued to pressure metals & mining groups, with Freeport McMoRan falling more than 30%. The price of gold declined further, ending the month around a six-year low, while iron ore prices touched their lowest levels ever.
Mergers-and-acquisitions activity continued to top records and boosted results in several sectors. Financials had the strongest sector gain, rising 2%. Most real estate investment trusts lost ground along with other rate-sensitive companies, but timber REITs Weyerhaeuser and Plum Creek Timber climbed 10% and 26%, respectively, on news Weyerhaeuser would take over its smaller rival. Among industrials, Norfolk Southern gained 20% as Canadian Pacific said it had offered around $28 billion for the rail operator. Within health care, Pfizer and Allergan announced a deal valued at $160 billion — the largest pharmaceutical tie-up ever, and among the largest mergers on record. Structured as a reverse merger rather than a tax inversion, which have come under fire from the Treasury Department, the smaller, Dublin-based Allergan will acquire Pfizer to extend its favorable tax rate to the Viagra maker.
Retailers braced for a mediocre holiday season amid signs consumers were spurning brick-and-mortar shops in favor of online shopping. Department store chains Nordstrom and Macy’s reported softer-than-expected sales and traffic for October and offered mingy outlooks, which sent their share prices lower. Target’s shares lost 5% after the discount retailer reported it would not meet its forecast for online sales growth. But the ongoing shift to e-commerce benefited retailers such as Amazon, which began its promotions well in advance of the traditional post-Thanksgiving “Black Friday” sales that have long marked the start of the holiday shopping period.
Economic data remained mostly positive. U.S. gross domestic product for the third quarter was revised up to 2.1% from the previous estimate of 1.5%, mostly due to gains in consumer spending. Price gains for new homes accelerated in September, according to the S&P/Case-Shiller Home Price Index, but other reports indicated sales of existing homes softened in October. October new-job gains surged to 271,000 while the national unemployment rate stood at 5% — a figure widely accepted as representing full employment. The jobs and GDP numbers had observers suggesting an increased likelihood that the Fed will raise interest rates for the first time in nearly a decade at its mid-December meeting. In other Fed news, the central bank adopted a new rule under the Dodd-Frank Act, restricting its ability to offer emergency bailouts to individual firms.
In bond markets, the Barclays U.S. Aggregate Index lost 0.3% for the month. The yield on the benchmark 10-year Treasury note rose 5 basis points to 2.21%. Corporate spreads to Treasuries narrowed about 4 basis points to 155 basis points. Treasury Inflation Protected Securities lost 0.1%, while corporate bonds fell 0.2% and municipal bonds notched a 0.4% return. Giving back most of their October gain, high-yield bonds declined 2.2%. In the new-issue market, Halliburton sold $7.5 billion of bonds. The deal, which was used to help finance the company’s acquisition of Baker Hughes, included two $2 billion fixed-rate notes with 10- and 30-year maturities paying 3.8% and 5% coupons, respectively.
European stocks rose on expectations for more central bank stimulus measures and rising export activity as the euro continued to decline sharply against the U.S. dollar. In a series of speeches, European Central Bank President Mario Draghi essentially committed the central bank to expanding its aggressive bond-buying program and also potentially cutting the ECB’s deposit rate. Overall, the MSCI Europe Index rose 2% and the euro fell more than 4% against the dollar.
Fresh evidence emerged that the ECB’s effort to suppress interest rates, boost lending and push down the euro has helped spur export activity, particularly in Germany. German exports to the United States jumped more than 20% in the first nine months of the year compared to the same period in 2014. German stocks advanced 5% for the month, supported by strong rallies in the shares of automakers Daimler, Volkswagen and BMW. Volkswagen shares climbed despite ongoing fallout from an emissions-testing cheating scandal that dented the automaker’s U.S. sales in November.
Surging M&A activity provided a tailwind for some European stocks. Shares of Anheuser-Busch InBev rose on investor optimism for the beer maker’s plan to acquire rival SABMiller. The $104 billion deal has raised antitrust concerns in the U.S. and elsewhere, but fears of a regulatory block were lessened by the companies’ pledge to sell off certain assets, including a controlling stake in U.S.-based MillerCoors. If the deal closes, it will be among the largest corporate takeovers in history.
