US and Asia at the centre of investment market activity

4 min read

Monthly economic update, November 2017 

It was a case – yet again – of onward and upward for the US share markets in November, as further signs of a strengthening US economy and record corporate profits were bolstered late in the month by the prospects for passage of the Trump Administration’s tax reform plan, with its centrepiece the slashing of corporate taxes.

Wall Street ended the month convinced that the biggest US tax overhaul since 1986 was a reality, and that conviction accentuated the positive move that has prevailed for most of the year.

A lower company tax rate would boost corporate earnings, which have been a major driver of stock market gains post the GFC. Analysts at investment bank UBS have stated that cutting US company tax from the current 35% to a rate between 20%–25% would boost S&P 500 earnings by 6.5%–9.5%.

The tax cut optimism overcame some late-month jitters in the technology sector, which saw Facebook lose 4% in a day. Late in November US stocks also got a boost from the OPEC meeting in Vienna, at which OPEC members and other oil-producing countries agreed to extend oil production cuts – which were due to expire in March – until the end of 2018.

November saw the Dow Jones Industrial Average push above 24,000 points for the first time in its history, on its way to a 3.8% rise for the month – its eighth consecutive winning month, the longest such streak since 1995. The broader S&P 500 Index also gained 3.8%, and also racked up its eighth straight monthly rise. The technology-heavy Nasdaq Composite index was up 2.2%, its fifth monthly gain in a row.

The US economy grew faster than first thought in the third quarter, recording its quickest pace in three years, supported by healthy business spending on equipment and a rebound in government investment. Gross domestic product (GDP) grew at a 3.3% annual rate in the September quarter, up from the Commerce Department’s initial estimate of 3%. It remained the first time since 2014 that the US economy had shown growth of 3% or more for two straight quarters. The revised 3.3% growth rate was the fastest pace since the third quarter of 2014, and an acceleration from the June quarter’s 3.1% rate.

The November jobs report showed US employers adding 261,000 jobs in October, the most in more than a year, which translated to an unemployment rate of 4.1%, the lowest in 17 years. Adding to the mostly positive mood in the US was the 15th consecutive month of a rising annual growth rate in house prices: the S&P CoreLogic Case-Shiller National Home Price Index rose by 6.2% in September, up from 5.9% a month earlier, for its strongest annual growth rate since June 2014.

In Asia, the Japanese economy grew for a seventh consecutive quarter – the longest streak in nearly two decades – according to the country’s Cabinet Office.
Japanese capital expenditure stood out in November data, beating expectations with a 4.2% gain in the third quarter.

Activity in China’s crucial manufacturing sector picked up in November, on the back of robust global demand for Chinese exports. The National Bureau of Statistics’ official gauge of factory activity, the forward-looking purchasing managers index (PMI), edged up to 51.8 in November from 51.6 in October (a reading above 50 signifies expansion), beating the median consensus forecast of 51.5. Tempering this rise was the private Caixin/Markit PMI, which tracks medium and small Chinese firms: this measure eased to 50.8 in November from 51 in the previous month, the lowest level in five months, reflecting the smaller companies’ battle with input costs.

On Asian stock markets, Japan’s Nikkei index gained 3.2% in November, nearing a 25-year high, and the Hang Seng index in Hong Kong gained 2.5% and China’s Shanghai Composite index slipped 2.2%. In South Korea, the KOSPI index retreated 1.86% for the month, after the Bank of Korea surprised the market by raising interest rates for the first time in more than six years. In Australia, the benchmark S&P/ASX 200 index was up 1% in November, while the broader S&P/ASX All Ordinaries index gained 1.4%.

In Europe, politics cast a pall over the markets as German coalition talks unexpectedly collapsed, leading to doubts that Chancellor Angela Merkel could form a government after the weaker-than-expected performance of her Christian Democratic Union (CDU) party in September's general election. At month’s end, Germany was still without a government, and the uncertainty overshadowed generally healthy economic news. In a survey taken before the collapse of the coalition talks, German business confidence hit a record high, with the business climate index of the Ifo economic institute in Munich rising to 117.5 for November, from an upwardly revised reading of 116.8 in October. This was the strongest reading since Germany reunified in 1990, and business confidence was last at this level in West Germany in October 1969.

In France, the national statistics agency INSEE said business confidence was at its highest level since January 2008, despite consumer spending falling by 1.9% in October. The French economy grew by 0.5% in the third quarter, down from 0.6% in the June quarter but enough to generate an annual rate of 2.2%, France’s best since 2011.

The Eurozone’s unemployment rate was 8.8% in October, an improvement from 8.9% in September, and the lowest rate since January 2009. Inflation ticked up, with the Consumer Price Index (CPI) for November coming in above estimates at 1.1%, against a reading of 0.9% in October – a further sign of the region’s growing economic momentum.

On European bourses, Germany’s DAX index retreated 1.6% for the month, while the CAC 40 in Paris was down 2.4%. These falls drove the STOXX Europe 600 index to a 2.2% decline for November, its largest fall since June. In the UK, the FTSE-100 index eased 1.6%.

With strong momentum in the major global equity markets, the bull market cycle we are currently in seems likely to continue for some time. Corporate profits have been strong, with consumers feeling positive on the whole. Consumption-led economies are benefiting from the current environment of low interest rates and benign inflation, arguable for the first time since the GFC. However, investors should take note of some risks on the horizon which may raise volatility and constrain share market returns. These include risks around policy implementation in the US, nervousness around the North Korean missile testing program, the sustainability of China’s economic growth, and closer to home, cooling in Australian housing and construction sectors, signs of more constrained consumer spending and the volatility of commodity prices.

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Information current as at 30 November 2017. This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.