International Equities Advance on the Back of Monetary Stimulus Hopes
International equity prices gained during February on expectations that the central banks in Europe and Japan would continue their quantitative easing programs, while the U.S. Federal Reserve could possibly delay its interest rate hikes. At the same time, economic trends from most major economies remained relatively stable. After two quarters of robust gains, the U.S. economy expanded at a slower pace during the fourth quarter of 2014, as expected. The Euro-zone avoided a recession during the second half of last year, with a marginal expansion during the fourth quarter. Japanese economic growth during the last three months of 2014 was weaker than expected, as the economy recovered from output declines during the previous two quarters. Developed markets in Europe outperformed, encouraged by the scale of the European Central Bank’s proposed bond purchases.
Emerging markets also saw healthy gains, though they underperformed the developed markets during the month. Europe gained the most among emerging markets as well, followed by Latin America and Asia. Global manufacturing output saw moderate growth in February, helped by gains in the U.S., the U.K. and the Eurozone. New order flows to the manufacturing sector continued the healthy trend from recent months. Strong U.S. growth also helped global services activity to expand at a faster pace in February. The Eurozone, the U.K. as well as some of the large emerging economies also saw healthier services activity during the month. Oil prices saw a modest rebound from the lows seen earlier this year, but remain well below last year’s levels.
Near-Term Outlook
The Euro-zone’s economic outlook has seen encouraging trends so far this year, though the gains have been modest and the environment remains fragile. Investor sentiment in the Euro-zone has surged to its highest level since the 2008 global financial crisis, helped by the expected roll out of ECB quantitative easing. Germany, the region’s largest economy, is seeing much of the improvement in export and domestic demand. Retail sales in Germany expanded at a faster than expected pace in January, as the continued decline in unemployment and lower fuel prices have lifted consumer sentiment. German exports rose to a record high in 2014, and the trend is expected to continue this year. Though shipments from Germany for the month of January were below expectations, further euro weakness and stronger U.S. demand are expected to lift exports in the coming months. Industrial output growth also showed a steady pace in Germany, Spain, the Netherlands and Italy, according to purchasing managers’ surveys for the month of February. The ECB’s bond purchases, commencing in March, are expected to lift business sentiment further and help sustain the recovery.
The outlook for some of the emerging economies has also seen moderate improvement this year, helped by the recovery in external demand as well as lower oil prices. Exports from China surged in February, though part of the gains were due to last year’s unusually low base. Retail sales in China also had a strong start at the beginning of this year, easing some of the concerns about the growth outlook. Manufacturing activity continued to expand in February, though at a slower pace, in China, India and Korea. Monetary policy easing and additional public spending on infrastructure and other projects have also supported economic activity in large countries such as China and India. Central banks in both these countries as well as Indonesia have cut benchmark rates recently. However, major resource exporting countries such as Russia and Brazil continue to face headwinds. The governments and central banks in these countries have limited flexibility to pursue policy measures that help short-term growth.
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