Most sectors enjoyed positive returns, led by gains among information technology and industrial stocks. Shares of Infineon Technologies surged after the German semiconductor firm reported an 80% increase in fourth-quarter profit. The chipmaker also indicated that it would increase its dividend and seek strategic acquisitions in the rapidly consolidating semiconductor industry. In the industrials sector, Siemens shares rose on the announcement of a dividend boost and the initiation of a €3 billion share buy-back program.
Telecommunication services stocks advanced 3%, supported by improving economic conditions in key European markets. Vodafone shares moved higher after the world’s second-largest mobile phone provider raised its full-year earnings guidance amid signs of better economic activity in several southern European countries. Shares of BT Group rallied to multiyear highs as the British phone company completed its acquisition of wireless firm EE. BT Group executives said M&A activity is likely to continue at a fast pace in the telecommunications sector next year.
In the health care sector, returns were mixed. Shares of Novo Nordisk advanced after the world’s leading supplier of insulin reported a nearly 30% rise in third-quarter profit. The shares rallied despite a warning from management that earnings may come under pressure next year due to increased pricing competition for insulin-related products. Meanwhile, Sanofi shares declined sharply after the drug maker said it expects to achieve no meaningful profit growth through 2017 due to fierce competition in the market for diabetes treatments.
In bond markets, Draghi’s comments boosted sovereign debt as investors awaited changes in the ECB’s €60 billion-a-month bond-buying program, originally launched in March. The highly anticipated decision is expected to come at the ECB’s December 3 meeting. The yield on Germany’s benchmark 10-year note declined 5 basis points to close the month at 0.47%. Similar maturities in Spain fell 15 basis points to 1.52%.
Japanese equities gained modestly amid a weakening yen and expectations of higher U.S. interest rates by year-end. Investors appeared undeterred that the Japanese economy fell into its second recession in two years, although a newly revealed stimulus plan did little to convince markets that long-term growth prospects would improve meaningfully. The MSCI Japan Index rose 1% while the MSCI Pacific Index was flat. The Japanese yen weakened 2% against the dollar.
Health care led all sectors in Japan, returning 5%. Shares of Olympus surged 20% after the maker of cameras and imaging products announced profits that topped estimates. Pharmaceutical companies Ono and Santen each rallied 18%. Elsewhere, Murata Manufacturing rose after announcing better-than-expected quarterly earnings.
Most automakers gained as a weak yen boosted earnings. Subaru maker Fuji Heavy announced a 41% profit increase and said it is on pace for a seventh consecutive year of record sales in North America. Toyota posted a record quarterly operating profit, although management also trimmed its full-year revenue outlook amid slower industry-wide sales in China. Nissan and Mazda also advanced.
Returns for other consumer stocks were mixed. Fast Retailing climbed 12%; Japan Tobacco rose sharply after raising its dividend. However, Asics plunged 16% after the sportswear maker cut its full-year operating profit forecast. Shares of Sony and Internet retailer Rakuten also fell.
The utilities sector had the lowest returns, declining 8%. Nine of the nation’s 10 largest power suppliers will cut their electricity rates for January amid falling crude oil prices. Tohoku Electric fell further after issuing ¥120 billion of convertible bonds that may significantly dilute existing shares. Elsewhere, shares of SoftBank declined after its struggling subsidiary Sprint announced a steeper-than-expected quarterly loss. Shares of Toshiba plummeted after the electronics manufacturer reported its first fiscal-half-year loss in six years and revealed it was involved in a lawsuit with former executives over its recent accounting scandal.
The Japanese economy fell into recession in the third quarter. However, the contraction was relatively mild, as the economy shrank at an annualized rate of less than 1% in each of the past two quarters. Exports decreased for the first time in more than a year in October, declining on weak demand from China and other Asian markets. Unemployment fell to 3.1% in October, a 20-year low, although wage growth remained tepid. Prime Minister Shinzo Abe unveiled a stimulus plan to boost the sluggish economy, citing a desire to seek more inclusive growth in which everyone contributes and benefits from economic activity. Measures include raising the minimum wage annual escalation rate and increasing spending on child care and elder care facilities.
Australian equities eased 1%. Declining commodity prices weighed on materials stocks, including Rio Tinto and South32. Potential financial and reputational consequences of a deadly mine dam disaster further dragged on shares of BHP Billiton, which fell to a 10-year low. Oil-and-gas producer Santos plummeted 27%. However, market returns were supported by Australia’s financial stocks as shares of all four megabanks rose. The Australian dollar rose 2% against its U.S. counterpart. Elsewhere, Hong Kong–listed equities fell 3%, dragged down by consumer stocks. Shares of most Macau-based casino operators had double-digit declines as industry revenues fell for the 17th consecutive month in October.
Emerging markets lost ground. The MSCI Emerging Markets Investable Market Index dropped 4% as waning growth in developing countries, political scandals and lingering China fears weighed on equities. All sectors declined, led by materials, utilities and telecommunications. Meanwhile, emerging markets debt struggled. U.S. dollar–denominated bonds, as measured by the J.P. Morgan EMBI Global Index, were flat; local currency debt, as measured by the J.P. Morgan GBI-EM Global Diversified Index, was unchanged in local currency terms but lost 2% in U.S. dollar terms as emerging markets currencies weakened.
The MSCI China IMI lost 3%. Stocks were pressured amid a widening regulatory probe into the brokerage industry, weak industrial profits and overall caution about the world’s second-largest economy, which is expected to grow 6.9% in 2015 — the weakest expansion in 25 years. The renminbi declined 1% against the U.S. dollar. In a significant decision, the International Monetary Fund announced it will add the renminbi to the basket of currencies that make up its lending reserve in late 2016, demonstrating China’s growing economic stature globally. The renminbi will join the U.S. dollar, the euro, the British pound and the yen in the basket of reserve currencies.
Almost all Asian markets declined. The MSCI India IMI fell 4%. Concerns persist over whether the government’s ruling party will have enough support to push through key economic reforms even though India’s economy grew 7.4% in the third quarter on a year-over-year basis. Indian equities were hurt by declines in the health care sector, with Dr. Reddy’s Laboratories slumping 27% on scrutiny from the U.S. Food and Drug Administration over its manufacturing practices. The Indian rupee fell 2% against the dollar. Elsewhere, the MSCI Indonesia IMI lost 2%. The latest economic data showed inflation is slowing, fueling debate that Indonesia’s central bank may cut interest rates next year to help stoke more growth. In the debt market, Indonesian local currency bonds rose 2%. Meanwhile, Taiwanese and South Korean stocks each fell 3%.
Latin American markets struggled. The MSCI Brazil IMI fell 3%. Shares of Vale slumped as the Brazilian government prepared to sue the miner following a dam failure at its joint venture with BHP Billiton. In financial services, Itaú Unibanco was a bright spot, gaining 5% on solid third-quarter results. The Brazilian real weakened 2% against the dollar even as Brazil’s central bank took steps to shore up support for the embattled currency. Brazilian U.S. dollar debt and local currency debt declined 0.7% and 1.0%, respectively. Elsewhere, Mexican stocks declined 3% and the peso was unchanged.
The MSCI Turkey IMI slid 5% amid escalating geopolitical tensions with Russia and questions about the direction of economic policy after the ruling AK Party regained its majority in the Nov. 1 snap election. The Turkish lira was flat against the dollar. Turkish U.S. dollar debt and local currency debt pulled back by 1% each. Meanwhile, stocks in Russia inched higher, buoyed by hopes for an improvement in its relationship with the West after the government said it would cooperate more with the U.S. and its partners on military action in Syria. The ruble weakened 3%.
Meanwhile, several oil-producing countries issued debt to raise funds as falling oil prices constrained their budgets. Angola and Bahrain each sold $1.5 billion of bonds while Cameroon’s bond issue gathered $750 million. Chinese companies were also active in the debt issuance market, with China Petroleum & Chemical Corp. (Sinopec) selling over $3.1 billion of bonds.